became one of the world’s most powerful financial firms by investing on behalf of large institutional investors. To boost growth, it decided to offer its products to individuals. Its new fund was a huge success, becoming the biggest Blackstone had ever raised.
Then it became a crisis.
The firm launched Breit, officially called Blackstone Real Estate Income Trust Inc., in 2017 to give retail investors a chance to own a piece of apartment buildings, warehouses, data centers and other types of commercial real estate. Individuals could invest as little as $2,500 and had the opportunity to sell their shares back to Breit each month if they wanted out.
Despite strong returns, a wave of Breit investors headed for the exits at the end of last year, spooked by a stock market downturn, rising interest rates and the slumping property market. Small investors differed sharply from the methodical, big-picture investors on which Blackstone had built its fortunes. They had smaller stakes and shorter timelines—and often made decisions based on gut and emotion.
Requests to sell spiked, so much so that the fund on Dec. 1 said it was enforcing a provision that allowed it to limit withdrawals. That caused Blackstone shares to tumble, leaving them down nearly 20% by the end of December.
It took a public-relations blitz by Blackstone, a $4.5 billion outside investment in Breit, better-than-expected quarterly earnings and an improved macroeconomic picture to quell investor concerns. The stock recovered, and is now trading above where it was before the limits were enforced.
But Breit has a backlog of billions of dollars worth of redemption requests to work through, and reassuring investors remains paramount. The debacle has raised doubts about the durability of a retail-investor focused strategy and left Breit facing ongoing questions about its property valuations.
‘Not very nice’
Stephen Pau, the chief investment officer at Hong Kong-based Hefeng Family Office, which manages money on behalf of several ultra-high-net-worth families in Asia, said the company started selling its shares in Breit late last year and has since redeemed the majority of them.
Mr. Pau said he understood why Blackstone raised the redemption gate—so the firm wouldn’t have to sell assets to meet the demands—but added, the move was “not very nice” for investors who are still in the fund. Today, he sees better opportunities in Asia for his clients’ money.
Breit’s performance has remained strong, even amid the recent selling by investors, a divergence that has irked many at Blackstone. “We have this frustration because there is a disconnect between performance and reality,” said its president,
The fund had a net asset value of nearly $70 billion, and returned 8.4% in 2022, trouncing the FTSE Nareit All Equity REIT index’s decline of 24.9% and beating the S&P 500 stock index’s 19% decline. Over the six-year life of the fund, Breit has delivered a 12.5% annual return—three times the MSCI US REIT Index, a benchmark for U.S.-focused public REITs.
High redemption requests have continued. Breit said in a Feb. 1 notice to shareholders that requests to sell exceeded the monthly limit in January, prompting it to continue to limit redemptions. It said it fulfilled 25% of the requests submitted. Shareholders who want to sell more must submit new requests in the following month. Breit had filled 4% of requests made in December, and also had limited withdrawals in November.
Blackstone said repurchase requests as of Friday are significantly lower compared with the equivalent time in January.
“It’s not surprising that high-net-worth individuals seek liquidity during major market downturns—happens every down cycle,” said Chief Executive
in an interview with The Wall Street Journal. That is why the vehicle was structured as semiliquid, he said, meaning investors can’t take money out whenever they want.
Other private-equity giants have also started targeting individual investors, including Starwood Capital Group,
Brookfield Asset Management Inc.
& Co., each of which launched its own version of Breit in recent years. Overall, these funds have raised more than $99 billion from nearly a million investors, according to Robert A. Stanger & Co., an investment banking firm that tracks the market. Over $63 billion of that total went into Breit, Stanger said.
After Blackstone said it would begin limiting redemptions, Starwood, which manages the second-largest competitor fund, and KKR also started to limit redemptions because of the large number of investors trying to cash out.
Starwood’s $14.2 billion fund, like Breit, allows monthly redemptions. In January that fund said in a regulatory filing that investors holding 4.2% of the fund requested redemptions and that it redeemed just 20% of those requests.
KKR, which allows quarterly redemptions of up to 5% of net asset value, said in filings that it would pay out 62% of the $128 million in redemption requests submitted during its most recent tender period, which closed in January.
Pressure to grow
Private-equity firms, particularly publicly traded ones, must continue to add assets under management in order to earn more fees and satisfy their shareholders. The biggest firms over the years have become sprawling enterprises with businesses that invest in real estate, credit, infrastructure and more.
Their traditional customers, such as pensions and other institutional investors, have largely stopped putting more of their portfolios into private markets. Firms are now counting on wealthy individuals for their next leg of growth.
“The issue is: How are they going to manage an illiquid asset from a psychological standpoint, when something happens?” said Jamie Stone, a Steamboat Springs, Colo.-based principal at private-wealth advisory firm MSW Financial Partners. “Historically, they don’t handle it very well, and that creates a problem.”
The stakes are especially high for Blackstone, which manages nearly $1 trillion in assets and has been a leader in targeting individuals. Breit has become one of the biggest drivers of Blackstone’s overall profit, and the firm views the money pouring in from individual investors as one of its big growth engines in the years ahead.
At its peak in 2021, the private fund, meaning it isn’t traded on a stock exchange, was attracting as much as $3 billion a month in new investments. One big appeal was the ability to get a dividend of more than 4% when interest rates were near zero.
Blackstone said Breit’s portfolio, consisting predominantly of warehouses used in e-commerce and multifamily apartments in fast-growing Sunbelt regions, is tailored to do well in the current market. Unlike office buildings and retail stores, both are parts of the market where cash flows have climbed due to inflation and rising rents.
