The bailout investment of $4.5 billion in UC pension
and endowment funds in the Blackstone Real Estate Investment Trust (BREIT)
keeps being noticed. UC received a “guarantee” of a 11.25% return in exchange
for the bailout. As this blog has pointed out in prior posts, there is a
too-cozy relationship between the Regents Investment Committee and the UC chief
investment officer.* The former generally doesn’t ask probing and critical
questions and seems to accept the investment strategies that are presented with nice slides
and explanations. Only one Regent member of the Committee so far has hinted at having any qualms about the BREIT investment.**
A lot of the coverage of this matter has focused on
landlord-tenant relations, rent increases, etc., involving BREIT residential properties.
Because of protests at the Regents by union and tenant groups, much of the
coverage in the news media has focused on those demonstrations and those issues
rather than on investment strategy. When we began focusing on the financial
side of the BREIT story – the financial risk/reward element and the legal risk –
it appears that someone mysteriously complained to Blogger about a post from
2018 on the chief investment officer. We appealed the complaint – which was
ridiculous since the old post in question was taken from a national news source –
and the complaint was rejected.
From The Lever of April 24, 2023:
As the world’s largest private equity firm faces
potential losses from a cloudy real estate market, its executives blocked
jittery investors from withdrawing their money from one of its real estate
funds, while insisting that rent increases and evictions will bolster returns. Now,
the Blackstone Group’s real estate investment trust has received a
multibillion-dollar bailout from a source whose employees and students are
already suffering through the housing crisis: California’s public university
system.
Just months after Blackstone’s real estate investment
trust purchased America’s largest owner of private student housing, the same
trust received a $4.5 billion infusion from the University of California’s
Board of regents, two of whom have close ties to the company. The investment
rewards the financial firm only a few years after the company and its
executives spent $5.6 million to kill California ballot initiatives that would
have expanded rent control in the state…
The latest episode revolves around the Blackstone
Real Estate Income Trust, or BREIT. In August 2022, BREIT purchased 69 percent
of American Campus Communities (ACC), the country’s largest student housing
company, in a $12.8 billion deal. ACC’s business model is built around rent
revenues; in January 2022 the company’s CEO boasted that it was “experiencing
the most substantial fundamental tailwinds we've seen in many years” thanks in
part to soaring rents. ACC has apartments at the University of California,
Berkeley, and the University of California, Irvine.
Five months after this acquisition, the UC Regents
pumped $4.5 billion into BREIT. Around the same time, Blackstone spent more
than $150,000 in the final quarter of 2022 on lobbying UC for more investment
dollars, doubling the amount it spent the previous quarter. In December, Nadeem
Meghji, Blackstone’s head of real estate for the Americas, told CNBC in
December that UC’s unprecedented bailout of BREIT “changed the narrative”
around the fund…
Real estate investment trusts are pools of
investor-backed cash that purchase real estate.. While pension funds routinely
invest in both REITs and private equity real estate, it is extremely uncommon
to have a pension effectively do a bailout of a fund facing massive redemption
requests…
Blackstone’s BREIT differs substantially from the $1.3
trillion real estate investment trust, or REIT, market. Nearly all REITs are
publicly traded, which means that investors can cash out their money at will.
This is not the case with BREIT, which allows Blackstone to suspend redemptions…
BREIT’s approach has lately faced turbulence. Because the fund
is substantially indebted -– it carries $90 billion in debt on $140 billion in
total assets — even small downturns like the recent economic decline put the
fund in jeopardy, since both gains and losses are magnified because of high
leverage.
What’s
more, BREIT has a small but significant portion of its holdings in the office
and retail sector, which have been battered in the post-pandemic economy. Earlier
this month, a separate Blackstone entity sold two office towers in Orange
County, California, for 36 percent less than it paid for them nine years ago.
One of the main
decision-makers behind the plan to pump billions of UC dollars into Blackstone
was Richard Sherman, chair of the UC Investment Committee, who has strong
connections to the investment firm. On January 3, Sherman announced in a
Blackstone press release, “This type of large, opportunistic investment
effectively leverages the UC’s more than $150 billion portfolio to benefit the
600,000 students, faculty, staff, and pensioners from our 10 campuses and six
academic health centers.”
Sherman, who heads up music mogul David Geffen’s
investment office, collaborated with Blackstone on the 2012 buyout of music
publisher EMI. What’s more, the late Blackstone co-founder Pete Peterson
purchased his New York penthouse from Geffen in 2007.
An additional member of the eleven-person Investment
Committee, Mark Robinson, also has ties to Blackstone. Robinson is a partner at
investment banking firm Centerview Partners, which advised Blackstone on a $2.2
billion acquisition in 2021.
On behalf of the Regents, the investment was launched
by Jagdeep Singh Bachher, UC’s Chief Investment Officer — who has been accused
of making investments in response to pressure from individual Regents with
conflicts of interest in the past. In 2018, he invested an unprecedented $240
million into a fund meant for high-net-worth individuals headed by the former
chair of the Regents’ Investment Committee, Paul Wachter.
In response to uproar over UC’s investment in Blackstone, Bachher played it
off as a zero-sum game of capitalism.
“The job of this team day in and day out is to pick
assets that are going to be accretive to future generations and future
retirees,” Bachher said at a Regents meeting in March. “And to do that... I
have to make some capitalistic decisions. And that decision around
Blackstone... was purely an investment decision for the benefit of the UC...
and to help the needs of our pensioners and our endowment.”
But a Lever review of UC’s performance under
Bachher’s leadership shows that his “capitalistic“ investment decisions have
resulted in the university’s pension and endowment funds massively trailing a
plain vanilla index fund of stocks and bonds.
Had the pension fund pursued a lower-risk index fund
strategy for the last decade — the kind advocated by Warren Buffett — it would
now boast $32 billion more in its coffers, or 40 percent more than its current
value. Likewise, the university’s endowment fund would have an additional $6.4
billion in its coffers, or 36 percent increase of its current value…
In response to a request for comment from The Lever,
the university spokesperson stated that a substantial portion of the UC’s
investment approach was in index funds. They did not answer questions about
poor fund performance under Bachher’s leadership, and Bachher declined an
interview with The Lever…
Full story at https://www.levernews.com/the-university-of-california-bails-out-eviction-happy-private-equity/.
So, what is the lesson from the BREIT affair? The Regents are the trustees of the pension, endowment, and other UC funds. They need to be asking probing questions about investment strategies and performance. The Investment Committee needs an independent outside auditor. Such an auditor, not the chief investment officer, would determine the benchmarks against which performance would be measured. A proper meeting would have the outside auditor making the basic presentation – not the chief investment officer and his staff. The chief investment officer could then respond. Absent a disinterested outside voice, what we typically get now is a clubby event, punctuated from time to time by union dissents or public comment protests.
We’re not calling for anyone to be rude at the meetings.
We are calling for a more arms-length distance between the
Regent-trustees and the chief investment officer and for an outside audit to be
the focus of each meeting.
===
*http://uclafacultyassociation.blogspot.com/2023/04/losses-and-gains-responses.html.
Use the search engine on this blog and search for “BREIT” for full past coverage.
**http://uclafacultyassociation.blogspot.com/2023/03/hernandez-approaches-right-question-on.html.
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