Steve Schwarzman’s Blackstone Inc. paved the way for private equity firms to pitch the everyday millionaire. Now, a flight of money from some of the industry’s retail funds is inviting scrutiny.

The $68 billion Blackstone Real Estate Income Trust has been grappling with an increase in investors pulling money, particularly from Asia. Rival Starwood Real Estate Income Trust has also seen an uptick in withdrawal requests. In recent weeks, both of the real estate trusts limited redemptions.

That’s prompted the Securities and Exchange Commission to reach out to the firms, according to people familiar with the matter who asked not to be identified citing private information on the requests. The regulator is trying to understand the market impact and circumstances of the events, and asked how the firms met redemptions and if affiliates sold before clients, one of the people said. The inquiries aren’t any indication that either firm is under investigation or committed any wrongdoing.

Spokespeople for Blackstone, Starwood Capital Group and the SEC declined to comment on the inquiries. 

After years of courting a wider audience, private equity firms are now bracing for a chill to a retail influx that brought the industry new dollars and profits. They’re also getting a harder look from investors, regulators and the public about their push to reach smaller investors.

Given Blackstone’s status in the industry, the increase in withdrawal requests has drawn attention to the complexity of packaging highly illiquid assets such as real estate or private credit into funds that offer cash back when investors want – to a limit. 

Such limits ease the pressures on managers, making it less likely they’ll have to quickly sell assets when investors get jittery. But it also means funds can be forced to restrict withdrawals, which may dent investor confidence at a time when fears about the state of markets loom large.

“This could cast a shadow over the entire industry,” said Sheldon Chang, president of CrowdStreet Advisors, an asset manager that runs private real estate funds for individuals. “It will prompt a review of semi-liquid funds and their structure. People will tend to get overly conservative.”

Blackstone said its returns speak for itself. “Our business is built on performance, not fund flows, and performance is rock solid,” a spokesperson said, reiterating an earlier statement.

Blackstone stock dropped to the lowest since April 2021 at 10:51 a.m. on Friday, falling 3.6% to $74.59. Shares have declined 42% this year.

Lowering Thresholds
Blackstone has been continuing to make it easier for some investors to get into BREIT. Starting this month, clients whose financial advisers route money to Fidelity Investments will be able to make minimum initial investments of $2,500 into BREIT’s lowest costing share class. The previous minimum for such customers was $1 million. A Blackstone spokesman said the firm had been working toward this for months after clients asked for this option.

Blackstone has mobilized its top executives in recent weeks to calm investor nerves. President Jon Gray went on CNBC to say the curbs prevented forced selling. Schwarzman, the firm’s chief executive officer, said at a conference that BREIT’s redemptions have been spurred by investors needing liquidity for other reasons, rather than any indication of the fund’s performance.

The restrictions on withdrawals though have caused some advisers to harden their stance toward funds such as BREIT.

“It reinforced our view that we need to think of these as illiquid products,” said Jeff DeMaso, director of research at Newton, Massachusetts-based Adviser Investments.

Blackstone staked a huge chunk of its growth on smaller investors in recent years, betting that it could drum up interest from financial advisers and their wealthy clients with a pitch that the private equity firm could give individuals access to a swath of investments normally reserved for institutions.

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