Inside the drama at Blackstone's $129 billion credit division, where pay changes, PR black eyes, and

Publish date: 2024-08-12
2020-08-20T13:01:00Z

When Mike Whitman vacated his role as leader of Blackstone's European credit division late 2019, he didn't expect that, months later, he'd find himself out of his new job after his former employer objected to his hire at the growth-equity firm, General Atlantic.

After Whitman took on the newly formed role as head of capital solutions at GA, Blackstone reached out to the firm and pointed to a contract that prohibited another exec who was working with GA — a onetime member of Blackstone leadership — from poaching their talent.

Whitman subsequently departed GA and Blackstone chalked up the kerfuffle to a unique dust-up that wasn't reflective of the firm's treatment toward outgoing executives. 

"Many former employees have gone on to great success after leaving the firm and we have never had such a dispute in our 35-year history," Blackstone spokesperson Kate Holderness told Bloomberg in July.

"We made it clear to General Atlantic that our objective was never to interfere with the successful launch of their venture."

Intentions aside, the news of Whitman's forced departure touched a nerve in a certain segment of the credit-investing community.

Some who have worked with Blackstone felt the maneuver showed how sensitive the investment giant had become to losing talent in its credit business after a push to integrate the unit with its corporate Blackstone owner. 

Aside from Whitman, GSO has experienced an exodus of senior traders, analysts, and execs in recent years, especially in its distressed-credit business — a unit that produced prodigious talent but also a considerable amount of controversy. Amid the run of exits and the rash of new opportunities from the ongoing economic carnage, Business Insider tracked where 11 of the firm's top distressed professionals are today, including powerhouse rivals like Ares and Angelo Gordon as well as successful fund launches of their own.

"The facts speak for themselves. GSO has continued its tremendous growth to $129B AUM and is coming off its best quarter since the global financial crisis," said a Blackstone spokesperson. "The integration of GSO into Blackstone has led to large scale deal opportunities, a rigorous investment process and a culture that prizes teamwork. Yes, a number of intentional changes have been made to the distressed investing unit which have been quite positive for performance and culture."

Blackstone and GSO had distinctly separate cultures from the start

Blackstone acquired its credit business in 2008, through a company called GSO, named after Bennett Goodman, by all accounts the face of the firm; Tripp Smith, who was closely involved with liquid funds; and Doug Ostrover, who oversaw fundraising. 

By almost any measure, the acquisition was phenomenally successful, with assets for the group ballooning from $10 billion to nearly $130 billion today. But the absorption of GSO wasn't an entirely smooth process, with distinctly separate cultures and executives focused on smaller deals let go in the early days.

While GSO had its own "in crowd" like many other businesses, its workplace wasn't as buttoned up, or hierarchical, as Blackstone, according to former employees. 

They had to implement new procedures to approve everything from investments to small company expenses. And some, at least in the years shortly following Blackstone's acquisition, found it mildly annoying that there seemed to be such a focus on cost management, pointing to a lack of bottled water in their offices. 

"GSO is the only place where executives didn't wear ties, in all of Blackstone," another former employee said. "The prototype of someone who worked at GSO was just way different." 

Distressed investing became a lightning rod

As time went by, more significant fault lines surfaced than cultural divisions — especially in relation to GSO's distressed-investing operations.

Following stellar performance in 2012 and 2013, the distressed-debt unit of GSO had some bumpy years — it pulled net returns of just 3% in 2014 and lost 8% in 2015, tougher years for the industry at large, before bouncing back with a 13% net return in 2016, according to the firm's public filings.  

Along the way, the compensation structure in GSO was retooled, sources said, shifting away from pay for performance in special situations after Ostrover left in 2015, toward lockstep compensation — which emphasizes seniority and tenure — to better equalize pay across GSO.

That presented retention challenges for the special-situations staffers who chiefly invest in public markets, where track records are more transparent and competition for high-performing traders and analysts is fierce. 

Paying high performers in lockstep meant they underpaid the market, making it easier for competitors to swoop in, sources said. 

But Blackstone wasn't exactly protecting the business from poachers, either. Amid the mixed performance as well as some public relations dust-ups, the firm opted to shut the distressed hedge fund in 2017, shifting its assets into a "lock up" structure more akin to its longer horizon private-equity businesses rather than the quarterly format favored by hedge funds that enables frequent investor redemptions.

