The University of California is investing $4 billion in Blackstone’s real estate fund

One of the largest endowments in the U.S. is investing $4 billion in Blackstone’s flagship private real estate investment trust, aiming to shore up confidence in a $69 billion fund that last year imposed restrictions on investor withdrawals after heavy repayments.

The University of California endowment, which manages more than $150 billion in assets, said Tuesday it will make the investment in Blackstone Real Estate Income Trust, or Breit, at its current net asset value. This means that it has a large position in the same valuation as the fund’s more than 200,000 existing investors.

However, Blackstone has promised a minimum annual return of 11.25 percent over six years and provides a $1 billion backstop if the fund falls short of that target. In return, the fund has agreed to keep its capital in the fund until 2028, while paying higher overall fees if the car performs well. Other investors do not benefit from the same arrangement.

Blackstone Chief Executive Stephen Schwarzman said the investment was a “validation” of Breit’s investment portfolio and performance.

In November, Blackstone restricted investor withdrawals from Breit after it breached monthly and quarterly payout limits, raising doubts about the fund’s future expansion and triggering a sharp slide in the New York-based private equity group’s shares. Breit has grown rapidly in recent years and accounts for a fifth of the group’s fee-based earnings, according to analysts.

Blackstone shares were up about 2 percent in midday trading in New York after the announcement. The company’s stock price has fallen by more than 40 percent in the last 12 months.

After the cap was imposed last year, Jagdeep Singh Baccher, the University of California’s chief investment officer, contacted Blackstone to offer a large direct investment in the fund. On December 8, Singh spoke to Blackstone president Jonathan Gray for an investment proposal.

“We consider Breit to be one of the best-positioned large-scale real estate portfolios in the U.S. managed by one of the world’s top real estate investors,” Singh said. “This is an opportunity that can only be achieved through strong, reliable partnerships.”

While the university will buy common stock in Breit, it will later transfer the investment to a strategic venture it is creating with Blackstone.

Its $4 billion investment will be combined with the $1 billion in shares Blackstone already owns in Breit and moved into a separate fund that carries a performance fee above the 11.25 percent barrier.

Blackstone will receive a 5 percent cash performance fee on any earnings that exceed this hurdle rate, the group said in a statement.

Those fees will come on top of Breit’s costs to all investors, including the University of California. Investors pay Blackstone a 12.5 percent performance fee above a 5 percent annual hurdle.

If the fund underperforms and does not generate an annual return of 11.25 percent, Blackstone will return the payments to the university until it receives a guaranteed return. The private equity group risks losing $1 billion in shares if the fund declines in value or generates minimal returns, two people briefed on the deal said.

Blackstone said the investment was profitable for the firm and its shareholders. Breit said he would make money on the investment if it returned at least an 8.7 percent annual return over the next six years.

The university has agreed to hold its investment in Breit for a minimum of six years and will then have the option to buy back its interest for two years starting in 2028. This contrasts with the monthly liquidity offered by Blackstone to the fund’s other investors. can redeem up to 2% per month or 5% per quarter of the fund’s total assets.

The university’s investment comes as other investors continue to make returns from the fund.

In December, U.S. investors tried to redeem 3 percent of their total assets in the fund, and 5 percent of all investors sought redemptions, according to people familiar with the matter.

However, only 0.43 percent of Breit’s net assets were redeemed in December as Blackstone restricted withdrawals.

In a note sent to Breit investors, Blackstone called the new investment a “win” for existing shareholders because it will increase the fund’s “balance sheet flexibility” and add capital during “what we believe is an appropriate deployment period.”

The company also said the investment should increase fees paid to the group and its common shareholders.

Source link