Blackstone failed to stem real estate withdrawals as profits plummeted

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Blackstone failed to stem redemption requests from its $69 billion real estate investment fund, which limited withdrawals at the end of last year as investors scrambled to pull money from the world’s largest manager of alternative assets.

Blackstone chairman Jonathan Gray 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,” Gray said. “I will say that the tone of the conversations with our advisors has improved a lot.”

In December, Blackstone limited investor withdrawals from the fund, as investors grew increasingly concerned about the long-term health of the real estate market.

Breit is designed to give wealthy investors exposure to the New York-based group’s sprawling portfolio of commercial properties such as warehouses, apartment buildings and office towers.

The fund has attracted tens of billions of dollars in assets in recent years, driving higher fees and asset growth within Blackstone.

However, the rapid and sustained redemption requests launched last summer underscored the risks of offering liquidity for illiquid assets and could lead to changes in the way Blackstone builds such funds.

“I think there will be an evolution in private wealth products,” Gray said. “This product worked as designed, but could there be tweaks that would improve things? Absolutely.” Gray noted that the new funds do not allow for monthly redemptions.

In fourth-quarter results released Thursday, Blackstone reported a sharp decline in its earnings as its fee-based earnings were hit by sluggish performance in British and worsening economic conditions.

Earnings related to fees for Blackstone, which is a proxy for the management fees it earns, fell 42 percent to $1.1 billion. Its distributable earnings — a measure that analysts favor as a proxy for overall cash flow — fell by a similar amount, to $1.3 billion. On a stock basis, the results either met or exceeded analyst expectations polled by Bloomberg.

The drop in fee-based earnings was due to the sharp drop in incentive fees — profits that Blackstone makes once it achieves a certain level of return for investors — that Breit made due to lower performance and an accounting change.

Blackstone cut BRIT by 1.5 percent during the quarter, which means the fund didn’t earn a significant stimulus fee. “No one was immune from a higher cost of capital and higher cap rates, but we saw strong cash flow growth,” said Gray of Blackstone’s real estate portfolio.

At the start of 2022, Blackstone began recording incentive fees earned by Breit on a quarterly basis, rather than on an annual basis.

Had the policy been in place in 2021, Blackstone’s fee-related earnings would have fallen 19 per cent, due to a lack of incentive fees.

Shares of Blackstone initially fell sharply when it capped withdrawals for Britt, but it has clawed back most of its losses, spurred by a broad market rally and a $4 billion investment the University of California made in the fund this month. On Wednesday, the university invested another $500 million in Project BRIT.

Institutional investors like UC continue to pour money into Blackstone, which raised more than $43 billion for the quarter, pushing total assets under management to $975 billion.

Gray said he remains optimistic about the long-term opportunity in attracting new assets from wealthy investors despite the problems at Brit.

He said that while only 1 percent of the $85 trillion in wealth available for investment was in alternatives, that would rise over time.

“I remember in the time period between 2008 and 2009, people said institutions weren’t going to invest in alternatives anymore. That clearly hasn’t been proven to be the case,” Gray said.

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