Blackstone’s march to $1tn marred by trouble at flagship property fund
Executives forced to reassure investors as buyout giant approaches significant milestone
Blackstone is on the cusp of surpassing $1tn in assets under management, a milestone that analysts predict will arrive as soon as Thursday when the private equity giant reports second-quarter earnings.
It should be a moment of unabashed celebration for the 38-year-old buyout giant, but it is one that risks being undermined by mounting pressures associated with amassing hundreds of billions of dollars in assets during an era of rock-bottom interest rates.
Those pressures burst into the open late last year in an episode that caught co-founder Stephen Schwarzman and his heir apparent Jonathan Gray off guard after investors started to yank money from the New York investment group’s flagship $70bn property fund.
What seemed at first like a minor issue affecting Asian investors feeling the pain of tighter monetary policy soon turned into a much bigger problem. The fund, Blackstone Real Estate Income Trust, or Breit, was forced to limit investor withdrawals to avoid a painful fire sale of assets to meet the flurry redemption requests.
It was a rare instance of vulnerability for a firm that had seemed all but invincible after growing its assets more than tenfold since the 2008 financial crisis, a breakneck expansion that turned it into a dominant fixture on Wall Street.
“It has been a really challenging situation for Blackstone,” said KBW analyst Michael Brown. “We are operating in uncharted territory in terms of the tremendous growth that Breit delivered since inception and running into a wall.”
After imposing the limit on withdrawals in November, known as a “gate” in the industry, Blackstone shares started to tumble and lost almost 20 per cent of their value before the year was out.
Schwarzman, chief executive, and Gray, who holds the titles of president and chief operating officer, launched a furious PR blitz to restore confidence. “It was a major narrative shift for Blackstone given how integral Breit had been to the story and their growth,” said Brown.
Schwarzman tried to project a sense of calm, telling staff that Blackstone had navigated many bouts of market turmoil over the years and always came out ahead. “I’ve seen all this all before and we are staying the course,” he told employees at a town hall late last year. Gray, meanwhile, attempted to reassure staff by repeating his favourite maxim: “Stay calm, stay positive and never give up.”
But they could not hide their frustration at what they saw as an outsized focus on Breit, which they argued had generated strong returns of about 12 per cent annually after sidestepping the distress in commercial real estate and investing in high-quality properties.
“The media has created a different narrative, but the customers are fundamentally happy,” Gray said on the company’s fourth-quarter earnings call in January. He started to feel that his judgment was being questioned, according to two people close to him.
Hurt feelings aside, the people that Schwarzman and Gray needed to reassure first and foremost were not necessarily employees, but rather investors in Breit and Bcred, a sister corporate lending fund. And these were not the sophisticated financiers that Schwarzman and Gray were used to hobnobbing with: they were in large part retail investors who had been attracted to the funds’ returns when interest rates were low.
Over the past five years, it has been these retail investors that have fuelled growth at Breit and Bcred, which were launched in 2017 and 2021, respectively. Since 2020, the vehicles have together attracted more than $100bn of new money and last year they accounted for nearly a quarter of the firm’s overall fee-based earnings.
All of that cash came with risks. The funds were structured as perpetual in nature, meaning Blackstone was under no obligation to sell assets and return cash to investors. But they did offer limited liquidity rights. In practice, this meant investors in aggregate were allowed to pull up to 5 per cent of the fund’s assets in any given quarter before limits kicked in.
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In 2022, the US Federal Reserve’s aggressive interest rate rises resulted in a sea change in investor behaviour. Some people with money in the Blackstone funds were feeling the pain of tighter monetary policy and needed cash. Others were tempted by the rising yields on products that had come nowhere near to matching Breit when rates were at rock bottom. Investors started trying to cash out of the funds in droves, forcing Blackstone to put up the “gate”.
Nor was Breit immune from the monetary tightening, given that it has $38bn of variable rate debt, according to securities filings.
“Retail capital behaves differently,” said one banker who has worked with the firm. “Blackstone is learning or discovering that, to a degree, it can also be more volatile. It has implications on the investing side and on the perception side.”
The different audience has required Schwarzman and Gray to adopt a new playbook, with regular appearances on CNBC, the financial cable TV channel beloved by retail investors and traders alike. Gray even set up a LinkedIn profile that is now followed by almost 25,000 people and read by considerably more.
“There was a real PR blitz . . . I don’t remember Stephen Schwarzman going on such a broad media tour ever before, but the universe of clients is now far more broad and it involves a different approach,” said the banker.
The results have been mixed. In June, investors tried to pull out $3.8bn from Breit, and Blackstone fulfilled just 17 per cent of those redemption requests. But the requests have fallen from the January highs. Blackstone has paid more than $8bn to redeeming investors since November, more than 10 per cent of its net asset value at that time.
The sense of crisis has since abated if not disappeared. Blackstone’s stock has recovered from last year’s sell-off, gaining nearly 40 per cent since the start of 2023, and now trades at a market valuation of $129bn — higher than Goldman Sachs.
“When Blackstone went public in 2007, I can’t imagine anyone would think just over 15 years later they would be crossing the $1tn in assets mark. It is a huge number to comprehend,” said Brown.
Other victories loom on the horizon. It remains on track to meet its goal of raising $150bn across 18 new vehicles in its current fundraising push. And KBW said last week that the firm may soon be added to the S&P 500 if Activision disappears from the index should Microsoft acquire the video game maker following a lengthy regulatory review.
Schwarzman has long encouraged comparisons to blue-chip companies in the indices such as Microsoft and Visa, once telling analysts Blackstone shared their “significant brand equity”.
While real estate and private equity investments comprise the bulk of Blackstone’s overall assets, it has built enormous operations spanning credit, insurance, hedge fund-oriented investments and other private investment strategies.
“They’re diversified across asset classes and a key differentiator versus peers is that they actually have scale and a track record,” said Karim Laib, an equity analyst at T Rowe Price, a Blackstone shareholder.
Patrick Dwyer, a managing director at Newedge Wealth Management, said: “Walk into any private bank in the world and ask if they have Blackstone products and they will. Banks are comfortable with the brand. All of the other shops are playing catch-up.”
He added: “It’s been a tougher period, but they have gotten through it . . . Where would you have rather been on Wall Street?”