As blog readers will know, UC put $4.5 billion of pension and endowment money in the Blackstone Real Estate Investment Trust (BREIT) as that institution was experiencing a run on the bank. Although the Regents' Investment Committee got itself into a discussion of landlord-tenant relations, no one asked about the risk-reward side of this investment. Since the Regents are trustees of the pension and endowment, they should be asking such questions.
Now, it may turn out that the "huge bet," as the article below from American Prospect describes the BREIT strategy, will ultimately pay off. But that doesn't mean the investment was ex ante wise for UC. (If UC had bet the pension and endowment on a horse, and the horse came in, would you think the bet had been wise?) Excerpt:
...Along with other institutional investors, Blackstone—the world’s largest private equity firm—has made a huge bet on housing since the Great Recession, buying up properties around the country and splitting the profits among shareholders through a financial structure known as a real estate investment trust (REIT). The corporatization of landlords has come under fire for incentivizing evictions and rent increases almost twice as high as the national average. In many documented cases, REIT properties also create miserable living conditions for tenants in the hopes of pushing them out to upsell.
Recently though, REITs faced setbacks. With property values dropping, enough investors fled Blackstone’s BREIT that the firm restricted withdrawals. That didn’t dissuade UC from pursuing a strategic venture, one that Blackstone’s head of real estate Nadeem Meghji described as “changing the narrative” around the fund.
Though UC Investments was able to extract concessions from Blackstone—mainly that a billion dollars of the firm’s own BREIT shares will go into the venture—the endowment will be locked in for six years. If housing markets in California collapse over that time frame, a phenomenon not without precedent in the 21st century, the university will have significant exposure. The UC system is following the model set out by private university endowments that have increasingly stacked their portfolios with venture capital and private equity investments.
Since the Federal Reserve’s interest rate hikes, private equity firms have slumped, with many funds not delivering the high returns investors had grown accustomed to. That’s pushed many PE funds such as Blackstone into buying insurance annuities and other riskier plays such as selling their own companies to themselves. These recent practices have led some Wall Street insiders and PE managers themselves to call the business model a “Ponzi scheme.”
Despite the market downturn, Blackstone’s CEO Steve Schwarzman, a former Trump adviser, took in a record $1.2 billion in base pay and dividends, higher than most heads of Wall Street banks. Blackstone was also embroiled in a recent child labor scandal after a sanitation company it owns paid $1.5 million in fines to the Department of Labor for employing over a hundred child workers at meatpacking plants across the country...
Full story at https://prospect.org/education/2023-02-28-university-california-blackstone-housing/.
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