“The pipeline is skinnier,” James said today in an interview with Bloomberg Television in Delaware City, Delaware, where Blackstone is opening an oil refinery it owns through PBF Energy, a three-year-old venture with private-equity firm First Reserve Corp. “Financing is expensive, prices are down. If you don’t have to sell your company, you don’t do it when prices are low.”
The value of global LBOs in the third quarter fell 33 percent to $23.2 billion from the second quarter, according to data compiled by Bloomberg, amid signs that banks were hesitant to finance deals because of Europe’s sovereign-debt crisis and a slowdown in U.S. economic growth.
Buyout firms typically use loans secured on the targets they acquire to finance more than half of the purchase price and cash from their own funds for the rest. The firms seek to improve performance at the companies they acquire or expand them before selling them within about five years.
Sales of junk bonds have stalled as the lowest-ranked debt, rated in the CCC tier or below, suffers its worst losses since credit markets froze after the 2008 bankruptcy of Lehman Brothers Holdings Inc. There were no high-yield offerings in the U.S. this week and issuance of the debt has fallen short of the 2011 average for 10 consecutive periods, according to data compiled by Bloomberg.
Volatility in equity markets and questions around governments’ abilities to deal with deficits are also hampering firms’ abilities to sell businesses they own. James said investors need more certainty to proceed.
“One thing we need is clarity of leadership,” James, 60, said. “The uncertainty, the divided Washington, it creates a lack of confidence.”
As a result, distributions of profits to pensions, endowments and sovereign-wealth funds, the primary backers of buyout funds, have slowed.
“Investors will get their capital back eventually,” James said. “They’ll have to wait. Meanwhile it’s earning a return, it’s not dead capital.”
Blackstone, the world’s largest private-equity firm, has invested about $5 billion in the energy and natural-resources industries. KKR & Co. and Apollo Global Management LLC, two of the firm’s biggest rivals, are also targeting oil and gas as a slowing economy and rising financing costs make traditional corporate buyouts more expensive.
Jobs in Maine
The Delaware City facility was PBF’s first investment, purchased from Valero Energy Corp. in June 2010. James was on hand, along with Delaware Governor Jack Markell and First Reserve’s Tim Day, for a ceremonial ribbon cutting.
Valero, based in San Antonio, shut the refinery in 2009. PBF spent $450 million on renovations, including steps to reduce carbon dioxide emissions by as much as 35 percent. The processing plant has about 500 full-time employees and 250 contract workers, and has a capacity of 190,000 barrels a day.
Blackstone Chairman Stephen Schwarzman, 64, told investors on a conference call in July that energy “has been a spectacularly successful place for us,” noting that the firm had never lost money on an energy deal.
Blackstone oversees $159 billion in assets across buyout investments, hedge funds and real estate.
KKR, also based in New York, earlier this year sold Hilcorp Resources Holdings LP in a deal that almost tripled its $400 million investment.
Blackstone said in a separate statement that it had committed $3 million through its foundation to fund businesses in Maine, with the goal of adding 10,000 jobs during the next decade.
To contact the editor responsible for this story: Christian Baumgaertel at firstname.lastname@example.org