Blackstone’s real estate crown jewel loses its shine
Blackstone’s Stephen Schwarzman and Jonathan Gray have built the best fundraising machine on Wall Street and become the envy of the private equity industry. Now, the billionaire duo are in an unfamiliar position — returning cash to clients asking for their money back.
Blackstone’s shares fell 7 per cent on Thursday after it limited withdrawals from its $125bn real estate investment fund, after a surge of redemption requests, DD’s Antoine Gara and Sujeet Indap report.
The new conditions present perhaps the biggest challenge the firm has faced since it went public just ahead of the 2008 financial crisis.
It’s well worth understanding what the fund, known as Breit, is all about. The FT’s Robin Wigglesworth breaks it down in this Alphaville post.
It’s a pool of money, mostly from wealthy individuals, which is used to buy property assets including warehouses, apartments, student housing and data centres. It offers investors steady yields: its annualised distribution rate has been 4.4 per cent since it was set up in 2017.
And it’s close to the hearts of Schwarzman and Gray — the latter of which has described it as his “beloved Breit”. You can see why. As of October, Breit accounted for about 10 per cent of Blackstone’s total fee-earning assets under management. According to Goldman Sachs, it accounted for about a fifth of its overall fee revenues last year.
But Breit faces potentially significant challenges. Higher yields are now more easily available elsewhere — and any major property downturn would hit it hard.
Most real estate investment trusts are publicly traded, and their performance has deteriorated in many cases, but Breit is private. If investors want to get out, Blackstone buys back shares at the fund’s “net asset value”.
And that’s what’s getting tricky. Breit said on Thursday that it had been forced to limit investor withdrawals as the fund’s limits — 2 per cent of net asset value taken out per month and 5 per cent per quarter — had been already reached with about $3bn taken out so far this quarter.
It’s a reminder that Blackstone is dramatically different today than it was during the last financial crisis. It has a spectrum of funds and formats that go well beyond private equity. In particular, growth has come from permanent and perpetual capital increasingly funded by wealthy individual investors who want access to real estate and credit investment vehicles outside of public markets.
But what hasn’t been tested is how their newfangled funds behave in a time of stress, either from underperformance or investors needing liquidity to meet other obligations. The poor signalling of the “gate” may only heighten a rush for the exits.
It’s a far different scenario from the 2008 crisis when Blackstone’s traditional private equity funds with long-term lockups allowed it to ride out the crisis and fix portfolio companies, most notably the Hilton hotels chain.