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 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, said at a conference that BREIT’s redemptions have been spurred by investors needing liquidity for other reasons, rather than being 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.
BREIT became the pillar of that strategy and was the firm’s biggest driver of earnings in the fourth quarter of 2021. It ballooned in size, taking in investors everywhere from Asia to suburban America, and a major share class notched returns of 12.7% since its launch in 2017.
The giant fund became the envy of the investment world, with firms such as JPMorgan Chase & Co. and KKR & Co. following suit. On the heels of BREIT’s success, Blackstone rolled out the now-$50 billion Blackstone Private Credit Fund, a nontraded business development company that fueled the firm’s rise into the biggest powerhouse in direct leveraged lending. Again, others followed, including Apollo Global Management Inc.
BREIT’s success has started to complicate its future. It’s attracted investors from all over the world, meaning it is exposed to the trends in a wider array of markets. In Asia, the strong dollar caused BREIT to become a bigger position in leveraged portfolios of wealthy Asians. When home markets tanked, a slew of Asian investors faced margin calls and turned to the parts of their portfolios that could be readily turned to cash — including the Blackstone trust.
The firm’s top executives added more money into BREIT starting in July, with Gray and Schwarzman each putting down an extra $100 million to demonstrate their conviction.
But it wasn’t enough to stem the tide of requests for cash. On Dec. 1, BREIT informed investors that it had only fulfilled 43% of each investor’s repurchase request in the previous month. The firm reiterated its longstanding withdrawal policy and cautioned it would limit redemptions. Blackstone shares closed down 7% that day. Less than a week later, the firm announced that it had hit withdrawal limits for BCRED, but planned to honor all repurchase requests this quarter.
Generally, the most sophisticated investors seeking to reduce holdings in illiquid real estate funds anticipate they’ll only get part of what they request and put in bigger redemption requests than they expect fulfilled immediately, said Jonny Gould, a real estate specialist at consulting firm Callan.
Both BCRED and BREIT have outperformed the broader market. A major share class of BCRED returned 2% this year through October, compared to a loss of 2.3% for the leveraged loan market during that time period. A popular BREIT share class generated a roughly 8.4% return this year through November, outperforming the S&P 500 Index, which was down roughly 13%. A Bloomberg index of REITs fell 21%.
Blackstone says that BREIT is well positioned because it bet on better-performing assets such as warehouses and apartments in the Sun Belt, and even enlisted interest-rate hedges to offset the pain from soaring borrowing costs.
BREIT sold more than $5 billion of assets this year at a premium to its valuations, the company said. Blackstone recently struck a deal to sell its stake in a joint venture that owns two Las Vegas hotels for more than the properties were marked on its books, generating profits for BREIT investors.
The rival Starwood real estate trust has said that it has “ample liquidity,” according to documents seen by Bloomberg News.
Chatter about withdrawals, rather than performance, may be driving investors to head for the exits, said Michael George, managing director of FPLCM, an advisory firm with $750 million in Metairie, Louisiana, whose clients have money in BREIT, SREIT and similar funds.
“We know fundamentally they’re good and we’ve enjoyed great performance — consistent income and very little volatility,” George said.
But the rise in wealthy individuals seeking to exit harder-to-trade assets raises questions about whether the people actually knew the risks, from higher fees than stock and bond funds to the illiquidity of the assets, and even the incentives advisers might get to push certain products.
“The broker-dealer adviser community is organized around fee generation,” Michael Rosen, chief investment officer at Angeles Investment Advisors, a private wealth advisory firm in Santa Monica, California. “If the advisers are incented to sell, they may spend less time than they should explaining the downsides to clients.”
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