Friday Letter: The feds made us do it

US Department of Justice, The Blackstone Group has a couple of choice words to send your way – “thank you”.  

Thank you for providing a perfectly timed excuse to go back to limited partners to ask for more capital commitments. Club deals seem unsporting? Agreed – Blackstone will need at least $5 billion more to buy its way out of the club.

As reported yesterday on PrivateEquityOnline, Blackstone, having raised an astonishing $15.6 billion for its latest fund (the largest ever – for the time being), is going back to limited partners with a rights issue intended to increase committed capital to roughly $20 billion. Part of the justification for this enhanced war chest has to do with Blackstone’s stated distaste for teaming with competitors on deals.

A larger fund, the firm is arguing, will allow Blackstone to more often speak for the equity in a deal on its own, or at least need to partner with fewer co-investors.

The move comes amid the US Department of Justice reportedly looking into private equity’s club deal practices to determine whether anything resembling anticompetitive behaviour may have been going on.

Kohlberg Kravis Roberts and Silver Lake Partners have reportedly been contacted by Justice on the matter. As reported on PEO on October 10, a source close to Blackstone says the firm has not been contacted by the DOJ.

Still, Blackstone’s leader Stephen Schwarzman is famously averse to liabilities. Coming under the hot glare of the federal government is not his idea of a good time. But, happily, raising lots of money is. Two birds, one stone.

A source at a rival large buyout firm, when asked about the new $20 billion target, put the number in perspective: “Unbelievable, isn’t it,” he gasped. He also had a couple of questions: how will the increased fund size affect the sidecar co-investment vehicle that Blackstone has crafted for its limited partners? And what will KKR do next?

Investors and market observers have been wondering about this ever since KKR launched its own mega fundraise, which is targeting just north of $15 billion. They are also asking the same thing about Texas Pacific Group, which has yet to announce a final fund close, although the firm has reportedly drawn more than $15 billion in commitments.

The truth is, the limited partners of these firms have no idea what their managers have planned. And as the world’s biggest fund keeps increasing in size, we have to wonder whether the mega managers themselves are entirely sure what they’ll do next.

A source close to Carlyle, speaking about the firm’s next US buyout fund, noted that it would seek only to maintain size parity with its peers in order to remain competitive. That was before Blackstone’s 32 percent upgrade. A $20 billion Carlyle fundraising now seems a distinct possibility.

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