Blitzer wasted no time striking his first deal for Tactical Opportunities. Hunting for undervalued assets, he explored collateralized loan obligations, packages of leveraged loans that are sliced into securities of varying risk. He said he contacted Bennett Goodman, the head of GSO, to ask about the riskiest portions that offer the highest returns. Goodman backed his thesis that investors were avoiding the investments in the wake of the financial crisis even as they performed well.
Blitzer went on the hunt, starting with deals overseen by GSO. He found a piece of a CLO called Inwood Park that was put together in 2007 and owned by Lehman Brothers Holdings Inc.’s estate, which needed to sell assets. GSO, as manager of the CLO, helped explain the structure, and Goodman, like Blackstone’s other group heads, sits on the investment committee for Blitzer’s division. In February 2012, Blackstone invested $38 million, paying about 70 cents on the dollar. It’s already returned most of the money through distributions and as of March 31 has a gross internal rate of return of 24%.
One of Blitzer’s advantages over hedge funds and other investors chasing trades is that he’s able to tap into ideas from across the firm. Its real-estate business, run by Jon Gray, is the world’s largest, overseeing $81 billion in assets. The private-equity unit headed by Joseph Baratta that buys companies has $66 billion; Blackstone’s hedge-fund business, run by Tom Hill, oversees $58 billion and the credit arm manages $66 billion.
“We’re trying to mine that expertise across the firm,” says Blitzer.
‘Best Minds’
His investment group meets every Monday at noon in the Blackstone boardroom on the 43rd floor of its Park Avenue, Midtown office. For up to two hours, Schwarzman, James and other senior members of the firm screen ideas—lucrative investments that fall outside the core mandate of each group. Teams from across the company are incentivized to pass on ideas since they get a share of the profits, says James.
“It’s the one activity in the firm when the best minds across Blackstone work together,” he says. “It’s thrilling in that sense.”
Gray’s real estate group, for instance, had looked at taking a control position in One Market Plaza in San Francisco, a two-tower complex near the city’s waterfront that it had sold to Morgan Stanley in 2007. The seller, Paramount Group, would only give up a 49% stake, so Gray passed the idea to Blitzer, who cut the deal in April.
Blitzer’s largest single investment for Tactical Opportunities has been Rothesay.
Goldman Sachs started the business in 2007 to take on retirement obligations. It was headed by Loudiadis, who had joined Goldman Sachs’s European derivatives marketing group in 1994 from JPMorgan Chase & Co., was named partner in 2000 and had risen to be one of the bank’s top sales executives.
Rothesay promises to pay pensions if retirees live beyond a certain age. The firm receives a portion of the pension plan’s assets and tries to hedge the risk they take on with derivatives. In 2013, the business had pretax profit of 184.4 million pounds ($310 million) and was responsible for pensions at companies including British Airways Plc.
Blitzer had followed Rothesay when he worked in London and considered investing in a rival. He said he talked to Goldman Sachs executives including Loudiadis and made sure they knew Blackstone was interested if they decided to sell.
By June of 2013, Rothesay had $9.66 billion of assets when more stringent capital rules imposed under new rules known as Basel III made holding Rothesay more expensive for the bank. By the end of the year, Blackstone and GIC Pte, the sovereign fund, bought a majority stake.
Blackstone “demonstrated their ability to combine creativity, flexibility and broad financial market expertise to analyze and execute on a complex opportunity,” Loudiadis said in a statement.
One reason for James’s excitement about the Tactical Opportunities business is drawing together the various strands and senior leaders of Blackstone. Another is the ability to keep raising money outside of traditional private equity. Schwarzman said last June he could imagine Blackstone growing to be a $500 billion investment firm.
The target isn’t as outlandish as it sounds. Blackstone has raised $132 billion in capital in the last three years, according to Luke Montgomery, an analyst at Sanford C. Bernstein & Co. in New York. Much of this has gone to newer products like those offered by Blitzer’s business.