What the Regents Likely Missed

The Regents usually discuss matters that could lead to litigation behind closed doors. But at their meetings of Jan. 22-23, they likely missed the flurry of presidential executive orders that followed Inauguration Day. Of course, we can't be sure of what went on behind closed doors. Nonetheless, there were a number of orders that could affect UC. From the Washington Post:

...The orders go far beyond the federal government. Trump also directed agencies to draw up lists of public companies to investigate over their DEI policies — a move that legal experts said could send chills through the private sector. The Justice and Education departments also were required to issue guidance to educational agencies and universities on ways to comply with the Supreme Court’s landmark decision banning race-conscious admissions...

The executive orders stand to reach deep into the private and government-contracting sectors, said Jason Schwartz, a partner at Gibson Dunn and co-chair of the law firm’s labor and employment group. The attorney general and agency heads have been tasked with identifying as many as “nine potential civil compliance investigations” of publicly traded corporations; large nonprofits or associations; foundations with assets of $500 million or more; state bar associations; medical associations; or universities with endowments over $1 billion.*

...He also highlighted new prohibitions on federal contractors and grant recipients from participating in many affirmative action or DEI measures. Violations are subject to the False Claims Act, which can bring heavy financial penalties — while lawsuits could be filed either by the government or private actors. “They are handing out sheriff’s badges to private citizens to sue about government contractor DEI programs,” Schwartz said...

Full story at https://www.washingtonpost.com/business/2025/01/23/trump-dei-affirmative-action/.

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*We noted the endowment matter - which covers UC and UCLA - in a prior post:

https://uclafacultyassociation.blogspot.com/2025/01/just-so-you-know.html.

Just so you know...

You have probably read about recent executive orders by President Trump that seek to end DEI programs. However, the anti-DEI executive orders apply to more than the federal workforce.

From the Washington Post: 

...The [anti-DEI] executive orders stand to reach deep into the private and government-contracting sectors... The attorney general and agency heads have been tasked with identifying as many as “nine potential civil compliance investigations” of publicly traded corporations; large nonprofits or associations; foundations with assets of $500 million or more; state bar associations; medical associations; or universities with endowments over $1 billion...

Full story at https://www.washingtonpost.com/business/2025/01/23/trump-dei-affirmative-action/.

Note that UC as a system has an endowment with well over $1 billion.* UCLA, in fact, has an endowment well over $1 billion.**

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*The latest statement for UC shows an endowment of $29.5 billion:

https://www.ucop.edu/investment-office/annual-report-240923_ucar24_final.pdf.

**The latest statement for UCLA shows an endowment of $5.5 billion: 

https://ucla.app.box.com/s/pe2ukr5i7vapih9gq1wker9ubnseawov.

Blackstone-REIT Still Draining - Part 4

The slow-motion run on the BREIT - in which UC put an added $4.5 billion towards the end of last year - continues. From Yahoo-Finance:

Blackstone Real Estate Income Trust (BREIT) said on Monday that redemption requests declined in June after months of turmoil that led to the private equity firm limiting investor withdrawals. "In June 2023, BREIT received $3.8 billion in requests under the Repurchase Plan, which is 29% lower than the peak in January 2023 and the lowest month of repurchase requests this year," the firm said in a letter to investors. Shares of Blackstone rose 1.1% to $94.03 in morning trading.

BREIT is fulfilling requests worth about $628 million, amounting to 1% of its net asset value (NAV) and representing 17% of the shares submitted for repurchase, it added. Blackstone has been exercising its right to block investor withdrawals from BREIT since November after requests exceeded a preset 5% of the NAV of the fund. The private equity firm said it has paid out $8.1 billion to redeeming shareholders since November 30.

Source: https://finance.yahoo.com/news/blackstone-reit-says-redemption-requests-134913519.html.

If you haven't kept up with this issue, put "BREIT" in the search option on this blog for background.

