Blackstone Inc. and the wealthy individuals invested in its private real estate fund are getting a real-time lesson in the potential pitfalls of bringing retail investors into illiquid funds.
Customers lined up at Blackstone's door this fall to withdraw money from nontraded real estate investment trust Blackstone Real Estate Income Trust Inc., or BREIT, pushing stock repurchase requests beyond monthly limits in both October and November. After calls for cash also hit their limit for the quarter, Blackstone on Dec. 1 did just what it promised to do in the fine print of BREIT's marketing materials and closed the gates on the fund.
Investors could get part of their money back but would have to wait for the rest. In trading that same day, Blackstone shares declined close to 7.1%.
"I do think it will be an educational experience for everyone involved," said Chris Kotowski, a senior analyst at Oppenheimer & Co. Inc., referring to Blackstone, the investors in BREIT and the financial advisers who put them there.
Blackstone describes BREIT as "generally illiquid," capping redemptions at 2% of the fund's net asset value per month and 5% per quarter. But the surge in withdrawal requests raises questions around whether that was fully understood by investors and financial advisers, who may now be feeling chastened by the experience, Kotowski suggested.
"Are the financial advisers as likely to recommend vehicles like BREIT in the future, given that the gates actually went up?" Kotowski asked.
That is a critical question for Blackstone and some of its peers, who in recent years sought to expand retail access to private funds. Until recently, Kotowski noted, access was limited to institutional investors like foundations and public pension funds.
Fast rise
Blackstone COO Jonathan Gray earlier this year estimated the world's population of millionaires held $80 trillion in investable wealth but had just 1% to 2% of that total invested in alternative assets. Gray went on to suggest that Blackstone's private credit and private real estate funds would be particularly appealing to those investors at a time of rising interest rates.
That appeal translated into a fundraising bonanza. According to data from Robert A. Stanger & Co. Inc., investors poured nearly $25.6 billion into BREIT in the 12 months leading to Sept. 30.
"When you look at the incredibly rapid pace at which BREIT grew, you wonder, was there some irrational exuberance in that?" Kotowski said.
BREIT was sold to retail investors via wirehouses, which typically only offered the product to investors with the income and wealth characteristics of accredited investors, said Stanger CEO Kevin Gannon. Access to other types of private funds is limited to accredited investors under U.S. SEC regulations.
In the roughly five years since its 2017 launch, BREIT amassed more than 5,000 properties. Its $70.4 billion net asset value as of Sept. 30 represented 68% year-over-year growth, according to S&P Global Market Intelligence data.
Industrial properties and rental housing comprise the bulk of the portfolio, and investments are concentrated in the Sunbelt, where job and population growth pace above the national average in the U.S., according to BREIT.
"They built a sound portfolio," Gannon said.
Looking for an exit
So why did investors want out?
Through the 10 months leading to Oct. 31, class 1 BREIT shares were up 9.3%, according to Stanger, a period when the total return performance of the S&P 500 declined 17.7%. Gannon suggested investors aiming to adjust their investment portfolios naturally turned to BREIT because of its outperformance.
"A good chunk of investors in BREIT came from Asia," Gannon added. "The dollar was so strong, they picked up probably another 10% on their money."
Gannon said some investors may have wanted out of BREIT because they saw unwelcome changes coming to the real estate market. Rising interest rates will make debt on REIT portfolios more expensive as it gets refinanced, the CEO said, adding that some investors may believe nontraded REITs are overdue for a markdown now that publicly traded REITs are trading around a 20% discount to NAV.
In a statement, Blackstone maintained that the performance of BREIT remained "rock solid," adding that a portfolio weighted to logistics and rental housing in the Sunbelt was "well positioned for the future."
Still, investor flow out of nontraded REITs is not limited to BREIT, a sign of more widespread concern. Its next-largest peer, Starwood Property Trust Inc., acted to slow redemptions within days of BREIT, Barron's reported.
Paying out
The same day BREIT gated redemptions, it also announced the planned sale of its 49.9% stake in two Las Vegas casinos, a deal expected to generate close to $1.3 billion. Both Gannon and Kotowski said BREIT should have little trouble producing the cash it needs to pay out investors.
Gannon noted that Blackstone fulfilled BREIT redemptions exceeding $3 billion last quarter and is on track to do it again this quarter, describing the figures as "staggering."
"It's mind-blowing how big that is, and they did exactly what they said they were going to do and met the redemptions of up to 5% per quarter. To me, you've got to tip your hat to them," Gannon said. "If people don't like the fact they got prorated, well, that's the deal they signed up for."