Blackstone Goes Big Bigger

Does the difference between $13.5 billion and $14.5 billion represent a competitive disadvantage in the high-stakes world of mega-LBOs? The Blackstone Group apparently thinks so, which is why it’s asking limited partners to approve a $1 billion fund ceiling increase.

The New York-based firm began fund-raising in early 2005 with a $12.5 billion target, inclusive of a $1.5 billion side fund. It was expected to be the largest private equity fund ever raised, easily topping efforts from Carlyle Group, Goldman Sachs and Warburg Pincus. Blackstone’s top dog coronation seemed even more certain when it raised the target to $13.5 billion, and told people to expect a final close by March 31, 2006. In fact, the date seemed so certain that Buyouts Magazine penciled it into the Q1 fund close calendar (thank goodness for erasers).

As Q1 winded down, however, word emerged that Blackstone was going to be surpassed by a $14.5 billion fund from Texas Pacific Group and a possible $15 billion in available fund capital from KKR (inclusive of an existing European vehicle). March 31 came and went with no news from Blackstone, which led folks like me to assume it was just waiting to round up final paperwork from a few stragglers.

Maybe that really was the issue, or maybe Blackstone was already rethinking its fund size. Either way, it has now delayed the formal close until (A) Getting the fund’s maximum cap formally increased to $14.5 billion and (B) Securing the additional $1 billion, which should be as difficult as me collecting five cents for the soda can on my desk.

So is this just a case of “Mine is bigger,” as some LPs are portraying it? Maybe a little bit, but Blackstone must know such strategy is a fool’s errand given how even $14.5 billion will likely be surpassed by someone in the coming years (or KKR this year). A Blackstone spokesman declined to comment, but LPs say the firm has argued that it needs the extra capital to remain competitive in terms of mega-deal access and terms. I really can’t believe that plus or minus $1 billion would really impact what Blackstone is able to offer in a bidding war with TPG or KKR – at least for the next couple of years – but I can see why Blackstone believes that it would. This is particularly true if the firm is really dedicated to reducing its number of club deals.

An outstanding issue, therefore, is where this leaves $10 billion firms like Bain Capital and Apollo Management. Are they still competitive mega-funds, or are they now playing in a slightly-smaller market? Or will they have to abandon their own plans to scale back on club deals? Should be interesting to watch.

*** Nantucket Partners may look dead, but it’s not yet buried. So says Phil Cooper, the former head of Goldman Sachs’ Private Equity Group. I ran into Cooper at an industry event the other night, and asked what he’d been up to since Nantucket failed to raise its targeted $1 billion co-investment fund. He said he was working on a pair of hedge funds, but surprisingly added that “something might be happening with [Nantucket] later this year.” He didn’t go into specifics, but anything involving Phil Cooper is worth watching (including his keynote at next Friday’s MIT Private Equity conference).

*** Speaking of unexpected personnel moves: Herb Chi has left Crescendo Ventures, where he served as a principal in the firm's Palo Alto office. No word yet on his future plans. Chi joined Crescendo as an associate in mid-2002, after having worked in project management with ONI Systems. Also, Mark Gudis has left The Blackstone Group, where he served as a managing director in its mezzanine financing group. He’s off to SAC Capital Advisors as a portfolio manager focused on mezzanine, second lien and holding company securities.

*** The NY Times reports today that private equity attorneys are in high demand (free sub required).

*** Quiz Time: What high-profile, VC-backed SRM company CEO is on his way out?

*** Oh The Places I’ll Go: Hope to see you next Wednesday at the Creative Economy conference in Salem, Mass., where I’ll be on a panel alongside Elliot Katzman of Kodiak Venture Partners, Doug Redding of VIMAC Ventures and David Ives of North Shore International Insurance Service. Ranch Kimball, the Massachusetts secretary of economic development, will moderate. Also, a scheduling change: I’ll now be giving the luncheon keynote address on May 12 – not May 11 – at the Canadian Venture Forum in Toronto.