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 aimed at shoring up confidence in the $69bn fund that put limits on investor withdrawals last year after suffering heavy redemptions.
The University of California’s $150bn endowment said on Tuesday it would make the investment in the Blackstone Real Estate Income Trust, or Breit, at its current net asset value, taking a large position at the same valuation as the fund’s more than 200,000 existing investors.
However, Blackstone will effectively guarantee an 11.25 per cent minimum annual return for six years in exchange for the endowment agreeing 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.
Shares of Blackstone increased more than 3 per cent in early New York trading following the announcement. Its stock price has plunged more than 40 per cent over the past 12 months.
After the restriction was put in place, 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,” Singh added.
“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.
If the fund performs poorly and doesn’t 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, Blackstone risks paying billions of dollars out of its own pocket to make the endowment whole.
The $1bn of Breit shares Blackstone will hold in the venture is there as a partial reserve against the guaranteed return, said a source briefed on the matter.
Blackstone said the investment was advantageous to the firm and its shareholders. It said it would make money on the investment if Breit returned at least 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. That 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 sources familiar with the matter.
However, due to 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”.
It also said the investment should bolster fees paid to the firm and its common shareholders.