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Blackstone chose to not place any limits on investors hoping to withdraw money from BREIT in July. Although the firm has always told its investors the product is only semi-liquid, such a move could have sparked fears among investors they could not get their money out easily.ANDREW KELLY/Reuters

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In July, Blackstone Inc. chief executive officer Stephen Schwarzman recounted a surprise meeting with an investor in the firm’s US$69-billion-in-assets private real estate vehicle designed for wealthy individual investors.

The person had approached Mr. Schwarzman to tell him the fund, Blackstone Real Estate Income Trust, or BREIT, was his largest position.

“I love you people. This is so amazing. All of my friends are losing a fortune in the market and I’m still making money,” recounted Mr. Schwarzman of the meeting on a quarterly earnings call.

In fact, investors were pulling money from BREIT at the time, alarming close watchers of Blackstone. Investors withdrew more than 2 per cent of its net assets that month, according to sources familiar with the matter and securities filings, exceeding a threshold at which Blackstone can limit investor withdrawals.

Asian investors had been pulling cash from the fund during the spring and summer as property markets in the region plunged. Some carried high personal leverage and were hit with margin calls, say two people familiar with the matter. BREIT, the value of which has risen this year, could be sold at high prices to meet the cash calls.

As the selling intensified and moved beyond Asia, Mr. Schwarzman and Blackstone’s president, Jonathan Gray, each added more than US$100-million to their investments in BREIT this summer, says a source with knowledge of the matter. Blackstone declined to comment on the purchases.

Blackstone chose to not place any limits on investors hoping to withdraw money from BREIT in July. Although the firm has always told its investors the product is only semi-liquid, such a move could have sparked fears among investors they could not easily get their money out.

But a growing tide of redemption requests forced BREIT to announce last Thursday it would finally raise “gates” – allowing the fund manager to limit the volume of assets redeemed – through to the end of the year.

The move has sent shockwaves inside Blackstone, tarnishing what has become the biggest engine of asset and fee growth inside the world’s largest alternative asset manager. Last Thursday, Blackstone’s shares fell more than 7 per cent and a host of analysts downgraded their outlook on the company over fears that the decision could cause its growth to stall.

“The BREIT outflow bear case is playing out,” says Michael Brown, an analyst at Keefe, Bruyette & Woods Inc. “[We] expect it to remain an overhang on shares in the coming quarters.”

Blackstone created BREIT in 2017 as a way for wealthy investors to gain access to its acclaimed real estate investment platform. Unlike its traditional funds designed for institutional investors like pensions, which came with 10-year lives, 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 per cent annual management fee and a 12.5 per cent performance fee on its annual profits above a 5 per cent hurdle.

Blackstone hired hundreds of sales and marketing staff to sell BREIT and made the fund broadly available to wealth advisors. It even created “Blackstone University,” an online portal on which the advisors could be indoctrinated on the fund’s merits.

It pitched BREIT as offering wealthy individuals the same ability as large institutions to diversify away from public markets and receive healthy dividends. However, to do so, they would have to accept giving up some liquidity rights. The fund allows for 2 per cent of total assets to be redeemed by clients each month, with a maximum of 5 per cent allowed in a calendar quarter.

BREIT became a roaring success, drawing in tens of billions of dollars in assets. Blackstone invested the money mostly in logistics and multifamily U.S. residential real estate, where it correctly predicted that supply shortages would propel rising rental income. The portfolio now stands at US$125-billion in gross assets, which includes leverage Blackstone has used to purchase property.

In 2021, Blackstone launched a similar product designed for debt-based investments, Blackstone Private Credit Fund (BCRED). Industry peers such as KKR & Co. Inc., Starwood Capital Group and Brookfield Asset Management Inc. have launched funds to replicate Blackstone’s success as they also prioritize winning wealthy individual investors as clients.

“I do have a little bit of non-traded ... REIT envy,” said Marc Rowan, Apollo Global Management Inc.’s chief executive officer, last year, referring to Blackstone.

“This has just been amazing. Kudos to the firms that have really gotten in front of this market and have really shown us how much money is out there.”

BREIT has grown to become a significant piece of Blackstone’s overall finances, representing about 10 per cent of its fee-paying assets under management (AUM) and about a fifth of overall fee-related earnings, according to analysts at Barclays. As the fund is ostensibly perpetual in nature, analysts have ascribed multiples as high as 30-times fee revenues to the fund’s assets.

As about $100-billion poured into BREIT and the Blackstone Private Credit Fund in recent years, Blackstone’s market value at times eclipsed that of Goldman Sachs Group Inc.

This year has proven to be more challenging, as rising interest rates and falling publicly listed property stocks scare some property investors. Over 70 per cent of redemptions from BREIT have come from Asia, the Financial Times previously reported, where regional property markets have plunged.

BREIT’s success also made it vulnerable to investor redemptions. The fund has delivered a 9.3 per cent total return this year, while U.S. listed real estate trusts have declined about 20 per cent. As the fund repurchases redemption requests at their most recent quarter’s net asset value, it became a rare asset that investors looking to raise cash could sell at annual highs.

Wealthy U.S. investors began submitting requests to trim parts of their holdings this fall. Some realized gains on BREIT and offset the taxes with losses on other assets, say sources familiar with the matter. Now that Blackstone has limited withdrawals, investor demand to pull their money from the fund may intensify.

“Our view is that the greatest rate of growth is behind BREIT,” says William Katz, an analyst at Credit Suisse Group AG. Mr. Katz says the redemptions cast into question the true value of BREIT to Blackstone and will diminish the firm and its peers’ ability to raise money from wealthy investors in the future.

“The ultimate question has to be asked about the efficacy of these products if clients only want to get their cash out,” he says, questioning just how perpetual such capital is.

Investors’ rush for the exits has come before BREIT reported any financial hit from rising interest rates, a slowing economy, or falling property valuations. Critics of the way private vehicles are valued note that the fund has gained this year while more volatile public markets have fallen sharply.

Blackstone says its valuations emphasize the underlying financial performance of its properties and not quickly shifting investor sentiment and they have accounted for higher interest rates.

Last Thursday, Blackstone announced the US$1.27-billion sale of a minority interest in two Las Vegas casinos that BREIT owns, which sources told the Financial Times could be used to support the fund’s liquidity. BREIT made about twice its money on the investments over three years and has sold US$5-billion in assets this year above their carrying values, say the sources. BREIT is considering other asset sales, but insists it will not be a forced seller.

Some advisors believe the limitation on redemptions will stave off any risks of firesales, but they’re advising clients to pause on committing to BREIT.

“The gates are one of the features of the investment that actually protects investors,” saus Andy Kapyrin, chief investment officer of CI RegentAtlantic Private Wealth, a registered investment advisor with about US$6-billion in AUM.

“I don’t think the liquidity risks are so big that they should book a capital gain to get out. For investors that aren’t in, we are recommending a cautious approach,” he adds.

Meanwhile, Blackstone said in a statement that “BREIT has delivered extraordinary returns to investors since inception nearly six years ago and is well positioned for the future.”

© The Financial Times Limited 2022. All Rights Reserved. FT and Financial Times are trademarks of the Financial Times Ltd. Not to be redistributed, copied, or modified in any way.

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