Comparable cash flows for Breit were up 13% in 2022, versus 8% for public REITs in a benchmark index, and Blackstone said hedges it put in place to protect the portfolio against rising interest rates appreciated in value by $4 billion. Breit has more than $14 billion of cash to make acquisitions and avoid being forced by redemption requests to sell property, the firm said.
But critics, including some Blackstone competitors, began to raise questions last year about Breit’s property valuations. Breit uses outside experts to help it reassess the value of the properties it owns each month, numbers which are reflected in Breit’s share price. While the share prices of public REITs have plunged, Breit’s price has held up. That led some Breit investors to worry that the fund’s valuations were lagging behind the market, and would eventually need to be marked down, too. For those investors, the concern added urgency to their desire to get out.
Blackstone has said private real estate is less volatile than public real estate, meaning its value doesn’t swing as much in either direction.
Severe market reaction
One of Breit’s most innovative features ultimately caused its biggest crisis. The fund allows investors to sell their shares every month, in contrast to Blackstone’s funds for institutional investors, in which money might be locked up for 10 years or more.
When redemption requests spiked late last year, it set off a roller-coaster few months.
“Private banking clients are much faster in shifting positions and reallocating money than institutional investors in Europe and the U.S.,” said Richard Mai, executive director of Hong Kong-listed social video platform company
Tian Ge Interactive Holdings Ltd.
He said his company added Breit to its own portfolio roughly two years ago. At the time, Tian Ge was attracted by the stable growth of the U.S. housing market. It started redeeming late last year and has since unloaded half of its holdings.
“When the Fed started to hike rates, we realized that the double-digit returns Breit was offering were not sustainable,” Mr. Mai said.
Breit’s terms say it can redeem up to 2% of its net asset value each month and up to 5% of its net asset value each quarter, and can limit redemptions after breaching those levels—which it announced on Dec. 1 that it was doing.
Blackstone shares fell 10% in the hours after the company said it was limiting withdrawals.
Messrs. Gray and Schwarzman appeared on TV and at investor conferences to undo the damage. The firm also ramped up its outreach to financial advisers, hosted webinars and published fact sheets to help answer clients’ questions, and hopefully rebuild confidence in Breit.
In January, Blackstone announced a $4 billion investment in Breit by the University of California, which effectively pledged to hold the position for six years. The money eased pressure on Blackstone to raise cash by selling properties, but it came at a cost. Blackstone had to take the unusual step of pledging $1 billion of its own Breit shares to provide the California school system with an annual return of at least 11.25% until the pledged amount was exhausted.
The University of California later agreed to invest $500 million more on the same terms.
Blackstone’s fourth-quarter earnings report last month also helped restore shareholder confidence, with the firm’s $226 billion fundraising haul for 2022 demonstrating that it has other growth engines besides Breit.
Vijay Kanal, president of San Mateo, Calif., private-wealth advisory firm Stinson Capital Management, said he reassured two clients who had concerns about Breit and wanted to sell by using information from a webinar Breit hosted for advisers in December that included data on why its properties were doing well.
“My main comfort level comes from what they’re invested in,” he said, saying his clients decided to have him monitor the situation and not sell. Mr. Kanal said 10% of his clients’ portfolios and some of his personal money is in Breit.
The vast majority of Breit’s investors have stayed put. The firm said it received redemption requests from 3% of U.S. investors and 5% of all investors during December.
Breit shareholder Larry Swedroe of St. Louis said he was glad to see Blackstone enforce the redemption limits. “You don’t want some naive retail investor to panic and sell, chasing returns, because that forces Blackstone to sell assets immediately,” said Mr. Swedroe, who works for a private-wealth advisory firm.
New kind of REIT
That Blackstone was caught flat-footed on Breit puts pressure on the product’s architect, Mr. Gray. The firm’s former head of real estate has had a meteoric rise within Blackstone, making him a billionaire and the heir apparent for the CEO job.
He has personally appeared in videos and fielded many questions about the fund on Blackstone’s earnings conference call last month. Mr. Gray defended the fund’s performance and complained about the “media narrative” around Breit.
Earlier versions of private REITs geared to individual investors imploded in 2014, after criticism for years over high fees, unreliable valuations and complaints from investors who were unable to cash out. The largest player collapsed that year after one of its companies disclosed it had falsified financial information.
In Mr. Gray’s new version, Breit charged initial management and sales fees of less than 2% of the invested amount, compared with as much as 15% by the earlier funds, and reset its share price monthly using third-party appraisers to value its properties.
Breit had an instant, broad appeal, especially amid low interest rates that fell even further during the Covid-19 pandemic.
Blackstone in 2019 began allowing investors outside the U.S. to put money into Breit. It hired 40 salespeople in Asia, and at one point about 30% of Breit’s total capital came from that region, especially Hong Kong and Singapore, according to people familiar with the matter.
Flows from the region began to reverse in 2022 as global markets faltered. Hong Kong’s Hang Seng Index fell further than the U.S. market, tumbling nearly 40% from the start of the year through the end of October.
For many of Breit’s Asian shareholders, the fund was one of the few winners in their portfolio. That made it a good choice to sell for anyone who needed to raise funds or wanted to reinvest elsewhere. Hong Kong and Singapore don’t have capital-gains taxes, so there were few disincentives to cashing out.
Mr. Schwarzman now believes Blackstone shouldn’t have pushed the product so hard in Asia, particularly given the common practice among investors there to borrow money to invest, according to people familiar with his thinking.
Blackstone said the redemption limits ensure an orderly distribution of cash back to investors without forcing the fund to sell properties when most commercial real-estate prices are falling. “The product is doing what it’s supposed to do,” said Mr. Gray.
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