Blackstone has warned it risks delaying the launch of a new private equity fund aimed at wealthy individuals as it grapples with the withdrawal of heavyweight investors from two other funds in real estate and credit targeting similar clients.
New York-based investment manager Blackstone Private Equity Strategies Fund, or BXPE, is set to launch a fund that will become its flagship strategy for wealthy individuals to participate in the private equity business. Blackstone has historically served institutional clients such as pension funds.
Blackstone has told wealthy investors and their financial advisers in recent days that it may wait for fundraising conditions and financial markets to improve before launching the BXPE, according to people familiar with the matter. Clients of Blackstone’s other “retail” products told the Financial Times they expect the fund to be launched in early 2023.
The potential delay comes days after the group’s limited withdrawal from the $69 billion Blackstone Real Estate Income Trust following demands for refunds from wealthy individual investors. In 2021, Blackstone launched a similar product for credit investments, which was also withdrawn.
Restrictions on withdrawals from the real estate fund have raised concerns about its future growth and hit Blackstone’s share price. Blackstone declined to comment.
Blackstone also informed clients that it will not raise new capital for vehicles known as Blackstone Total Alternative Solutions funds.
BTAS funds have a life of 10 years and are compounded annually. Instead, Blackstone plans to direct interested clients to BXPE, which is designed as a perpetual vehicle that does not return capital at the end of the fund’s life. BXPE clients would commit their own capital when they initially invest, rather than being called on a deal-by-deal basis.
Since the years immediately following the financial crisis, Blackstone founder Stephen Schwarzman has been looking for ways to make the buyout business accessible to a wider range of investors beyond the pensions, endowments and sovereign wealth funds that have traditionally been the firm’s clients.
BXPE is structured to invest in corporate buyouts and equity-oriented strategies.
The fund is poised to be Blackstone’s most complex product yet. Unlike Breit and Bcred, both of which generate a significant portion of their income from regular cash distributions to investors, BXPE will not pay a dividend.
Investors will derive their returns from episodic and unpredictable asset sales or the complex and often subjective appreciation or deletion of the quarterly net asset value of its holdings.
Kevin Kneafsey, chief investment strategist at Allspring Global Investments, said this structure could face problems if investors start to withdraw their money when markets fall or financial conditions tighten.
“The mechanism is going to run into trouble when people are withdrawing money and the underlying assets need to be valued,” Kneafsey said, adding that if Blackstone undervalues the portfolio too much, it could be reversed. If the assets are overvalued, investors who are bailed out of the fund at inflated prices will “effectively be taking money from people who are not being paid back.”
“The valuation of BXPE’s assets may differ from the liquidation values that may be realized if BXPE is forced to sell the assets,” BXPE’s prospectus warns.
Investors have been pulling back from Breit at an increasing rate since last spring, hitting limits set by Blackstone to guard against the risk of being forced into a fire sale of illiquid real estate to meet purchases.
Breit allows 2 percent of total assets to be redeemed by customers each month, with a maximum of 5 percent per calendar quarter. Both Breit and Bcred hit retracement limits this quarter, although pullbacks were not capped for the latter.
BXPE will allow investors to commit on a monthly basis, but will only allow withdrawals of up to 5 percent per quarter. According to the documents, BXPE will invest up to 80 percent of its assets in equity-oriented strategies and up to 20 percent in debt securities.
At launch, BXPE Partners Group will compete with products operated by rivals including Hamilton Lane and StepStone Group.
Executives at those funds acknowledged that Breit’s recent withdrawal limits and greater volatility could slow new commitments from wealthy investors. However, they expressed confidence in the market’s long-term prospects.
Bob Long, chief executive of StepStone Private Wealth, told the FT that equity-focused funds may not be exposed to the same buyback risks as Breit because, unlike real estate or credit, there are no obvious ways to gain public market exposure to private equity strategies. . investors have access to many publicly listed vehicles.
Additional reporting by Sujeet Indap in New York