Blackstone has failed to stem redemption requests from its $69bn real estate investment fund, which limited withdrawals at the end of last year as investors rushed to pull cash from the world’s largest alternative asset manager.
Jonathan Gray, president of Blackstone, said in an interview with the Financial Times that it was “a little early” to say redemption requests were slowing at the fund, called Blackstone Real Estate Income Trust, or Breit.
“We have a backlog from November and December,” said Gray. “I will say the tone of the conversations with our advisers is much improved.”
In December, Blackstone limited investor withdrawals from the fund, as investors grew concerned about the long-term health of the property market.
Breit is designed to give wealthy investors exposure to the New York-based group’s sprawling portfolio of commercial real estate properties such as warehouses, apartment buildings and office towers.
The fund has attracted tens of billions of dollars in assets in recent years, fuelling fee and asset growth inside Blackstone.
However, the rapid and sustained redemption requests that kicked off last summer have underscored the risks of offering liquidity for illiquid assets and may drive changes to the way Blackstone builds such funds.
“I think there will be an evolution of private wealth products,” said Gray. “This product has worked as designed, but can there be tweaks that improve things? Sure.” Gray noted that newer funds didn’t allow monthly redemptions.
In fourth-quarter results released on Thursday, Blackstone posted a sharp drop in profits as its fee-based earnings were hit by falling performance at Breit and worsening economic conditions.
Blackstone’s fee-related earnings, a proxy for the management fees it earns, plunged 42 per cent to $1.1bn. Its distributable earnings — a metric that is favoured by analysts as a proxy for overall cash flows — fell a similar amount to $1.3bn. On a per-share basis, the results either met or exceeded analyst forecasts polled by Bloomberg.
The decline in fee-based earnings was caused by a sharp drop in incentive fees — profits Blackstone makes once it has achieved a certain level of return for investors — earned by Breit due to falling performance and an accounting change.
Blackstone marked Breit down by about 1.5 per cent during the quarter, meaning the fund did not earn significant incentive fees. “Nobody was immune to a higher cost to capital and higher cap rates, but we saw really strong cash flow growth,” said Gray of Blackstone’s property portfolio.
At the beginning of 2022, Blackstone began recording incentive fees earned by Breit on a quarterly basis, instead of an annual basis.
Had the policy been in place in 2021, Blackstone’s fee-related earnings would have declined 19 per cent, due to the lack of incentive fees.
Blackstone shares initially tumbled sharply when Breit limited withdrawals, but they have recovered most of their losses, fuelled by a broad market rebound and a $4bn investment made by the University of California into the fund this month. On Wednesday, the university invested a further $500mn into Breit.
Institutional investors such as UC continue to pour money into Blackstone, which raised more than $43bn for the quarter, propelling overall assets under management to a record $975bn.
Gray said he remained optimistic about the long-term opportunity in attracting new assets from wealthy investors despite the troubles at Breit.
He said that while only 1 per cent of the $85tn in wealth available to be invested was in alternatives, that would rise over time.
“I remember in the 2008 and 2009 time period, people saying institutions wouldn’t invest in alternatives anymore. Obviously, that didn’t prove to be the case,” said Gray.
