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Blackstone chief executive Stephen Schwarzman said the investment was a ‘validation’ of Breit’s portfolio and performance © Angus
Mordant/Bloomberg
Antoine Gara in New York YESTERDAY
One of the largest endowments in the US is making a $4bn investment into
Blackstone’s flagship private real estate investment trust, in a move intended to shore
up confidence in a $69bn fund that put limits on investor withdrawals last year after
suffering heavy redemptions.
The University of California’s endowment, which manages more than $150bn of
assets, on Tuesday said it would make the investment in the Blackstone Real Estate
Income Trust, or Breit, at its current net asset value. That means it is taking a large
position at the same valuation as the fund’s more than 200,000 existing investors.
Blackstone Group LP
University of California invests $4bn in Blackstone’s real estate fund
Private equity group offers minimum annual return of 11.25% with $1bn backstop to entice endowment
However, Blackstone has promised a minimum annual return of 11.25 per cent for six
years and is providing a $1bn backstop if the fund does not achieve that target. In
exchange, the endowment has agreed to lock up its capital in the fund until 2028,
while paying higher overall fees if the vehicle performs well. Other investors do not
benefit from the same arrangement.
The investment was a “validation” of Breit’s investment portfolio and performance,
said Blackstone chief executive Stephen Schwarzman.
In November, Blackstone limited investor withdrawals from Breit after breaching
monthly and quarterly limits on redemptions, an announcement that cast doubt on
the future expansion of the fund and prompted a sharp slide in the New York-based
private equity group’s shares. Breit has grown quickly in recent years and accounts for
a fifth of the group’s fee-based earnings, according to analysts.
Blackstone shares were up nearly 2 per cent at midday in New York following the
announcement. The company’s stock price has plunged more than 40 per cent over
the past 12 months.
After the restriction was put in place last year, Jagdeep Singh Baccher, chief
investment officer at the University of California, reached out to Blackstone to
propose making a large direct investment in the fund. On December 8, Singh spoke to
Blackstone president Jonathan Gray to propose the investment.
“We consider Breit to be one of the best positioned, large-scale real estate portfolios in
the US, managed by one of the world’s top real estate investors,” said Singh. “This is
an opportunity that comes only through strong, trusted partnership.”
While the university will be buying common shares in Breit, it will then move the
investment into a strategic venture it has created alongside Blackstone.
Its $4bn investment will be combined with $1bn in shares Blackstone already owns in
Breit and moved into a separate fund that carries a performance fee above an 11.25
per cent hurdle rate.
Blackstone would receive a 5 per cent cash performance payment on any returns in
excess of that hurdle rate, the group said in a statement.
Those fees would be on top of Breit’s costs for all investors, including the University of
California. Investors pay a 12.5 per cent performance fee to Blackstone above a 5 per
cent annual hurdle.
Copyright The Financial Times Limited 2023. All rights reserved.
If the fund performs poorly and does not achieve an 11.25 per cent annual return,
Blackstone will return fees to the university until it receives its guaranteed return. If
the fund were to fall in value, or earn minimal returns, the private equity group risks
forfeiting the $1bn of shares, said two people briefed on the agreement.
Blackstone said the investment was advantageous to the firm and its shareholders. It
said it would make money on the investment if Breit returned an annualised return of
at least 8.7 per cent over the next six years.
The university has agreed to hold its investment in Breit for a minimum of six years
and then will have the ability to redeem its interests over a two-year period beginning
in 2028. This contrasts with the monthly liquidity Blackstone offers the fund’s other
investors, who can redeem up to 2 per cent of the fund’s overall assets a month, or 5
per cent per quarter.
The university’s investment comes as other investors continue to redeem from the
fund.
In December, US investors sought to redeem 3 per cent of their overall assets in the
fund and 5 per cent of all investors sought redemptions, according to people familiar
with the matter.
However, because of Blackstone’s restriction of withdrawals, just 0.43 per cent of
Breit’s net assets were redeemed in December.
In a communication sent to Breit investors, Blackstone called the new investment a
“win” for existing shareholders because it would increase the “balance sheet
flexibility” of the fund and add capital during what “we believe is an opportune
deployment period”.
The company also said the investment should bolster fees paid to the group and its
common shareholders.