Mid-Market Delusions
August 10, 2009
In music, it’s the guy wearing the concert T-shirt on the day of the show; in sports, it’s the Patriots fan who has never heard of Rod Rust; in private equity, it’s the mega fund that suddenly bills itself as a middle market specialist. Bandwagonism can take on many forms, but it’s usually pretty transparent. That’s what makes The Blackstone Group’s sudden love for the middle market so laughable.
For months, Blackstone has been telling its limited partners that it is a middle market fund, and in its most recent earnings call, the publicly held behemoth seemed somewhat casual in its assertion of love for the middle.
Here are a few choice quotes from the call, courtesy of Thomson One Analytics:
“We’re sort of a very big fund, a big platform, but we’ve always focused on – on sort of medium-sized deals, more mid-market deals.”
“Our ability to foster change in our companies is significant, and allows us to execute better than most peers, particularly in mid-market deals, which we focus on, and where most competing firms do not have the resources and scale that we do.”
“While debt financing remains scarce, we continue to be a preferred client of banks, and we can still obtain funding for good companies and middle-market companies generally, which is our sweet spot.”
“In one of our most recent mid-market acquisitions, Apria, a home health care company supplying oxygen, we’ve identified savings…”
Maybe it’s just me, but I think they’re trying too hard. For one, Apria, at $1.7 billion, would hardly qualify as a mid-market deal to anyone except a truly huge firm like Blackstone.
It's as if Blackstone forgot that it filed a 600-plus page prospectus two years ago; a filing that throughout touted Blackstone's size as “one of the largest fund managers," having invested in 112 companies with a total enterprise value of $199 billion. That averages out to $1.77 billion for those who don’t have a calculator handy.
I'm not trying to imply that a middle market approach couldn't work for Blackstone. It's just a little disingenuous to try to pretend that that has been the focus all along or would continue to be the focus should lenders again abscond from their senses.
Of course, the model for the mega funds has changed irrevocably. Gone are the EOP and Freescale types of transactions that helped build Blackstone’s name. While I feel for your predicament, to quote Judge Judy, don’t pee on my leg and tell me it’s raining.
Blackstone can say it’s a middle market fund, but there is no track record supporting this and the firm has withheld any details explaining how it intends to follow through on the strategy. It has $14 billion of dry powder dedicated to private equity, so assuming the new targets are businesses ranging from $500 million to $750 million in size, that translates into roughly 56 new portfolio companies.
There's something to be said for diversity, but that seems like overkill to me.
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