Investors Beware: Blackstone's Generous Concession

If you're looking to cash out of Blackstone's giant private property fund, the new year brought some mixed news. On the one hand, there's been some bad news. But on the other hand, there's also been some potentially good news.

The news wasn't great, you won't be able to have all your money back right now. So many other people tried to withdraw in December that the 5% quarterly limit will limit the amount that comes out until March, assuming everyone renews their withdrawal requests.

The University of California's endowment, UC Investments, has decided to invest $4 billion into the Blackstone Real Estate Income Trust (BREIT), a fund that is locked up for five years with a two-year limited withdrawal period afterward. This is a huge investment, especially into a fund with fees that are set for small private investors, not major institutions.

Blackstone will use up to $1 billion to pay UC Investments if it fails to earn 11.25% a year after fees. This is a fabulous return, comparable with the 10% annual dividend and option to buy discounted shares secured by Warren Buffett when he put $5 billion into Goldman Sachs at the height of the 2008 financial crisis.

Since launching in 2017, BREIT has focused on Sunbelt housing, warehouses and data centers, which have been in strong demand. As a result, the fund has generated strong returns for investors. However, the fund lost value in November, and a recession would surely hit rents.

Despite the investment, the university is taking a risk with BREIT. The $1 billion of possible support from Blackstone is not enough to guarantee the 11.25% return if Sunbelt rental apartments, warehouses and data centers fall out of favor. Blackstone also gets a higher fee if BREIT beats the 11.25%.

The university's investment in BREIT should help to ease some of the recent concerns about the company, namely that it is overvaluing its properties or that it might be susceptible to a bank run.

Blackstone said that the university team did their research on the portfolio, including meeting the heads of each BREIT unit. Even though this doesn't guarantee that values won't be marked up too high or that rents and housing won't be affected by the recession later this year, it's still a good sign because it shows that the people investing serious money into this project are confident in what they're doing. A spokesperson for the university declined to comment.

The extra $4 billion means that BREIT is even less likely to run out of cash to finance withdrawals. With monthly and quarterly limits on overall withdrawals, and more than $20 billion of cash, easy-to-sell investments and loan facilities, a run on the bank was already unlikely, and is now even more so.

The trouble for BREIT's other investors is that the recent influx of cash from UC Investments does not solve the original problem of too many people wanting to withdraw their money from the fund. In December, investors asked for 5.44% of the fund back, but only 0.23% was available because of withdrawals in the two prior months. The money from UC Investments won't be used to lift the cap on withdrawals, so the cap will almost certainly limit withdrawals again this quarter. If the outlook for BREIT's returns worsens, more will want to get out, so the danger is that withdrawal limits stay in place for many months.

Investors who are content to keep their money in BREIT for years alongside the university won’t be concerned about the withdrawal limits, even though they won’t receive the university’s privilege of Blackstone part-underwriting an 11.25% return. However, anyone who thinks they might need their money this year—or just wants to have it available in case the looming recession hits their income—would be right to worry that they may not be able to get it back quickly.

As interest rates rise, liquidity becomes more valuable. The University of California recently put a price tag on that value: $1 billion to underwrite an 11.25% return over six years. That is expensive. It suggests that private funds without the track record of BREIT or the financial resources of Blackstone will have a difficult time attracting the money that flowed in so easily during the boom years.

Remember this when you're thinking about investing in something where it would be difficult to get your money back.