Blackstone-REIT Still Draining - Part 3

The tale of the BREIT (Blackstone Real Estate Investment Trust) continues. As blog readers will know, UC's chief investments officer threw $4.5 billion of UC pension and endowment money to BREIT which was experiencing a run on the bank. Unlike commercial banks, BREIT can limit withdrawals. So, in the face of a run, it doles out less than requested. 

UC's bailout was in exchange for a "guaranteed" 11.25% return, presumably at the expense of those trying to exit. Blog readers will also know that we have questioned the lack of questioning by the Regents about the risk/reward tradeoff and potential legal risk entailed. Only one Regent seemed to be concerned about that issue, dispute the fiduciary responsibities of the Regents. The others were mainly concerned about landlord-tenant relations of the BREIT because of public comments on that issue, but seemed to be satisfied by PR reps from BREIT.

Meanwhile, the slow-motion run continues:

Blackstone Real Estate Income Trust Inc., a non-traded real estate investment trust sponsored by Blackstone Group, received redemption requests totaling $4.4 billion in May, which decreased by 4% month-over-month and 18% lower compared to January 2023, according to the company. In accordance with their repurchase plan, BREIT is fulfilling approximately $1.3 billion, which is equal to 2% of NAV and represents 30% of the shares submitted for repurchase. May marks the seventh straight month during which BREIT has limited repurchases requests.

The company noted that it has repurchased a total of $7.5 billion of common stock since proration began in November, and that a hypothetical investor who continually requested redemption since then would have received approximately 90% of their investment back and that “the semi-liquid structure is working as intended” to prevent a liquidity mismatch and maximize long-term shareholder value...

Full story at https://thediwire.com/breit-redemptions-total-4-4-billion-in-may-says-semi-liquid-structure-working-as-intended/.

As we have noted in the past, yours truly can't say whether the UC investment in BREIT will turn out to be a good deal or not. But he does question the lack of Regental interest in playing their fiduciary role in this matter. Indeed, at the most recent meeting of the Investments Committee, the Regents were given a report indicating that the portfolio has been underperforming relative to its own selected benchmarks. But no one seemed to want to ask any questions about that, either.

Blackstone REIT Keeps Paying Dividends in Bad PR

Although on this blog, we have focused on the risk/reward issue surrounding UC's sudden $4.5 billion pension and endowment investment in the Blackstone Real Estate Investment Trust (BREIT), much of the bad PR that has resulted has centered on landlord-tenant issues. (If you are unfamiliar with the issue, put "BREIT" in the search option on this blog.) The bad PR shows no signs of going away. From CalMatters: [Excerpt from lengthy article.]

Gladys Balcazar says she can barely afford food after paying rent to her new landlord, Blackstone Inc, one of the world’s largest private equity firms. Balcazar, a 60-year-old janitor, lives with her 27-year-old son in a two-bedroom apartment in Imperial Beach. She supports her son, who has a disability, on a salary of $2,800 a month. 

Blackstone bought her building and 65 others in San Diego County in 2021, becoming one of the region’s biggest landlords and alarming lawmakers, affordable housing advocates and Balcazar. In March Balcazar’s monthly rent rose $200 to $2,000. “All of this has really depressed me because I don’t see a way out,” she said in Spanish. “I only earn enough to pay the rent, and after that there is nothing left.” Adding to her stress were large swaths of dark mold outside her building, on walls and window ledges, climbing to a roofline. A building manager said she would be responsible for mold remediation in her unit if she moves out, Balcazar said. “They said we’re responsible because we’re not ventilating the unit,” she said. 

When asked by CalMatters, Blackstone said in a written statement that Balcazar would not be responsible for mold remediation. “This is not something that would be required of our residents in any scenario,” the statement reads. “In the event where any issues like this are raised to management, the team addresses the situation as quickly as possible.”

