February 25, 2010 10:51 pm

Credit crunch easing for private equity

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Blackstone’s chief operating officer said it had restructured $23bn of debt at its portfolio companies last year as it nears completion of a deal to shave about $4bn off the debt of Hilton, the hotel chain it bought for $20bn in 2007.

Tony James said credit markets had rallied to such a surprising extent that banks were actively pushing to lend the private equity group money for new deals. Debt was now much easier to raise for medium-sized buy-out deals.

“Some banks are coming to us directly and seeking to lend us money for deals and it is the first time we have seen that really, ever,” he said.

His comments came as Blackstone credited the recovery in financial markets with helping it return to profit last year, when it generated economic net income of $703m, compared with a loss of $1.2bn in 2008.

But after $875m of charges, mostly linked to its initial public offering in 2007, the private equity group made a net loss of $715m, compared with a loss of $1.2bn in 2008.

“Availability of debt for new deals is back to normal, and possibly above normal in some cases, within a certain size range,” he said. “If you are doing a very small deal there isn’t much debt and if you are very big there still isn’t much debt.”

Blackstone invested $1.5bn of equity in deals that closed last year, including its buy-out of the Birds Eye food business in the US, and has about $2bn committed to pending deals.

He said Blackstone’s real estate business had started investing again after two years on the sidelines, committing $650m to new property deals in the fourth quarter. “We think values are compelling now, often we are buying property for less than half the replacement cost of these buildings,” he said.

The group’s income from maintenance and advisory fees remained stable at $1.48bn.

But its income from performance fees and allocations, which gyrates with the value of its portfolio, switched from a loss of $1.25bn to a profit of $221m.

Blackstone had $28bn of dry powder to invest in new deals. Its total fee-earning assets under management rose from $91bn to $96bn last year.

Mr James said the fundraising log-jam for private equity was clearing and he expected Blackstone’s new global buy-out fund, which had been stuck until recently at about $9bn, to be completed on June 30.

“I expect you will see the whole fundraising market picking up in the next year unless we have another downturn,” he said.

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