The University of California is investing $4 billion in a Blackstone Inc. BX 1.40% real estate vehicle aimed at retail investors and providing crucial baggage to a fund hit by a redemption wave.
The investment will be made in the form of equity in Blackstone Real Estate Income Trust Inc., known as BREIT, and will be subject to the same fees and terms as the vehicle’s other shareholders, Blackstone executives said. The typical BREIT investor has the option to sell shares monthly, but University of California manager UC Investments effectively commits to holding his shares for six years.
As part of the agreement, UC Investments will contribute its BREIT shares to a strategic company into which Blackstone will contribute $1 billion in BREIT shares it already owns. The company will have a hurdle rate of 11.25%, meaning Blackstone will earn an additional 5% incentive fee if BREIT’s annualized net returns exceed that rate. If vehicle performance falls below the 11.25% rate, Blackstone will make up the difference.
BREIT has achieved 12.7% annual net returns since inception.
Blackstone hopes the announcement will help allay doubts about the stability of BREIT, a $68 billion undeclared real estate fund that has been one of its biggest growth drivers in recent years. It has helped the private equity community attract a new class of investors who may not be wealthy enough to invest in their traditional funds but want access to private wealth.
Blackstone’s shares are down about 19% since BREIT said Dec. 1 that it was limiting payouts because redemption requests exceeded certain internal thresholds, wiping out about $20 billion in market value.
Blackstone said the wave of redemption requests started in Asia after the Chinese stock market collapsed. Other investors have since followed suit, buoyed by concerns that BREIT will have to downgrade its portfolio following Federal Reserve rate hikes and sharp declines in the market values of comparable public REITs.
The company said redemption requests as a percentage of BREIT’s total capital in December were 3% in the US and 5% overall.
Blackstone President Jonathan Gray said the investment was the result of a television interview he conducted on BREIT on Dec. 8. Mr. Gray’s comments prompted UC Chief Investment Officer Jagdeep Bachher, who has a long-standing relationship with the company, to contact Blackstone to ask if there was an opportunity to work together. Mr. Gray said Mr. Bachher and his team performed a significant amount of due diligence prior to committing to the transaction and traveled across the country to meet with the heads of all BREIT portfolio companies.
“We believe this is a massive endorsement of the quality of the portfolio,” said Mr. Gray. “Unlike others who had focused on short-term flows, they looked under the hood.”
He said the deal gives UC Investments access to the types of properties they want to own — multi-family rental housing, including student housing, in the fast-growing Sunbelt region and warehouses used in e-commerce — in one fell swoop.
Blackstone executives said the company will benefit from its $1 billion investment if BREIT’s annualized net return, thanks to management and incentive fees, exceeds 8.7%. After the deal with UC Investments, BREIT will have approximately $14 billion in liquidity.
Write to Miriam Gottfried at [email protected]
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