Balcazar isn’t the only tenant getting the squeeze from Blackstone, advocates say. Two years ago, Blackstone bought a portfolio of 66 relatively low-rent apartment buildings in San Diego County from a well-known charitable foundation for $1.48 billion. This year, tenants of those 5,800 dwellings say they’re worried about rent increases, maintenance issues and potential evictions. And advocates and tenant groups have mounted an organized campaign, warning that thousands of previously affordable homes are becoming less affordable as Blackstone’s influence grows. Residents have protested a $4.5 billion investment in Blackstone by the University of California. They staged a public town hall with San Diego’s city council president, and they lobbied state lawmakers to increase renter protections.

Some lawmakers share their concerns. Senate President Pro Tem Toni Atkins, a Democrat from San Diego, said so many affordable units under one corporation’s control is cause for “major concern,” especially if the company is raising rents. “Unlike many of our mom-and-pop property owners, who themselves may be trying to stay afloat in today’s economy, Blackstone is a huge company, and should not be building its portfolio on the backs of working Californians,” Atkins said...

Jagdeep Singh Bachher, head of UC Investments, told the Board of Regents the decision to invest in a fund with an annual rate of return of 11% was a “capitalistic” one in the best interest of UC pensioners. “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. “And to do that … I have to make some capitalistic decisions.” ...

Full story at https://calmatters.org/california-divide/2023/05/california-renters-fear/.

As we have pointed out in past postings, it is not clear how "capitalistic" the decision to invest was. BREIT was experiencing a run on the bank. Thus, its "guarantee" of a super-normal return for UC in exchange for a bailout raises questions of both the risk/return tradeoff and the legal risk. As we have pointed out, the Regents are the trustees of the pension and endowment funds. But only one seemed to raise this issue.*

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*http://uclafacultyassociation.blogspot.com/2023/03/hernandez-approaches-right-question-on.html.

Watch the Regents' Investments Committee of May 16, 2023 (and its interesting deflections)

We noted that the material provided in advance to the Regents' Investment Committee included - as it always does - rates of return over various durations on the pension, endowment, and other funds. In our posting of May 11th, we noted substandard investment returns were being reported. This is what we said:

...The pension fund and the endowment fund have different mixes of assets in their portfolios, each mix presumably assumed to be appropriate for the two purposes. According to the table available in the detailed agenda, the pension return is below the benchmark for all durations shown up through the 5 years ending March 31.

Source: https://regents.universityofcalifornia.edu/regmeet/may23/i2.pdf (p. 3).

The returns for the endowment are below benchmark for durations through 3 years...  Will any Regents ask questions about the below-benchmark returns? (Boldface added)

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Source: https://uclafacultyassociation.blogspot.com/2023/05/investment-performance-above-or-below.html.

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Short answer to the question above: No. 

So what did happen at the meeting? In public comments, there were remarks on staff burnout and pay, staff shortages, hiring undocumented students, Blackrock and Blackstone, the student-worker strike, affordable student housing, antisemitism, student food needs, Hawaiian telescope, UC fossil fuels emissions, climate change, and disabled student funding.

The official program then opened with an approval of a policy change allowing somewhat longer duration investments in the working capital funds. Lots of interesting material was presented about diversity in the investments industry, medical advances at Irvine, and artificial intelligence. In the midst of these interesting presentations, there was a brief review of investments performance. However, the charts that were put on the screen showed absolute amounts in the portfolio over time, but not the benchmarks. In principle, the committee members had the pre-meeting materials and could have asked about the below-benchmark returns. No one did. 

Again, we point to the role of the Regents as trustees of the pension and endowment. Isn't the prime function of this committee to ask critical questions about the earnings of those funds? There is nothing wrong with taking up topics de jour such as artificial intelligence. But such topics should not be deflections from the prime function. Surely in a meeting that ran over three hours, the committee members should have ample time to ask the critical questions.

You can see the meeting at:

https://archive.org/details/investments-committee_202305.

