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.