Friday Letter: Fourth time lucky

So far Blackstone’s fundraising bar has been raised at least three times and yet, according to a number of investors canvassed by PEO it still seems likely that the firm will hit its latest reported target of $20 billion.  

Or more. A source close to Blackstone has told PEO that when it began talking again to investors about the latest tranche of fundraising there was no fixed target in mind.

He said the firm was at the start of long process and it didn’t know whether the final number would be $4 billion, $5 billion or $6 billion – or indeed any other amount.

What is also noteworthy is how far the firm will go to scoop up the capital it wants. The £4bn Wirral Metropolitan Borough Council Merseyside Pension Fund recently signed off its commitment to Blackstone’s mega fund, allocating a (relatively) mere $10 million.

Clearly, Blackstone is not too proud to cash the smaller cheques that could en masse add up to an administrative nightmare. At a subscription level of $10 million, the firm could fit 2000 investors in a $20 billion plus fund. Thank heavens for pension funds like Washington.

Anecdotal evidence suggests that the early responses from investors to the latest bar-raising proposal have been positive.

Blackstone appears to be managing its repeated returns to the fundraising with aplomb.

One told PEO that Blackstone had been clever in its pitch to existing investors. He said the firm was telling them it was coming back to the market after closing its fund because of the faster than anticipated investment pace.

In effect it is arguing it has been a victim of the success of its investment thesis. Deal flow for the mega fund is every bit as good as it expected and then some. Indeed its estimate of there being $45 billion of averagely leveraged deals has proved conservative.

Instead it anticipates spending that much by 2008. Thus its argument to investors is that the latest additional fundraising is to tide it over to the next fund, scheduled to come to market in 2009.

If investors chose not to commit additional capital now then they will effectively miss a year of Blackstone deals. They will not have any exposure to a portfolio of about $15 billion worth of deals, on current projections.

Indeed declining investors would probably miss more than a year of deals.

As another investor noted, Blackstone is doing this because it can in this market. Its last fund took a big bet and it shot the lights out. It is taking a big bet again and it will reward the investors that back it.

It seems reasonable investors that decline this latest round of fundraising may not get the allocations they might wish for.

Blackstone meanwhile appears to be making its own luck as it raises the trophy fund to a new level. For the time being at least.