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And by the way, the segment on artificial intelligence was interesting. Below is an excerpt. The artificial intelligence (AI) presentation was by UC-Berkeley Professor Michael Jordan. In response to a question by Regent Hernandez, Jordan criticized the sci-fi hyping of AI and slammed Geoffrey Hinton (formerly of Google), Elon Musk, and Sam Altman as misrepresenting or not understanding the technology.

Or direct to https://www.youtube.com/watch?v=AygJUbwCwJc.

Investment Performance: Above or Below?

In an earlier post, we provided the basic schedule of the upcoming Regents meetings of May 16-18.* The meetings kick off with the Investment Committee. Now, the more detailed agenda for the various sessions is available including for that committee.

The Investment Committee always includes a review of returns on the portfolios for the various funds the Regents control including the pension and endowment. Included is the actual return over various periods and a comparison with a "benchmark," essentially a comparison which the return should at least equal if not exceed. So, the question is whether the returns are above or below the benchmark. Note that the benchmark takes account of the ups and downs of financial markets so that the comparison is whether the return is better or worse than what might be expected given the state of the markets.

The pension fund and the endowment fund have different mixes of assets in their portfolios, each mix presumably assumed to be appropriate for the two purposes. According to the table available in the detailed agenda, the pension return is below the benchmark for all durations shown up through the 5 years ending March 31.

Source: https://regents.universityofcalifornia.edu/regmeet/may23/i2.pdf (p. 3).

The returns for the endowment are below benchmark for durations through 3 years. 

We noted in the context of the controversy over the chief investment officer's decision to put $4.5 billion into the Blackstone Real Estate Investment Trust (BREIT) that only one Regent asked a question directly focused on the financial risk entailed.** Will any Regents ask questions about the below-benchmark returns? 

The agenda for the committee includes two other topics apart from portfolio performance: diversity in the larger investments industry and artificial intelligence. While those other topics are undoubtedly of interest, the prime function of the Regents - and particularly those Regents on the Investments Committee - is to look after the health of the funds for which they are trustees. Discussion of other matters should not crowd out critical discussion of investment performance. 

We will be watching to see if there are any critical questions.

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*http://uclafacultyassociation.blogspot.com/2023/05/the-regents-will-be-back-at-ucla-may-16.html.

**http://uclafacultyassociation.blogspot.com/2023/03/hernandez-approaches-right-question-on.html. For full coverage of the BREIT matter, search for "BREIT" in the search engine of this blog.

Blackstone-REIT Still Draining - Part 2

We continue our tale of the Blackstone Real Estate Investment Trust (BREIT) which experienced a run on the bank and which UC bailed out to the tune of $4.5 billion using pension and endowment funds. (And which the Regents simply accepted as a good deal with little critical questioning of the chief investment officer.) The run on BREIT, in slow motion, continued in April. See below.

Just a reminder that yours truly is not saying that UC's investment will necessarily turn out to be a bad deal. He is saying that the investment appears to pose significant financial and legal risk and that the Regents had a fiduciary duty to question both the investment and the process by which the investment decision was made which they have not fulfilled. Again, if you have followed this matter, you know that the investment has been questioned at Regents meetings by outsiders, mainly in public comments, concerning BREIT's landlord-tenant relations but with little said about the financial/legal risk. To the extent that the Regents have paid attention, the focus also has been largely on landlord-tenant relations.

If you have not kept up with the BREIT affair, use the search engine for this blog to find our prior postings on it. From Barrons:

Blackstone Limits Breit Withdrawals Yet Again

Andrew Bary, 5-1-2023

Blackstone’s $70 billion retail real estate fund limited withdrawals for the sixth straight month in April after seeing no letup in outsize redemption requests. The Blackstone Real Estate Income Trust, known as Breit, said it received $4.5 billion of withdrawal requests in April and paid out 29% of those requests to investors, or $1.3 billion, according to the Breit website on Monday. The fund limits monthly withdrawals to 2% of its net asset value and 5% a quarter. Blackstone ’s $70 billion retail real estate fund limited withdrawals for the sixth straight month in April after seeing no letup in outsize redemption requests.

