New York: Credit-market gridlock has trapped Stephen Schwarzman, who relies on lenders to fund acquisitions, while leaving Warren Buffett free to pursue the debt-free deals that have helped make him the world’s richest person.

Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc, has $59 billion in cost-free money from insurance premiums to invest.

Schwarzman’s New York-based Blackstone Group LP,manager of the biggest private-equity fund, is being forced to bypass Wall Street banks after they stopped financing most leveraged buyouts.

Buffett and Schwarzman each take a different approach to the same goal: finding companies they consider undervalued. Investors are betting Buffett’s model will prevail, at least for now.

Berkshire climbed 5.4% since the subprime-lending crisis sent the Standard & Poor’s 500 Index tumbling as much as 19.7% from its October 9 peak. Blackstone dropped 43% in the same period.

“There’s a massive, massive advantage for Buffett in this kind of market,” said Guy Spier, chief investment officer of New Yorkbased hedge fund Aquamarine Capital Management LLC.

“All the leveraged finance has dried up, so he’s going to have a much better time finding things to buy.”

Blackstone’s vulnerability was underscored March 10, when the company said fourth-quarter profit plummeted 89% amid what Schwarzman called a “severe financial crisis.”

Banks started pulling back from most LBO lending last June after as much as $400 billion in debt sat unsold on their books and losses from the subprime-mortgage market increased.

Without new loans, LBO firms struggled to complete deals,while declining bond prices forced Blackstone to write down the value of some of its holdings. The company is now contacting hedge funds and mutual funds in search of new financing, which usually accounts for as much as twothirds of the price of an LBO.

Buyout firms such as Blackstone and New York-based Kohlberg Kravis Roberts & Co relied on free-flowing debt to announce a record $745 billion of transactions last year, according to data compiled by Bloomberg. The pace has stalled in 2008, with $56 billion of announced deals through yesterday, a 71% drop from a year earlier.

The retreat by investors from all but the safest government debt has driven up LBO financing costs. The amount of extra yield investors demand to hold speculative-grade bonds over US Treasuries more than tripled to 7.97 percentage points on Tuesday from 2.41 percentage points at the start of June, according to indexes compiled by Merrill Lynch & Co.

“When both equity and credit markets go down in concert, it’s not unfair for people to expect our nearterm earnings to suffer,” Blackstone President Tony James.

Blackstone led some of the biggest deals last year, including the $39 billion purchase of Chicago-based Equity Office Properties Trust, then the largest LBO, and the buyout of hoteloperator Hilton Hotels.

Source : DNA