As the gates closed on Blackstone’s runaway estate vehicle

In July, Blackstone chief executive Stephen Schwarzman reported a surprise meeting with an investor in the company’s $69 billion private real estate vehicle designed for wealthy individual investors.

The person had reached out to Schwarzman to say the fund, called Blackstone Real Estate Income Trust, or BREIT, was his largest holding. “I love you guys. That’s so impressive. All my friends are losing fortunes in the market and I’m still making money,” Schwarzman reported on a quarterly conference call about the meeting.

In fact, investors were withdrawing money from BREIT at the time, alerting keen observers to Blackstone. Investors withdrew more than 2 percent of their net worth this month, according to sources familiar with the matter and securities filings, exceeding a threshold at which Blackstone can limit investor withdrawals.

Asian investors withdrew cash from the fund over the spring and summer as property markets in the region plummeted. Some had high personal leverage and were hit by margin calls, two people familiar with the matter said. BREIT, which has risen in value this year, could be sold at high prices to meet cash demands.

As sales intensified and expanded beyond Asia, Schwarzman and Blackstone President Jonathan Gray each added more than $100 million to their investments in BREIT this summer, a source with knowledge of the matter said. Blackstone declined to comment on the purchases.

Blackstone has decided not to impose any limits on investors hoping to withdraw money from BREIT in July. Although it has always told its investors that the product is only semi-liquid, such a move could have sparked fears among investors that they might not be able to get their money out easily. But a growing spate of redemption requests forced BREIT to announce on Thursday that it would finally be raising “gates” by the end of the year – which would allow the fund manager to limit the volume of assets being redeemed.

The move sent shockwaves inside Blackstone and dulled the biggest engine of asset and fee growth within the world’s largest alternative wealth manager. Blackstone shares fell more than 7 percent on Thursday, and a number of analysts lowered their outlook on the company amid concerns the decision could stall growth.

“The BREIT outflow bear case is playing out,” said Michael Brown, an analyst at Keefe, Bruyette & Woods. “[We] Expect an overhang of stocks to remain in the coming quarters.”

Column chart of billions of US dollars showing BREIT's total assets grew rapidly

Blackstone founded BREIT in 2017 to provide affluent investors with access to its renowned real estate investment platform. Unlike its traditional institutional funds such as bonds, which had a 10-year term, BREIT was designed as a “perpetual” fund with no expiration. Interested investors could buy in at the fund’s net asset value, and Blackstone would charge a 1.25 percent annual management fee and a 12.5 percent performance fee on its annual gains above a 5 percent hurdle.

Blackstone hired hundreds of sales and marketing people to sell BROAD and provided wealth advisors to the funds on a broad basis. She even created Blackstone University, an online portal where advisors could be indoctrinated on the merits of the fund.

BREIT offers wealthy individuals the same opportunity as large institutions to turn away from public markets and receive healthy dividends. To do this, however, they would have to forego certain liquidity rights. The fund allows for monthly redemptions of 2 percent of total assets by clients, with a maximum of 5 percent allowed in any calendar quarter.

BREIT became a resounding success, raking in tens of billions of dollars in assets. Blackstone invested the money primarily in logistics and multifamily residential real estate in the United States, where it correctly predicted that supply shortages would lead to rising rental income. The portfolio now totals $125 billion in gross assets, including the leverage Blackstone used to purchase real estate.

In 2021, Blackstone launched a similar product called BCRED designed for debt-based investing. Industry peers like KKR, Starwood, and Brookfield have launched funds to replicate Blackstone’s success as they also attract high-net-worth individuals as clients.

“I have a little untraded . . . Riding envy,” Apollo chief executive Marc Rowan said last year in reference to Blackstone. “That was just incredible. Kudos to the companies that really got in front of this market and really showed us how much money is out there.”

According to analysts at Barclays, BROAD has become a significant part of Blackstone’s overall finances, accounting for about 10 percent of fee-based assets under management and about one-fifth of total fee-related revenues. Because the fund is said to be a perpetual fund, analysts have attributed multiples of up to 30 times fee income to the fund’s assets.

When around $100 billion flowed into BREIT and BCRED in recent years, Blackstone’s market value at times exceeded that of Goldman Sachs.

This year has proven more challenging as rising interest rates and falling listed property stocks scare off some real estate investors. Over 70 percent of BREIT redemptions come from Asia, the FT previously reported, where the regional real estate markets have collapsed.

BREIT’s success also made it vulnerable to investor redemptions. The fund has posted a total return of 9.3 percent this year, while U.S. listed real estate funds are down about 20 percent. As the fund repurchases redemption requests at the most recent quarter’s net asset value, it became a rare asset for investors looking for cash to sell at year-highs.

Wealthy US investors began submitting requests to trim portions of their holdings this fall. Some realized gains at BREIT and offset the taxes against losses on other assets, sources familiar with the matter said. Now that Blackstone has limited withdrawals, investor demand to withdraw their money from the fund could increase.

“In our view, the biggest growth rate is behind BREIT,” said William Katz, an analyst at Credit Suisse. Katz said the redemptions called BREIT’s true value to Blackstone into question and would reduce the company’s and its peers’ ability to raise money from wealthy investors going forward.

“The ultimate question has to be about the effectiveness of these products if customers just want to withdraw their money,” he said, questioning how perpetual such an asset is.

Investors’ rush to exit came before BREIT reported a financial hit from rising interest rates, a slowing economy or falling property valuations. Critics of the way private vehicles are priced note that the fund has risen this year while the more volatile public markets have fallen sharply. Blackstone says its valuations emphasize the underlying financial performance of its properties and aren’t changing investor sentiment quickly, and they’ve factored in higher interest rates.

On Thursday, Blackstone announced the sale of a $1.27 billion minority stake in two Las Vegas casinos owned by BREIT, which FT sources said could be used to support the fund’s liquidity. BREIT made about double its money on the investments over three years and has sold $5 billion in assets above their book values ​​this year, the sources said. BREIT is considering further asset sales but insists it will not be a forced sale.

Some advisors believe that limiting redemptions will stave off any risk of distressed sales, but they advise clients to break ties with BREIT.

“The gates are one of the features of the investment that actually protect investors,” said Andy Kapyrin, chief investment officer of RegentAtlantic, a registered investment advisor with about $6 billion in assets under management.

“I don’t think the liquidity risks are so great that they should book a capital gain to get out. For investors who aren’t on board, we recommend a cautious approach.”

“BREIT has delivered exceptional returns to investors since its inception almost 6 years ago and is well positioned for the future,” Blackstone said in a statement.

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