Those moves signaled a push away from a controversial trading practice GSO had become known for, called "default manufacturing."

The practice was perhaps most closely associated with a London-based trader named Akshay Shah. And here is how it would go:

Blackstone would buy a credit-default swap on the debt of a struggling company, and then offer its executives a separate loan to keep the business afloat — with the condition that the company pay other loan obligations a couple days late, triggering a payout from the CDS Blackstone had bought. 

That kind of trading landed Blackstone on the Daily Show with Jon Stewart, who called the activity "insane" and drew a parallel to the 1990 movie Goodfellas when the lead characters bought insurance on a restaurant and then "deliberately [blew] the restaurant up."

"But in 'Goodfellas,' it was illegal; in the financial world, it's above board," Stewart said.

Some of the companies in which GSO conducted this default manufacturing included Spanish gaming company Codere SA — which Stewart referred to — and homebuilder, Hovnanian. 

Blackstone shuttered its distressed hedge fund

But it all came to an end in 2017 when Blackstone disbanded its hedge fund business and some of the lead distressed debt executives found new homes.

Shah, whose aggressive tactics were profiled at length in the Financial Times, launched his own European fund, Kyma Capital, while Ryan Mollett, another top-ranking executive behind some of GSO's friskiest trades, joined Angelo Gordon.

Throughout the tumult, there was internal finger-pointing over who was most responsible for causing what Blackstone's top brass considered an optics problem, according to insiders. One executive who rose the ranks within GSO — and succeeded firm founders in 2019 — was Dwight Scott, an energy focused investor who was close with Blackstone's president, Jon Gray. 

Gray, the chair of Hilton Worldwide whose rise on Wall Street came from real estate and private-equity investing, wasn't the biggest fan of distressed-debt trading, especially given the unflattering media coverage it had generated for Blackstone, according to people who know him.

Amid a run of black eyes for GSO, including poor performance and senior defections that forced the firm to renegotiate with investors and accept lower fees, Gray has been buoyant about the credit division, telling the FT last December it was in "extraordinarily positive shape," — except for its distressed business. 

"The one area where we're not satisfied with the performance has been in this distressed area," Gray said.

A slew of senior exits — and an economy riped for distressed-credit all-stars

Now, the coronavirus is presenting opportunities for distressed professionals as businesses in many industries find themselves in need of rescue financing.

While GSO has just under $8 billion in assets dedicated to the strategy as of April — a formidable figure — many of the executives who GSO said goodbye to after shuttering its hedge fund are gearing up for action, too. 

With the help of ex-GSO exec Ryan Mollett, Angelo Gordon has raised $3.5 billion for distressed debt investing according to Bloomberg, while Craig Snyder over at Ares has helped raised more than $3.5 billion for special opportunities.

Meanwhile, Kennedy Lewis, a fund co-founded by former GSO exec Darren Richman, has raised $2 billion for companies undergoing some form of disruption.

To be sure, despite these exits, there has been continuity within GSO: In aggregate, GSO's roster shows 16 executives who have remained with the group since before the 2008 acquistion by Blackstone. 

And GSO stands by its decision to part ways, after having clinched other lending deals in areas outside of shorter term distressed bets, which wouldn't have been possible without having integrated more fully with Blackstone.

This includes a $2 billion financing of biopharmaceutical company, Alnylam Pharmaceuticals Inc., this April, when GSO worked with other Blackstone divisions including a life sciences arm to get the deal done.

"The facts speak for themselves," said a Blackstone spokesperson in a statement, pointing to GSO's growth to $129 billion in assets under management and coming off a strong quarter — its best, by the firm's measure, since the global financial crisis. 

"The integration of GSO into Blackstone has led to large scale deal opportunities, a rigorous investment process and a culture that prizes teamwork," the spokesperson said.

"Yes, a number of intentional changes have been made to the distressed investing unit which have been quite positive for performance and culture."

GSO's distressed debt business is now being co-run by Dan Oneglia, a former Goldman Sachs exec hired in 2019, who is working with GSO veteran David Posnick. 

But for those who did leave, either voluntarily or otherwise, we took a look at which GSO alums are now well positioned to buy assets shaken loose by the pandemic. 

Read our full list of 11 top GSO distressed debt alums here.

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