The Blackstone Real Estate Income Trust, known as Breit, said it received $4.5 billion of withdrawal requests in April and paid out 29% of those requests to investors, or $1.3 billion, according to the Breit website on Monday. The fund limits monthly withdrawals to 2% of its net asset value and 5% a quarter. The April withdrawal requests were flat relative to March and were up from the $3.9 billion in February. Peak requests were $5.3 billion in January. Blackstone (ticker: BX) initially limited withdrawals in November.

Breit has paid out $6.2 billion to investors since November. The continuing gating of the fund may be frustrating investors who want immediate liquidity. But Breit said Monday its structure, which is “designed to both prevent a liquidity mismatch and maximize long-term shareholder value” is “working as intended.” Breit said an investor who began submitting withdrawal requests in November has received 84% of their money back.

Breit is a nontraded real estate investment sold through major brokerage firms and financial advisors. Its shares don’t trade publicly and investors rely on the fund to provide liquidity. The 6-year-old fund is focused on apartments and warehouses, two of the strongest sectors on the commercial real estate market. The persistently large redemption requests have been a concern for investors since late 2022 given the importance of Blackstone’s industry-leading retail business among alternative managers. But shares of Blackstone have rallied this year, gaining 20% to $89, and topping those of most of its major rivals.

Breit has vastly outperformed comparable public REITs since the start of 2022, which may be creating incentive for Breit investors to redeem their shares. So far this year, Breit has had a negative total return of 0.5% based on its largest share class. On Monday, Breit said: “We are seeing significant dispersion across real estate sectors and believe BREIT is very well positioned with +9% estimated cash flow growth in the first quarter.” It added: “We have virtually no exposure to certain challenged sectors such as commodity office, for-sale housing and regional malls.”

Breit has returned about 12% annualized since its inception, compared with the 4% yearly total return for a key REIT index.

Source: https://www.barrons.com/amp/articles/blackstone-breit-withdrawals-retail-real-estate-f118d087.

BREIT Affair Highlights Need for Outside Investment Auditor at Investment Committee Meetings

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.

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*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.

Losses and Gains: Responses Needed/Questions from Regents Needed

Business Insider runs a story on UC investments which raises questions about some of them. UCOP Daily News Clips reproduced it today. The headline, probably written separately from the text, is a bit misleading. Nonetheless, as in the case of the BREIT investments we have blogged about, the Regents need to maintain an arms-length relationship with their chief investment officer and always ask questions. "Declin(ing) to comment" isn't a good enough response when issues are raised for a public institution such as UC. Note that the article raises questions about UC investments in UC-related venture capital funds. Anything that suggests UC is involved in self-dealing investment projects that aren't providing adequate returns in particular should be carefully examined.

The University of California has invested billions in venture capital firms since 2000 and it has lost hundreds of millions so far. Here's why. 

Business Insider, Ben Bergman and Darius Rafieyan, 4-11-23

UC Investments, which manages the University of California's $152 billion in endowment and retirement accounts, has invested more than $3.4 billion since 2000 in venture capital funds managed by well-known firms such as Khosla Ventures, Insight Partners, and Lightspeed Partners.  But through the middle of last year, UC Investments had only received $2.6 billion in distributions from these VC funds, according to an Insider analysis, meaning so far at least it would have been far better off investing in index funds rather than far more risky and higher fee venture firms (the S&P 500 index has delivered a compounded average annual growth rate of 10.7% per year for the last 30 years.) 

Insider obtained UC Investments' returns through a Public Records Act request, providing a rare look at what is normally a closely guarded secret in the highly opaque world of venture. Unlike many other financial institutions, VC funds are not required to show their return on investment in startups. UC Investments, which has been managed by Jagdeep Singh Bachher since 2014, declined to comment. 

