New York-based Blackstone Group’s popular private real estate fund known as BREIT (Blackstone Real Estate Income Trust) limited withdrawals earlier this month for the fourth consecutive month. Many investors in the fund, which has a current net asset value (NAV) of $70 billion and total asset value of $124 billion, could not get their money out as monthly redemptions kept exceeding the limits established by Blackstone.

Now investors have a new option. LODAS Markets, an alternative trading platform based in Overland Park, Kan., has started trading the shares. Whether it can handle the volume remains to be seen.

LODAS, an acronym for Liquidity on Demand As a Service, matches buyers and sellers just like a stock exchange. However, prices and the degree of liquidity can vary from Blackstone's limited redemption rates.

Alternative trading platforms like LODAS are regulated by the SEC, though not to the extent that a regular exchange is supervised. They must register as broker-dealers and are therefore regulated by Finra. They must also periodically file detailed reports about operations, potential risks, and potential conflicts of interest. Institutional investors often use these trading systems to shield their large transactions from public view and avoid impacting market values.

Securities trade at whatever value the bids and offers reflect in the fully automated system. LODAS’s first trade of BREIT Class D shares was executed at $14.42, equal to January's NAV and just below February's NAV of $14.47, according to a LODAS press release. Sellers are charged a fee of between 2% and 2.9% to complete each transaction.

As private trading platforms establish their own markets for non-traded funds like BREIT, issuers like Blackstone will lose control over who gets to buy the fund and how new buyers can access it. Until now, investors had to have an account at a broker-dealer that had a selling agreement with Blackstone. 

LODAS itself is likely to have competitors. Yoonify, a Carlsbad, Calif. startup, is developing a blockchain-enabled electronic trading system for private real estate.

Launched as Realto in 2021, LODAS has executed trades of more than 30 different funds with volumes of up to $1 million in value, it said in a press release. All trades are paperless and settled in as quickly as five days.

In February, the same platform started trading the Starwood Real Estate Income Trust (SREIT), another big private real estate fund that had “gated” redemptions. Unlisted funds like BREIT and SREIT gate their funds after monthly withdrawal requests exceed 2% of the fund’s NAV, or quarterly requests exceed 5% of NAV. This is considered a necessary safety mechanism, not a sign of trouble, as it protects investors against forced asset sales to meet liquidity obligations. It’s designed to protect shareholders.

The reason these funds limited withdrawals was essentially to stop a “run on the bank” before it got out of hand. Private REITs and other non-traded assets were never designed to be traded like public equities.

So how can LODAS get around redemption restrictions and lift the gate?

“We're attracting institutional buyers that have designated millions of dollars to these funds,” said LODAS CEO Brian King, in the press release. “It’s a significant opportunity for liquidity for investors who don’t want to wait another month to test their luck in redemption queues.”

Most buyers on the platform are institutional investors, including hedge funds and insurance companies, who purchase many nonlisted REITs, business development companies, and other illiquid real estate investments. These investors are the primary source of liquidity at present.

Sellers don’t have to be accredited investors, but the buyers do—meaning they fit the SEC definition by being sufficiently financially sophisticated and not needing the same degree of regulatory protections as ordinary investors.

Blackstone established BREIT in 2017 as a nonlisted real estate investment trust focusing on income-generating residential and commercial real estate and, to a lesser extent, real estate debt instruments. Since inception, it has realized returns of 12.3%, with three-year annualized returns of 14.7%.

Prices in the private REIT market have held up much better than those of publicly traded REITs, prompting some investors to question the disparity. Others have questioned whether the models of BREIT and SREIT, both sold through brokers and advisors, were properly explained to investors. Many of the redemption requests rportedly have come from Asia.

The question also remains whether if Blackstone limited redemptions to keep the fund from forced asset sales, is it a good idea for LODAS and private trading trading platforms to open the floodgates?

“Investors in securities should be able to get liquidity when they'd like, whether it be a publicly held stock or ETF or a so-called non-listed real estate investment trust like BREIT or SREIT,” said King, in a separate interview. “Yes, Blackstone theoretically put the gates up to prevent a run on BREIT. However, the buyers on LODAS are all accredited institutions, and if institutions want to be owners of BREIT and are able to stand in to backstop liquidity, we believe that helps Blackstone, both in the short and long term.”

Whether this greater liquidity is safe remains to be seen.

“The vast majority of investors aren't seeking to redeem BREIT shares, so it seems unlikely that there would be a massive run on the fund,” said King. “After all, securities like BREIT and SREIT are well-regarded investments run by reputable institutions. LODAS is merely offering a secondary platform to help those investors who are looking for a bit of liquidity.”