Sorry to confess that yours truly missed the Daily Bruin opinion piece of March 16th below dealing with the Blackstone Real Estate Investment Trust (BREIT) investment/bailout by UC of $4.5 billion in return for a "guaranteed" 11.25% return.
As we have been noting, only Regent Hernandez at the meeting of March 16th questioned the financial wisdom of the transaction.* Maybe someone alerted him to the Bruin piece that day. (??) But it is incredible that no one else on the Regents' Investment Committee - despite the fiduciary duty of the Regents to university pension and endowment funds - raised any issues about the story told by chief investment officer Jagdeep Bachhar about how he decided on the investment. No one besides Hernandez raised any issues about the risk-return involved. From the Bruin's columnist Jalyn Wu: [excerpts]
Any financial decisions made by our institution that have the ability to create a huge economic impact should be very carefully considered. On Jan. 3, UC Investments and Blackstone Inc. signed a deal agreeing to invest $4 billion in the Blackstone Real Estate Income Trust. Later that month, an additional $500 million was added under the same terms...
From their investment in BREIT, which owns and finances income-producing real estate, UC Investments has been promised an 11.25% minimum return over a period of six years, with a commitment of up to $1.125 billion of their own holdings in BREIT to pay to the UC to make up the difference if the minimum return rate is not reached. According to an emailed statement from UC Investments, one of its top priorities in investing with Blackstone is ensuring that the UC pension fund, which is around $81 billion, can pay out retirement benefits to faculty and staff.
It seems too good to be true.
UC Investments and Blackstone may want the world to believe that there is little risk and guaranteed high returns associated with their partnership. Unfortunately, high expectations can indicate high risk, which is dangerous for pension holders, current employees and the entire UC community who all count on UC Investment’s ability to handle their money with care. UC Investments and Blackstone owe members of the UC community transparency when it comes to where our money is going and what it is being used for.
Mark Karlan, a continuing lecturer at the UCLA Anderson School of Management and former CEO of Imperial Credit Commercial Mortgage Investment Corp., a publicly traded REIT, said UC Investments cannot withdraw its investment for six years, which increases risk because the UC cannot cash out on their investment at any point even if the REIT performs poorly. Since November last year, Blackstone has blocked investors from withdrawing their investments from BREIT amid growing concerns about the trust’s financial state. More investors cashing out indicates weaker returns in the long run, putting the UC’s investment in jeopardy...
Full op ed at https://dailybruin.com/2023/03/16/opinion-uc-should-put-its-mouth-where-its-money-is-with-investment-transparency.
To repeat, there are financial and legal risks that are evident in this matter and that go beyond the landlord-tenant issues which the Regents did discuss (although largely taking the word of the PR team from BREIT that all was well). It might turn out in the end that putting $4.5 billion was a good deal, i.e., we got the 11.25% over an extended period with no problems, just as betting $4.5 billion on a horse that later came in first would be a good deal after the fact. The issue is whether the decision was wise before the fact. The key questions are a) whether the risk of investing $4.5 billion was low enough to justify the investment, and b) whether such large investments in an evidently risky situation should be decided by one person without extensive consultation.
Our congratulations to undergraduate Bruin columnist Jayln Wu for raising the issue the Regents should have been discussing.
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*http://uclafacultyassociation.blogspot.com/2023/03/hernandez-approaches-right-question-on.html.
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