It is important to note venture investing is a long game where funds can take upwards of a decade to bear fruit and endowments often take a very long-term view of a 20-year time horizon. UC Investments says its VC portfolio has $1.9 billion in unrealized gains. Still, the valuations from last June could be optimistic given some of the most severe markdowns occurred in the third and fourth quarters of 2023. And even just looking at the 2000-2018 time period to exclude younger funds, UC Investments still received less in cash than it paid in, according to Insider's analysis.  

The reason for the underperformance could be attributed to a mix of poor fund selection, bad timing, and an ill-timed decision to sell many holdings early in 2015, missing out on six of the best years the venture world has ever seen. Soon after Bachher took over managing the University's endowment in 2014, he sold more than $1 billion of the private equity portfolio on secondary markets in an effort to reduce fees. Firms typically charge a 2% fee on assets under managemnt and 20% fee of profits.  

According to University documents, between 2014 and 2015 the endowment sold off its stakes in nearly two dozen venture capital funds, including high-profile names such as Bessemer, DCM, GGV, Insight, IVP, and Khosla. Some of the funds were only a year or two old at the time. Though selling early produced an initial windfall, UC Investments could have ultimately missed out on substantial gains from these VC funds. For instance, UC Investments reported paid-in capital multiples on the 2011 and 2013 vintage Insight funds of 1.52 and 1.26 respectively, severly undershooting the industry benchmarks that it uses to measure performance. Had UC Investments stayed in those funds through 2022, they would have seen multiples of 2.4 and 2.1 respectively, far surpassing the benchmarks, according to a person familiar with the funds.  

It's a similar story with the 2006 and 2008 Lightspeed funds, which UC Investments sold off early and which are listed as underperformers in the university data. UC Investments would have seen both funds outperform industry benchmarks had it staid [sic] in them until they closed, according to data provided by a person with direct knowledge of the funds. 

In-house funds 

At the same time that the University was ditching brand-name VCs, Bachner shifted hundreds of millions of dollars into an in-house fund that aimed to capitalize on research conducted by its faculty and students. UC Ventures, as the fund was known, was scrapped about two years later, according to person with direct knowledge of the matter. The University continues to make venture investments through partner funds that are UC-affiliated but operate independently. The performance of the initiative has been mixed, the returns obtained by Insider show. 

For instance, since 2016 UC Investments has sunk more than $231 million into Bow Ventures Fund I, a joint venture between UC and Bow Capital, but received less than $70,000 in distributions. The fund is marked up to $372 million on paper and last year UC Investments committed another $100 million to Bow Ventures Fund II. Bow is an investor in multiple unicorn startups including autonomous vehicle company Nuro and online lending platform Clearco. Starting in 2016, UC Investments invested $61 million into four funds managed by The House Fund, a pre-seed and early-stage fund focused on startups coming out of The University of California, Berkeley. None of the funds has returned any distributions. Among The House Fund's portfolio companies are data analytics company Databricks, recently valued at $38 billion, as well as global logistics platform Flexport. 

On the positive side, a 2018 fund from Vertical Venture Partners, a venture fund that partners with the University of California, San Diego, has returned more than triple the University's initial investment, according to the data.  Vertical is an investor in unicorn gene editing startup Inscripta and electronic switch manufacturer Menlo Microsystems. UC Investments also invested more than $800 million in funds managed by Sequoia Capital since 2018 but half those funds have posted losses, Insider previously reported.  

UC Investments does not independently break out its VC performance. But its private equity portfolio, of which venture is only a small slice, has delivered 20.8% return over the last three decades thanks to strong performance of private equity firms such as Warburg Pincus and KKR. By comparison, UC Investments earned a 8.3% return for its investment in public markets.  

Source: https://www.businessinsider.com/uc-california-investments-returns-venture-capital-2023-4; UCOP Daily News Clips.

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PS: We are still waiting to hear from the anonymous complainer who caused a temporary blocking of one of our investment-related blog posts:

https://uclafacultyassociation.blogspot.com/2023/02/time-to-come-clean-part-2.html.

