In January, Blackstone announced that it would acquire GSO, an alternative asset manager specializing in leveraged finance. The acquisition will give Blackstone one of the biggest credit platforms in the industry. GSO’s $10 billion in assets augments the $11 billion that Blackstone already has in corporate debt operations.
Blackstone got a good deal, paying just $620 million initially; it will pay an additional $310 million over five years depending on earnings targets. That values GSO at just 9% of assets under management. That is far less than Blackstone’s own valuation despite GSO’s having suffered a 40% fall in its stock price since launch.
“We all wanted GSO,” says a Morgan Stanley source. Most peeved, however, must be Merrill Lynch, which bought a 20% stake in GSO in May 2006 at what was probably a higher price – the terms of the minority stake were not disclosed. Blackstone’s long-standing relationship with the GSO principals no doubt played a part in the partnership decision.
An increasing number of acquisitions are being made in the alternative investment sector. Erika Cramer, advisory director at financial services M&A boutique Silver Lane Advisors, says that over the past three years, deal flow has tripled. “In the early part of this decade, we’d see maybe 10 to 15 deals take place on average. In the last two years there have been more than 40 deals taking place each year,” she says. A hedge fund lawyer says: “Everyone is buying everyone.” Indeed, Elizabeth Nesvold, who founded Silver Lane, says buyers span a multitude of types. “Investment banks, wire houses, hedge funds, private equity firms: we have seen acquisitions from all of these.” Most are looking for multi-strategy and fund of hedge funds firms, says Nesvold, as they are hesitant to take bets on a single-strategy player. GSO, while focusing on debt, is a multi-strategy fund. The exception is single-strategy hedge funds that merge together to gain scale and become multi-strategy players. Reasons for selling are plentiful. In some cases hedge funds can benefit from the distribution capabilities that an acquiring financial institution can offer. Selling also enables managers to redistribute equity.
Capital gains tax
Given that public listings have been less successful than expected, the acquisition route is looking more popular. GSO’s president and COO, Hamilton James, cited scale and access to intellectual capital as motives for the sale to Blackstone. Some hedge fund managers are looking to replace seed investors with strategic buyers because they want to trade out of a pure financial arrangement. Nesvold adds that an emerging reason for managers to look for partners is concern about the future of long-term capital gains tax. It is speculated that in 2010 the 15% capital gains tax might rise to as high as 30%.
Although acquisitions are likely to increase, upward pressure on valuations is unlikely in the near future as supply is meeting present demand. Nesvold says that valuations vary from manager to manager depending on ebitda, growth prospects, and volatility of performance fees. She expects more sophisticated buyers to bifurcate streams of revenues when making acquisitions of hedge funds. “It’s likely that buyers will separate out recurring fee streams and performance fees when evaluating prices. The less correlated the performance fees are to the management fees, the lower the blended ebitda pricing multiple.”
