Blackstone chief dismisses concerns over $69bn real estate fund (From The Financial Times) [3 Articles]
~ Tuesday, December 13, 2022 Blog Post ~
By Antoine Gara in New York, December 7, 2022
Stephen Schwarzman calls Breit vehicle ‘some of our best work’ after limits on investor withdrawals
The head of Blackstone has spoken out for the first time since the investment group restricted withdrawals from a $69bn property fund, tying a spate of redemptions to investors facing stress in Asia.
The outlook for the Blackstone Real Estate Income Trust, or Breit, has riveted Wall Street after the group limited withdrawals last week. Blackstone’s stock has slid more than 10 per cent since the announcement.
Blackstone chief executive Stephen Schwarzman on Wednesday disputed the idea that the restrictions reflected problems at the fund, which has $125bn of assets mostly invested in warehouses and apartments in the US when accounting for leverage.
“The idea that there is something going wrong with this product because people are redeeming is conflating completely incorrect assumptions,” Schwarzman said at an industry conference. “This was not meant to be a mutual fund with daily liquidity. These are pieces of real estate.”
He confirmed that many of the redemption requests came from Asia, where investors tend to use more borrowed money to back positions and needed to raise cash to meet margin calls when markets soured earlier this year. Those investors faced “excruciating financial pressure”, Schwarzman said.
Blackstone limited investor withdrawals from Breit after breaching monthly and quarterly limits on redemptions. The announcement has cast doubt on the future expansion of the fund, which has grown quickly in recent years and accounts for a fifth of the group’s fee-based earnings.
Breit was launched in 2017 as a way for wealthy investors to gain access to its real estate investment platform and offer them the same ability as large institutions to diversify away from public markets.
As a trade-off, they would have to accept giving up some liquidity rights. The fund allows for 2 per cent of total assets to be redeemed by clients each month, with a maximum of 5 per cent allowed in a calendar quarter.
In October, Breit received $1.8bn in redemption requests, or about 2.7 per cent of its net asset value, and has received redemption requests in November and December exceeding the quarterly limit.
It fulfilled 43 per cent of redemption requests it received for November. Investors will be allowed to redeem just 0.3 per cent of the fund’s net assets this month.
Schwarzman acknowledged Breit could face continued pressure and slower inflows amid rising market volatility.
“[We] are in a cycle where retail investors are less apt to be investing in things . . . [People] get scared. It is completely normal and not a concern,” he said. “I look at this and say this is just a pause — an expected pause — of people pulling money out.”
Schwarzman said Breit’s portfolio continues to perform well, with income from its properties rising 13 per cent this year.
“In a way, Breit is some of our best work,” said Schwarzman, who characterised fears over the fund as “a bit baffling”.
Blackstone’s Gray: ‘We didn’t want to have to sell assets at the wrong time, under pressure,’ after $69 billion REIT limits withdrawals (From MarketWatch.com)
By Joy Wiltermuth, December 8, 2022
“We knew at some point there would be periods of volatility. And we didn’t want to have to sell assets at the wrong time, under pressure.”
— Jon Gray, Blackstone president and chief operating officer
That’s Blackstone’s Jonathan Gray, in an interview with CNBC on Thursday, defending recent limits placed on investor withdrawals from the real estate giant’s $69 billion private real-estate fund.
Investors were rattled when Blackstone Real Estate Income Fund Trust, or BREIT, in recent weeks limited withdrawals from the mega fund, which focuses on U.S. residential real-estate rental and industrial properties.
“What’s happened has been very surprising, given our performance,” Gray, Blackstone’s president and chief operating officer, told the network. “I think it’s really been a disconnect between performance and fund flows.”
Gray said the fund returned “more than 13% net to our customers” since it was created about six years ago. It’s 3-year annualized return was pegged at 15.5% in October, with a year-to-date return of 9.3%.
Shares of all public REITs were down about 25% on the year through November, according to NAREIT data. The S&P 500 index SPX, +1.43% was about 17% lower on the year through Thursday, while the Dow Jones Industrial Average DJIA, +1.58% was off about 7%, according to FactSet.
The Blackstone president told CNBC that the fund’s semi-liquid nature was fully disclosed to investors. Gray also said the fund was already positioned for this year’s volatility as the Federal Reserve has sharply increased interest rates as part of its fight to tame high inflation.
“We would be in a much different position if we’d bought office buildings or enclosed shopping malls,” Gray said.
Investors in the fund were warned in early December that limits on withdrawals from the fund could continue into the first quarter.
