TheChek News Flow

Blackstone’s mammoth property fund gets a helping hand

Over the summer, investors were pulling money out of Blackstone’s private real estate investment fund Breit at an increasingly rapid pace.

As they did, Blackstone’s Stephen Schwarzman and Jonathan Gray were putting money in. They added more than $100mn apiece to their investments in the $69bn-in-assets trust, which was launched in 2017 and has become the biggest engine of growth inside the Blackstone empire.

But redemptions last month were so heavy that Breit limited withdrawals, a decision that has provoked some scepticism about Blackstone’s ability to continue growing its assets and its overall stock market valuation.

The purchases and sales underscore a reality within the broader private equity universe that will be the big story in coming years.

Private equity firms and their executives are still flush with cash after an epic decade for buyouts, but their investors who have committed to illiquid funds are facing a crunch amid sharply rising interest rates and unwinding public markets.

Blackstone’s Briet perfectly encapsulates the state of play.

The fund was hit with redemptions from Asia in the spring and summer from overleveraged investors who were exposed to troubled property markets in the region, DD’s Antoine Gara and Sujeet Indap reported. As some investors faced margin calls, Breit turned into a perfect source of liquidity where they could pull cash out quickly without realising losses.

Then the selling spread globally.

But Breit did have some big buyers — Blackstone insiders such as Schwarzman, Gray and other executives. Collectively, they now own a staggering $1.4bn in Breit, according to calculations from Credit Suisse analyst Bill Katz, more than double their holdings since the beginning of the year.

In July, when Breit investors increased their redemptions to troubling levels, Schwarzman had an interesting anecdote to share on an earnings conference call.

He recounted a surprise meeting with a Breit investor who told him: “I love you people. This is so amazing. All of my friends are losing a fortune in the market and I’m still making money.”

There’s some truth to the statement, though its provenance remains a mystery. Breit has invested in logistics and multifamily US real estate where supply remains short and rents are up.

The only issue — unless Schwarzman and Gray want to continue buying Breit — is that even happy clients can monetise the fund whenever they want to pay bills, or bargain hunt in public markets.

Now that investors have tripped withdrawal limits — 2 per cent of net assets a month or 5 per cent a calendar quarter — Blackstone will find out whether they value its investing acumen enough to find liquidity elsewhere, or will pull out more cash in the coming months and years.

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Brussels refuses to extend rules of origin exemption agreed in Brexit trade deal

Carmakers have warned that the prices of many electric vehicles made or sold in the UK and Europe could jump 10 per cent or more from 2024 after Brussels said it would not extend tariff exemptions agreed in the Brexit trade deal.

The UK-EU Trade and Cooperation Agreement (TCA) temporarily exempted EVs from rules stating that products must be substantially made in Britain or the bloc to qualify for the EU’s zero tariff, zero quota regime because such a large proportion of EV batteries are imported from Asia.

Both EU and UK car manufacturing groups are asking for the rules of origin exemption to be extended from December 31 2023 because there are not enough batteries and precursor chemicals currently being made in Europe. If London and Brussels do not agree a change, many EVs moving between the two would pay 10 per cent tariffs, increasing prices for consumers.

“The European battery industry is simply not taking off quickly enough to keep in line with more restrictive rules,” said a spokesperson for the European Automobile Manufacturers Association, which represents EU carmakers. “What is more, given the recent spike in prices of raw materials — which make up most of the non-European content of a battery — it is becoming increasingly challenging to meet the rules of origin for batteries.”

“If the batteries do not meet the rules, then it is virtually impossible that the electric car itself will, as batteries make up 30-45 per cent of the total price of an electric car,” the spokesperson added.

Under the TCA a maximum of 45 per cent of the value of products is allowed to originate from outside the EU in order to benefit from zero-tariff trade.

Until January 1 2024, at least 40 per cent of the content of electric vehicles, and 30 per cent of batteries, must originate from the EU or the UK. From 2024 until January 1 2027, this increases to 45 per cent of electric vehicles and 50 to 60 per cent of batteries. If this is exceeded carmakers will pay 10 per cent tariffs.

Mike Hawes, chief executive of UK trade body the Society of Motor Manufacturers and Traders, said he supported an extension to the exemption. “I do not think the battery manufacturing capability in either the UK or Europe will expand enough to meet demand,” he added.

However, an EU official said Brussels was “not open to changes to the rules of origin”. “They are part of a dedicated balance of the TCA. Stakeholders have been given the time to adapt, and they are advised to use the transition time provided,” the official added.

The UK government said it was confident the industry could adapt in time. “We are determined to ensure the UK remains one of the best locations in the world for automotive manufacturing, especially as we transition to electric vehicles. We agreed a zero tariff, zero quota deal with the EU, which includes modern rules of origin for the automotive sector,” said a spokesperson.

More than a dozen battery factories are expected to open across Europe this decade to cater for the growing number of electric vehicles made in the region. But carmakers say promises by the chemical and battery industry for a swift increase in production have not been met.

“We were sold a pup by the chemical industry,” said one person familiar with the talks.

However, neither the UK nor EU wanted to request an extension to the exemption. “The politics is such that if one side requests the other will demand something in return.”

EU member states could press Brussels into accepting rules of origin changes if London also agrees. But a qualified majority of member states would have to vote for the change at the council of the European Union.

Xiana Mendéz, Spain’s trade minister, recently told the FT that Madrid would favour the move. Spain is the second-largest carmaker in Europe by volume, producing 16 electrified models.

“We would be sympathetic. We have a value chain between the EU and UK. It is in the mutual interest for the right rules of origin to be in place. If we import batteries from Asia that has to be taken into account,” he said