Blackstone-REIT Still Draining

The slow-motion run on the bank at Blackstone Real Estate Investment Trust (BREIT), to which the Regents' chief investment officer committed $4.5 billion of pension and endowment funds, is continuing. As we have pointed out in several prior blog posts, so far only one regents (and one Daily Bruin columnists - plus yours truly) has questioned the investments from a financial risk-reward perspective.* All the other discussion has been on landlord-tenant relations.

From Reuters:

Blackstone Inc (BX.N) said on Monday it had again blocked withdrawals from its $70 billion real estate income trust in March as the private equity firm faced a flurry of redemption requests. Blackstone has been exercising its right to block investor withdrawals from BREIT since November after requests exceeded a preset 5% of the net asset value of the fund. BREIT fulfilled March withdrawal requests of $666 million, representing only 15% of the $4.5 billion in total redemption requests for the month, the firm said in a letter to investors.

Total redemption requests for March were 15% higher than the approximately $3.9 billion demanded by investors in February but 16% lower than the $5.3 billion Blackstone received in January. "BREIT is not a mutual fund and has never gated," a Blackstone spokesperson said in a statement. "It is a semi-liquid product and is working exactly as planned. In fact, BREIT has paid out nearly $5 billion to redeeming shareholders since November 30th when proration began."

The level of withdrawal requests is expected to normalize over time as Blackstone works through its backlog, Blackstone President Jonathan Gray said during an analyst earnings call in January. Blackstone shares were down 4.2% at $84.10, in line with the broader market, which was also weaker. Its shares have gained 18.4% in the first quarter after falling 43% in 2022. BREIT's net asset value had risen by 8.4% last year while the publicly traded Dow Jones U.S. Select REIT Index (.DWRTF) fell 29%. "Cognizant of easing forward interest rate expectations, we believe the reacceleration of gross redemptions may weigh on the shares," Credit Suisse analysts, led by Bill Katz, said in a note to investors.

Source: https://www.reuters.com/business/finance/blackstone-reit-limits-investor-redemptions-again-march-2023-04-03/.

So, will UC's investment turn out to be a good deal eventually? I have no idea. Should the Regents - as fiduciary trustees - ask questions about a situation in which the chief investment officer hears news reports about a run on the BREIT, calls the CEO of the BREIT and cuts a deal on his own motion ultimately totaling $4.5 billion? Absolutely. Should they question the process as well as the deal. Also absolutely. The Regents spent half of 2022 fretting about the process by which UCLA changed athletic conferences with lengthy discussions, special meetings, etc. There seems to be an imbalance in priorities. 

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*http://uclafacultyassociation.blogspot.com/2023/03/hernandez-approaches-right-question-on.html; 

http://uclafacultyassociation.blogspot.com/2023/03/it-wasnt-just-hernandez-bruin-columnist.html.

It wasn't just Hernandez: A Bruin Columnist Also Asked the Right Question on March 16th

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.

Just a Reminder: We Need Real Discussion at the Upcoming Regents Meeting

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/.

The Upcoming Regents Meetings: Agenda Now Available

The agenda for the upcoming Regents meetings at UC-San Francisco is now available.

Agenda: Regents Meetings of March 15-16, 2023

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Wednesday, March 15

8:30 am Board (open session - includes public comment session)

Agenda – Open Session

Public Comment Period (30 minutes)

Remarks of the Chair of the Board

Remarks of the President of the University

Remarks of the Chair of the Academic Senate

B1 Discussion: University of California Basic Needs Annual Report, 2021–22

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10:10 am Joint Meeting: Academic and Student Affairs  Committee & Finance and Capital Strategies Committee (open session)

Action: Approval of the Minutes of the Meeting of January 18, 2023

J1 Discussion: Overview of University-Provided Student Housing

(Note: Possibly, there will be some reference to the stalled UC-Berkeley People's Park project in this segment. See also in the closed session below.)

