The story reproduced below has appeared in various financial news reports. When you sort through the verbiage, it looks as if Blackstone was experiencing something like a run on the bank from retail investors, and that UC bailed Blackstone out in exchange for an 11.25% "guaranteed" return.
Yours truly hopes that at the upcoming Regents meeting, when the Investments committee meets, some questions will be asked about the level of risk taken. The current yield, for example, on a two-year Treasury note is a little over 4%. Anyone offering 11.25% for a bailout suggests a high level of risk is present. The article also indicates that UC was already invested in Blackrock, suggesting it had a choice of joining the run - which might take down the whole edifice - or doing a bailout. If that's the case, maybe UC didn't really have a choice.
Yours truly doesn't know what to make of the statement that UC chief financial officer Bachhar learned of Blackstone's problems when he happened to see something on a TV program and then made the bailout offer. Really? While that explanation gives the story a folksy touch, it is not reassuring that UC depends on such a happenstance to track what is happening to a major investment.
Another quote from chief financial officer Bachhar, albeit one from the past, seems to link this transaction in some way to investments in dorms and buildings housing labs in the vicinity of campuses. But at a recent Regents meeting, as the article notes, it was made clear that while UC can invest in such structures, it can't subsidize them or earmark them for campus use; it has to operate as any commercial landlord would and charge market rents to any tenants that apply. In short, the transaction below does not appear to provide any indirect benefit to campuses.
Blackstone Backstop Sweetens University of California's BREIT Investment
Dawn Lim and John Gittelsohn, January 3, 2023, Bloomberg, Yahoo Finance
Blackstone Inc. became the envy of the private equity world after persuading moneyed individuals to back a massive $68 billion real estate trust. But it was a traditional institutional investor that swooped in when too many of those individuals rushed for the exits at the same time. The private equity titan announced Tuesday that it turned to the University of California for a $4 billion injection into Blackstone Real Estate Income Trust [BREIT]— a deal sweetened by Blackstone’s willingness to earmark $1 billion as a backstop to help the university system notch a 11.25% minimum annualized return from its investment.
After years of pushing aggressively to court dentists, doctors and the mass affluent — clients better known for investing thousands rather than billions of dollars — the unusual transaction with the university system falls squarely in the wheelhouse of what the private equity firm has been traditionally known for: doing business with deep-pocketed institutions. “This is a big win for us,” Jonathan Gray, Blackstone’s president, said in a Bloomberg Television interview about the University of California’s investment.
Blackstone nabbed the deal, which the university has pledged for a holding period of about six years, after a rough patch for BREIT. The real estate trust invested in everything from warehouses to apartment buildings across the US to become a behemoth in the industry and major profit driver for the New York-based firm. But the retail investors the private equity firm had long sought to woo started to pull back last year amid swings in markets, shifting the tide for one of the private equity firm’s crown jewels. Investors requested to withdraw 5.44% of the fund’s net asset value in December, the firm said Tuesday.
BREIT’s challenges in the past few months are a cautionary tale that individuals are a fickle bunch in comparison to institutional capital. Blackstone will keep forging ahead with its push to reach individual investors. Chief Executive Officer Steve Schwarzman said in a statement that the private equity firm is “committed” to bringing its investments to those investors and it views the University of California’s investment as “validation.”
Investors Redeeming
Blackstone’s push to reach individuals was facing one of its biggest challenges last month since BREIT’s launch in 2017. Gray went on CNBC in early December to try to drum up support for BREIT after the private equity firm announced that the trust had hit its redemption limits and would restrict withdrawals. One TV appearance caught the attention of the University of California, which has invested with Blackstone for more than 15 years. Jagdeep Bachher, the University of California’s chief investment officer, reached out to Blackstone.
While some investors might be concerned that it’s an unusual transaction for BREIT, the deal shows Blackstone “putting their money where their mouth is” and “we think most will see it as affirmation of the portfolio and strategy by a big institutional” player, Evercore ISI analysts including Glenn Schorr said in a note. The university’s investment arm won’t gain influence over BREIT’s investments or operations, one of the people said. But the capital injection could deepen ties between the two organizations.
Satish Swamy, co-head of real estate for the university system’s investment arm, said the investor is looking forward to working with Blackstone portfolio companies to explore potential deals in areas such as student, staff and faculty housing. The University of California’s investment office didn’t reply to requests for further comment.
Capital Injection
With the agreement, the University of California will inject the $4 billion into BREIT and Blackstone will backstop the university system’s investment by $1 billion if returns fall short of a goal. If the investment generates more than 11.25% annualized net returns, Blackstone will receive a higher payment from the university system. Blackstone will make money on the deal if returns are at least 8.7%, the company said. The fund has averaged 12.7% annual returns in the last six years. The deal, coming at a time when commercial real estate valuations are declining amid soaring borrowing costs, is a warning signal that big investors will demand more protections to bet on property investments.
“In our view, the transaction provides a negative read-through to the commercial real estate sector based on a higher cost of capital,” Jade Rahmani and Michael Brown, analysts with Keefe, Bruyette & Woods, wrote in a note. Bachher and his team at the university had been seeking ways to invest in dorms and laboratories and had ventured into bets on the real estate surrounding campuses over the past eight years, he told a meeting of the system’s regents in November. But being a direct owner of real estate comes with its own challenges.
“I certainly don’t want to take on another day job of trying to be a real estate developer,” Bachher said at the time.
Source: https://finance.yahoo.com/news/blackstone-backstop-sweetens-university-californias-201447027.html.
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https://ia904700.us.archive.org/34/items/new-year-outlook/sniff.mp3
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