Blackstone has hired a high-stakes law firm to determine if it can recover losses exceeding €200mn from a loan made to Bain Capital, a rival buyout shop.
According to sources familiar with the situation, the $1tn US company is paying Pallas Partners for an assessment of whether Blackstone could bring claims against Bain Capital or other parties regarding the collapse of Italian tiremaker Fintyre in 2020.
The agreement to fund Pallas – founded by former Boies Schiller attorneys – is part of an investigation by Teneo’s restructuring unit, which had been appointed by the court to manage Fintyre’s liquidation.
Teneo is advising Pallas and is looking into whether it can file a claim against Fintyre directors, including Bain Capital executives, for their actions leading up to the insolvency of the company, according to one person.
The fact that two of Wall Street’s biggest names have now become embroiled in a dispute shows the tensions between private lending funds, and the firms they finance.
The report also highlights the risks associated with investing in private credits, an asset class worth $1.5 trillion that has been hailed by some participants as a virtually risk-free way to make money.
Stephen Schwarzman, the chairman and founder of Blackstone, said that lending to certain companies could yield double-digit returns “with virtually no risk”. Apollo, KKR, and Carlyle, among others, have shifted their focus from leveraged buyouts to credit.
Blackstone is yet to recover the €200mn that it loaned to Fintyre. It faces total losses if the company cannot do so via legal action.
Bain Capital purchased Fintyre on March 17, 2017 with the aim of making it the largest tyre company in Africa. Blackstone provided debt financing of more than EUR200mn for the deal.
Fintyre was to grow by acquiring other companies in Europe with the help of Blackstone and Bain equity.
At first, the plan worked. According to Fintyre’s company filings, by 2019, revenues had nearly doubled to €900mn after the acquisitions of La Genovese Gomme in Sardinia and Reifen Krieg in Germany.
The company stated in its accounts for October 2019 that “the directors believed it unlikely there would be any breach of financial covenants in the Senior Facilities Agreement and the Bond Note within 12 months of the date of signing the financial statements.”
Fintyre’s collapse, less than a yea later, was a shock to the lenders. They usually have the opportunity to provide rescue funding to keep a troubled company afloat.
Bain lost its investment in the tyre company. This is not unusual in private equity investing where gains in other portfolios can compensate for losses in one deal.
Blackstone’s credit division was owed €230mn from a company that is now in liquidation. Blackstone was seated behind another group of creditors owing €65mn, further reducing the chances of recovering the money.
Credit funds, unlike equity investors, usually earn money through a contractual return of money lent. If they lose money, it’s much more difficult to recover the funds, since direct lending usually has little upside beyond getting the loan paid back with interest.
According to sources familiar with the situation, Blackstone executives complained to Bain Capital about the losses they had incurred and the perception that Bain was not transparent during the period preceding the insolvency.
Some people also said that it led to tensions among executives of Blackstone’s European Lending business and Bain’s Private Equity unit.
Blackstone, three years after its company went bankrupt, is still trying recover its investment.
The group of creditors ranking above Blackstone received a payment of £1.4mn in June. They are still more than £50mn behind.
The liquidators have written that they are working with Pallas to “assess if there are any issues that could lead to a recover for creditors, such potential claims against parties who are connected to the company or had previous dealings with it.”
Pallas, founded in 2022 and specializing in high-profile cases, represents two groups of Credit Suisse Bondholders that were completely wiped out in March by UBS taking over the bank.
Blackstone is reshaping the credit arm of its company to move away from the more risky deals that made it famous. Both of Blackstone’s European credit heads left after the Fintyre transaction.
Dwight Scott, a veteran Blackstone credit executive who was previously the head of its insurance division, has been appointed chairperson of this new division.
According to a Blackstone filing, by June of this year the fund which did the Fintyre transaction had generated a rate of internal return of 2%.
Blackstone, Bain Capital and Pallas, as well as Teneo, all declined to make any comment.