Blackstone Plans to Line Up LBO Lenders, Bypass Banks (Update2)

By Edward Evans

Feb. 26 (Bloomberg) — Blackstone Group LP, manager of the world’s biggest private-equity fund, plans to bypass Wall Street firms and directly find lenders for leveraged buyouts, President Hamilton James said.

The firm is contacting hedge funds and mutual funds to provide loans for takeovers, James said after a panel discussion today at the Super Return conference in Munich. Other firms may follow New York-based Blackstone’s lead, he added.

“We’re bypassing the banks,” James said. “There’s still ultimately demand for this paper out there if you can go directly to the buyers.”

The move may cut fees for Wall Street firms led by JPMorgan Chase & Co., which earned $412 million last year arranging loans for U.S. buyouts, more than twice its takeover advisory fees, according to data compiled by New York-based research firm Freeman & Co. and Thomson Financial. Banks are trying to cut a $230 billion backlog of debt they agreed to provide, making them less willing to back new buyouts.

“They found themselves holding the baby,” Alchemy Partners LLP founder Jon Moulton said at the conference today. “The banks aren’t coming back for a while.”

Demand for loans the LBO firms rely on to fund deals dried up in August as the collapse of U.S. subprime mortgages sent investors fleeing all but the safest government debt.

Goodman Global

Blackstone rose $1.05, or 6.6 percent, to $17 at 4 p.m. in New York Stock Exchange composite trading, after gaining as much as 11 percent earlier. The stock has lost 23 percent this year, compared with the 5.9 percent decline by the Standard & Poor’s 500 Index.

Some buyout firms already have turned to alternative financing. Hellman & Friedman LLC agreed to buy Goodman Global Inc. last October using debt provided by Farallon Capital Management LLC and GSO Capital Partners LP. Blackstone in January agreed to buy New York-based GSO for as much as $390 million to expand its credit and hedge-fund unit.

James said his firm will solicit loan investors even after a recovery in the credit markets because it will give the firm a competitive advantage.

“We’ll stay with that because it allows us to find pockets of capital that may not be generally available,” James said. “When there’s a staple from a big bank and they’re syndicating it, the problem with that is all buyers get the same financing,” he said.

Blackstone completed $90.9 billion private-equity deals in 2007, according to data compiled by Bloomberg. Firms typically borrow two-thirds to three-quarters of the purchase price of a leveraged buyout.

To contact the reporter on this story: Edward Evans in London at at eevans3@bloomberg.net

Last Updated: February 26, 2008 16:03 EST

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