Blackstone buys hedge fund for $1bn

Blackstone, the world's largest private equity house and an increasingly powerful player in the hedge fund industry, is paying $930m for a fund manager specialising in the credit markets.

The acquisition of GSO Capital Partners is a bet that there are still plenty of lucrative investment opportunities in parts of the credit markets, despite the meltdown in mortgage-backed debt since last summer.

Blackstone's founders are also using the acquisition as cover for a $500m buy-back of its shares, which it floated on the stock market less than a year ago but which have fallen by a third in value. At current prices, it will be paying around $20 apiece for shares it sold to investors last June at $31.

The buy-back will ensure that there is no dilution to existing shareholders from the issue of new shares to GSO's investors, the company said.

GSO was created three years ago by Bennett Goodman – a junk bond industry veteran – and Merrill Lynch is among its minority investors. It manages $10bn of investments in distressed debt and the leveraged loans used by private equity to fund acquisitions.

The acquisition will double the amount of funds that Blackstone's hedge fund business allocates to credit market investing, said Stephen Schwarzman, the chairman. "Given the current dislocation in the credit markets, this is an ideal time to create a more powerful, diversified platform from which to grow Blackstone's business."