Apollo defends push to retail investors amid Blackstone storm
By Sujeet Indap in Los Angeles, December 13, 2022
Group rolling out gated product that seeks to recreate S&P 500 returns for wealthy clients
After Blackstone’s retail-focused credit and retail funds were hit by a wave of redemption requests, its rival Apollo is facing scrutiny over its own plans to target wealthy individuals.
Apollo co-founder Marc Rowan last week defended his firm’s drive to offer private capital products to rich clients as it rolls out a gated product that it says can match the returns of the S&P 500 but with less volatility.
“I actually think it’s good for the industry right now,” Rowan told a Goldman Sachs investor conference, as questions emerged about the suitability of so-called alternative investments for retail investors after Blackstone restricted withdrawals from a $69bn property fund.
“We are going to train clients and advisers to think about how much liquidity they need and how much they’re prepared to stock away.”
Rowan’s comments come days after Blackstone’s decision tarnished what had been the biggest engine of asset and fee growth inside the world’s largest alternative asset manager, and raised questions about the wider push by private equity to court individuals with high net worth.
“Private equity firms never wanted retail. Retail was not smart money. Now they are knocking on our door,” said one wealth management executive at a prominent Wall Street bank, noting that Blackstone’s success with retail had prompted a wave of copycats.
Apollo, which manages more than $500bn, is rolling out Apollo Aligned Alternatives, a vehicle that it says can replicate the annual 10–12 per cent returns of the S&P 500 but with less volatility, justifying its high fees relative to index funds from the likes of Vanguard that charge just a few basis points.
“I truly believe this could be the single biggest product inside the Apollo family in the not too distant future,” said Rowan earlier this year.
Apollo’s AAA is one of dozens of customised products that private capital managers pitch to well-heeled retail buyers who want to diversify away from public market exposure.
Apollo has said it hopes to raise $50bn from retail channels through 2026 for funds ranging from AAA to real estate and corporate debt funds.
Firms such as Apollo, Blackstone, Ares, KKR and Blue Owl increasingly concede that their traditional offerings for pensions and sovereign wealth funds will not be enough to reach their aspirations to manage trillions of dollars. At the same, high-net-worth individuals have been clamouring to get access to “alternative” assets whose high returns had until recently not been readily available to them.
While the S&P 500 index tracks the biggest listed American companies, Apollo’s AAA is to be backed by nearly 200 investments made by Apollo’s retirement annuities merchant, Athene. A bulk of Apollo’s profits comes from so-called “spread” earnings, where it invests premiums more creatively to capture the difference between promises to customers and investment returns.
A small fraction of these investments have included ownership stakes in various Athene vehicles that, for example, lend to midsized businesses or to fund the purchase of heavy equipment or aircraft.
While most of Athene’s investment portfolio has been in senior debt securities, this equity portfolio has returned over the past decade on average between 10 per cent and 12 per cent annually, a record that makes it “fundamentally a replacement for S&P core equity holdings within an investor’s allocation”, according to Rowan.
Apollo has said that the net asset value of Athene’s equity portfolio is up 11 per cent this year even as the S&P 500 fell more than 15 per cent.
Private capital titans insist that the traditional 60/40 investor allocation between listed stocks and bonds has been rendered useless by central bank largesse correlating the entire market. This dilemma opened up the opportunity for private assets whose returns are presented as a hedge against public market gyrations.
At the same time, private equity firms have themselves become far more diversified, moving deeply into corporate credit and real estate, with those areas often becoming the basis of these new retail products.
Blackstone — whose property and corporate debt funds, Breit and BCRED, manage nearly $200bn in gross assets — remains by far the leader in private capital retail offerings. Retail funds across private capital managers have similar pitches: dividends will be healthy but redemptions will be limited to 5 per cent of total assets per quarter as the source of long-term investment gains stems from a premium for holding illiquidity.
Apollo says that its AAA product already has $5bn in institutional commitments from backers including the Japanese bank SuMi Trust. Apollo and Athene already have $10bn committed to AAA.
Rowan has previously acknowledged that the retail products on offer have yet to prove themselves in a real market storm, something analysts agree with.
“These businesses are experiencing what we would characterise as its first real-life stress test,” wrote Brian McKenna in a research note to his clients at JMP Securities this week.
Sources:
https://www.ft.com/content/195d6a3a-a320-46ec-b879-c7753d1bf205
https://www.ft.com/content/2084e80d-8bac-4c3a-89d5-0c3eace67e32
https://twitter.com/FT/status/1600581231259049985?t=D3qiOsZxkNM-Ju-ZWcw0UA&s=03
https://twitter.com/ftfinancenews/status/1602536879685074944?cxt=HHwWgIC80aWzrb0sAAAA
https://twitter.com/MarketWatch/status/1600972609239359488?t=m27B8VDE7n-1Ci9GTA7bVA&s=03
