Blackstone faces persistent redemption requests from its $69bn real estate investment fund, which had limited withdrawals late last year as investors rushed to pull money from the world’s biggest alternative asset manager.
Jonathan Gray, president of Blackstone, said in an interview with the Financial Times that it is “a little early” to say that the redemption request is slow in the fund, called Blackstone Real Estate Income Trust, or Breit.
“We have a backlog from November and December,” Gray said. “I would say that the tone of the conversation with our advisors is better.”
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 offer wealthy investors a portfolio of New York-based 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, increasing fees and asset growth at Blackstone.
However, the rapid and ongoing redemption requests that began last summer have underscored the risks of offering liquidity to illiquid assets and could lead to changes in the way Blackstone builds its funds.
“I think there will be an evolution of personal wealth products,” Gray said. “This product works as designed, but could there be any tweaks that could improve it? Of course.” Gray notes that newer funds don’t allow for monthly redemptions.
In its fourth-quarter results released on Thursday, Blackstone posted a drop in profit as fee-based earnings slipped due to a decline in performance at Breit and worsening economic conditions.
Blackstone’s fee-related earnings, a proxy for management fees, fell 42 percent to $1.1 billion. Distributable earnings – a metric favored by analysts as a proxy for overall cash flow – fell by the same amount to $1.3bn. On a per-share basis, results could meet or exceed analysts’ forecasts polled by Bloomberg.
The decline in the base of the earnings fee is caused by a clear drop in the incentive Fees – the profit Blackstone makes if it has reached a certain level of return for investors – earned by Breit due to the decline in performance and accounting changes.
Blackstone marked Breit down about 1.5 percent during the quarter, meaning the fund did not incur significant incentive fees. “Nobody is immune to higher costs of capital and higher cap rates, but we’re seeing very strong cash flow growth,” said Gray of Blackstone’s property portfolio.
Beginning in 2022, Blackstone began recording incentive fees earned by Breit on a monthly basis, instead of annually.
If the policy were to be implemented in 2021, Blackstone’s fee-related earnings would drop 19 percent, due to the absence of incentive fees.
Blackstone shares initially fell sharply when Breit canceled the limited, but has recovered most of the losses, supported by the rebound of the broad market and the investment of $4bn made by the University of California to the fund this month. On Wednesday, the university reinvested $500m in Breit.
Institutional investors such as UC continued to pour money into Blackstone, which raised more than $43bn for the quarter, pushing its overall assets under management to $975bn.
Gray said he remains optimistic about long-term opportunities to attract new assets from wealthy investors despite the problems at Breit.
He said only 1 percent of the $85tn in wealth available to invest was in alternatives, which would increase over time.
“I remember in the period of 2008 and 2009, people said that institutions will not invest in alternatives anymore. Obviously, that is not the case,” said Gray.