BREIT became the pillar of that strategy and was the firm’s biggest driver of earnings in the fourth quarter of 2021. It ballooned in size, taking in investors everywhere from Asia to suburban America, and a major share class notched returns of 12.7% since its launch in 2017.
The giant fund became the envy of the investment world with firms such as JPMorgan Chase & Co. and KKR & Co. following suit. On the heels of BREIT’s success, Blackstone rolled out the now-$50 billion Blackstone Private Credit Fund, a non-traded business development company that fueled the firm’s rise into the biggest powerhouse in direct leveraged lending. Again, others followed including Apollo Global Management Inc.
Swelled in Size
BREIT’s success has started to complicate its future. It’s attracted investors from all over the world, meaning it is exposed to the trends in a wider array of markets. In Asia, the strong dollar caused BREIT to become a bigger position in leveraged portfolios of wealthy Asians. When home markets tanked, a slew of Asian investors faced margin calls and turned to the parts of their portfolios that could be readily turned to cash—including the Blackstone trust.
The firm’s top executives added more money into BREIT starting in July, with Gray and Schwarzman each putting down an extra $100 million to demonstrate their conviction.
But it wasn’t enough to stem the tide of requests for cash. On Dec. 1, BREIT informed investors that it had only fulfilled 43% of each investor’s repurchase request in the previous month. The firm reiterated its long-standing withdrawal policy and cautioned it would limit redemptions. Blackstone shares closed down 7% that day. Less than a week later, the firm announced that it hit withdrawal limits for BCRED, but planned to honor all repurchase requests this quarter.
Generally, the most sophisticated investors seeking to reduce holdings in illiquid real estate funds anticipate they’ll only get part of what they request and put in bigger redemption requests than they expect fulfilled immediately, according to Jonny Gould, a real estate specialist at consulting firm Callan.
Both BCRED and BREIT have outperformed the broader market. A major share class of BCRED returned 2% this year through October, compared to a loss of 2.3% for the leveraged loan market during that time period. A popular BREIT share class generated a roughly 8.4% return this year through November, outperforming the S&P 500 Index, which was down roughly 13%. A Bloomberg index of REITs fell 21%.
Blackstone says that BREIT is well positioned because it bet on better-performing assets such as warehouses and apartments in the U.S. Sun Belt, and even enlisted interest rate hedges to offset the pain from soaring borrowing costs.
BREIT sold more than $5 billion of assets this year at a premium to its valuations, the company said. Blackstone recently struck a deal to sell its stake in a joint venture that owns two Las Vegas hotels for more than the properties were marked on its books, generating profits for BREIT investors.
The rival Starwood real estate trust has said that it has “ample liquidity,” according to documents seen by Bloomberg News.
More Illiquid
Chatter about withdrawals, rather than performance, may be driving investors to head for the exits, according to Michael George, managing director of FPLCM, an advisory firm with $750 million in Metairie, Louisiana, whose clients have money in BREIT, SREIT and similar funds.
“We know fundamentally they’re good and we’ve enjoyed great performance—consistent income and very little volatility,” George said.
But the rise in wealthy individuals seeking out of harder-to-trade assets raises questions about whether the people actually knew the risks, from higher fees than stock and bond funds to the illiquidity of the assets, and even the incentives advisers might get to push certain products.
“The broker-dealer adviser community is organized around fee generation,” Michael Rosen, chief investment officer of Angeles Investment Advisors, a private wealth advisory firm in Santa Monica, California. “If the advisers are incented to sell, they may spend less time than they should explaining the downsides to clients.”
—With assistance from Lisa Lee and Allyson Versprille.
This article was provided by Bloomberg News.