Blackstone Said to Target Up to $3 Billion for Energy Fund

Stephen Schwarzman, chairman and CEO of the Blackstone Group
Stephen Schwarzman, chairman and chief executive officer of the Blackstone Group LP, speaks during a panel session on day three of the 2010 World Economic Forum (WEF) annual meeting in Davos, Jan. 29, 2010. Photographer: Nelson Ching/Bloomberg

Blackstone Group LP is seeking as much as $3 billion for its first energy fund, aiming to become the biggest diversified private-equity firm investing in the industry, according to two people with knowledge of its plans.

The target tops those for natural-resources funds in the works at KKR & Co. and Apollo Global Management LLC, said the people, who asked not to be identified because the information is private. Blackstone, which started energy investing in 1997 through the purchase of oil refiner Premcor Inc., has initial commitments of $1 billion for the fund, President Tony James said yesterday on an earnings conference call with the media.

An industry-focused fund is a departure for the New York-based company, which in the past has made almost all its corporate private-equity investments through a general pool. Co-founder and Chairman Stephen Schwarzman has pushed the firm beyond company buyouts, quickly surpassing competitors in new businesses such as real estate, hedge funds and credit funds.

“Energy has the macro wind at its back and firms raising those funds are benefiting from that now,” said Erik Hirsch, chief investment officer of Hamilton Lane, a Bala Cynwyd, Pennsylvania-based firm that invests in private equity on behalf of clients.

There have been $265 billion of announced takeovers in the energy industry this year, about the same as the comparable period last year and an increase of almost 80 percent from 2009, according to data compiled by Bloomberg.

Peter Rose, a Blackstone spokesman, declined to comment on the firm’s goal for the energy fund.

Real Estate, Credit

Blackstone, which started its first real estate fund in 1994, today has the largest pool of capital available for property deals, Schwarzman told investors on a conference call yesterday. Its real estate unit had $30 billion in fee-earning assets as of Sept. 30, compared with $37 billion for its corporate-buyout unit.

The firm’s credit business, which invests in loans and other debt and is led by GSO Capital Partners LP, has grown to $28.7 billion in assets from $10 billion in 2008, making it one of the largest managers in the market. Schwarzman has said the hedge fund-of-funds unit, which has allocated $37.2 billion on behalf of clients, is the largest among private-equity firms.

Now Schwarzman and James are targeting energy. In their marketing they highlight that none of the firm’s prior deals in the industry have lost money. Potential investors such as employee pension funds are also drawn by another element of their pitch: job creation driven by investments in U.S. energy companies.

Energy Record

Earlier this month, one of Blackstone’s portfolio companies put 500 union workers back on the job when it opened an oil refinery that had been shuttered by the previous owner.

“The banks won’t lend, the government doesn’t have the money to do it, venture capital has little bits and pieces, and it takes a lot of money to save America’s industrial base,” James said at an Oct. 7 ceremony at the refinery in Delaware City, Delaware.

David Foley, who joined Blackstone in 1995, leads a group of 30 people hunting for energy deals that ramped up about 18 months ago. His group has deployed about $3.2 billion in the industry through the third quarter. The total accounts for half of the dollars Blackstone spent in private equity over the period.

Kosmos Energy

During a conference call with analysts in July, Schwarzman offered Kosmos Energy LLC as an example of a successful energy investment. The Dallas-based oil- and gas-exploration company, whose assets include a stake in West Africa’s biggest offshore discovery in a decade, went public at a price equal to six times Blackstone’s initial cost in 2004, Schwarzman said. Kosmos is now trading at more than $15 a share, below its initial public offering price of $18. Blackstone hasn’t sold any of the shares it owns since the IPO.

Other investments include a $300 million stake in an Indian power company; Sithe Global, a developer of coal and natural gas plants in the U.S. and internationally; and WindMW GmbH, which is building Germany’s largest offshore wind-energy plant. The firm has also backed companies exploring and producing fuel trapped in shale formations with $500 million in three separate deals.

Private-equity firms raised $6.4 billion for five energy funds this year through October, according to researcher Preqin Ltd. There are 12 funds seeking a combined $15.8 billion from investors, data from the London-based firm show.

Riverstone Holdings

KKR, the New York-based firm run by Henry Kravis and George Roberts, has attracted more than $1 billion for its natural-resources fund, exceeding the target, according to person familiar with the matter. Apollo, the New York-based firm co-founded by Leon Black, is seeking as much as $1.5 billion to make long-term bets on metals, mining and energy prices, a person briefed on the plan said in July.

Riverstone Holdings LLC is aiming to gather as much as $6 billion, according to a person with knowledge of the firm’s fund-raising efforts. Unlike Blackstone and the other diversified firms, New York-based Riverstone has invested exclusively in energy and power since it was formed 11 years ago.

Officials for the firms declined to comment on their energy fund-raising.

Buyout firms are expanding into energy to capitalize on increasing demand from developing markets and to buy mature oil and gas fields that the world’s biggest energy companies are shedding to finance new exploration.

Blackstone, by emphasizing job creation at its portfolio companies like the one that owns the Delaware refinery, is attempting to strike a chord with public pensions, which are among the largest clients for private-equity firms.

“We manage money for half the pensioners in America, and that’s where the profits go,” said James as he pounded the podium at the refinery reopening.

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