J2 Discussion: Strategic Campus Overview, Irvine Campus

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Concurrent Meetings

12:30 pm Finance and Capital Strategies Committee (closed session)

Action: Approval of the Minutes of the Meeting of November 16, 2022

F1(X) Action: Authorization to Purchase Replacement Residential Property: Current and Future UC Santa Cruz Chancellors, Office of the President

F2(X) Discussion: Does v. Regents, et al. – Lawsuits Pending – Sexual Misconduct – Los Angeles Medical Center and Campus Health

(Note: This topic may refer to the UCLA Heaps affair.)

F3(X) Discussion: Update on Legal Issues for the 2021 Long Range Development Plan Environmental Impact Report, Berkeley Campus

(Note: The stalled UC-Berkeley People's Park project may be discussed in this segment.)

Upon end of closed session:

Finance and Capital Strategies Committee (open session)

Action: Approval of the Minutes of the Meeting of January 19, 2023

Consent Agenda:

F4 Action: Consent Item: Preliminary Plans Funding, Gayley Towers Redevelopment, Los Angeles Campus

F5 Action: Consent Item: Preliminary Plans Funding, North District Phase 2, Riverside Campus

F6 Action: Consent Item: Preliminary Plans Funding, Undergraduate Teaching and Learning Facility, Riverside Campus

F7 Action: Consent Item: Budget, Scope, External Financing, and Design Following Adoption of a Mitigated Negative Declaration Pursuant to the California Environmental Quality Act, Mesa Court Residence Hall Expansion, Irvine Campus

F8 Action: Budget, Scope, External Financing, and Design Following Consideration of an Addendum to the 2018 Long Range Development Plan Environmental Impact Report Pursuant to the California Environmental Quality Act, Triton Center, San Diego Campus

F9 Action: Budget, Scope, External Financing, and Design Following Consideration of an Addendum to the 2018 Long Range Development Plan Environmental Impact Report Pursuant to the California Environmental Quality Act, Ridge Walk North Living and Learning Neighborhood, San Diego Campus

F10 Action: Budget, Scope, Interim and Standby Financing, and Design Following Consideration of an Addendum to the 2021 Long Range Development Plan Environmental Impact Report Pursuant to the California Environmental Quality Act, Heathcock Hall, Berkeley Campus

F11 Action: Budget, Scope, and External Financing, Student Housing West, Phase 1 ‒ Hagar Development and Preliminary Plans Funding and External Financing, Student Housing West, Phase 2 ‒ Heller Development, Santa Cruz Campus

F12 Action: Amendments to the University of California Retirement Savings Program Plans as Permitted by the Securing a Strong Retirement Act of 2022

F13 Discussion: Fiat Lux, the University’s Captive Insurance Company: A Ten-Year Update

F14 Discussion: Significant Information: Technology Projects Report for the Period September 1, 2022 through December 31, 2022

F15 Information: Mid-Year Report of the UC Office of the President’s Budget to Actual Expenditures and Second Quarter Forecast for Fiscal Year 2022-23

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12:30 pm Academic and Student Affairs Committee (open session)

Action: Approval of the Minutes of the Meeting of January 19, 2023

A1 Action: Approval of Professional Degree Supplemental Tuition (PDST) for Eight Graduate Professional Degree Programs

A2 Action: Approval of UC Irvine Membership in Unizin, a Member-Based Nonprofit Higher Education Data Consortium for Student Success

A3 Discussion: Systemwide Dashboards to Address Equity Gaps

A4 Discussion: Student Academic Preparation and Educational Partnerships (SAPEP) Funding Update

A5 Discussion: Implementing the CCC-UC Transfer Task Force Recommendations Four and Five at the University of California

(Note: Possibly, the governor's budget item with regard to UCLA and transfers might come up in this segment.)

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3:45 pm Governance Committee (closed session)

Action: Approval of the Minutes of the Meeting of January 18, 2023

G1(X) Discussion: Market-Based Salary Adjustments for Certain Level One Senior Management Group Members, Office of the President

G2(X) Discussion: Collective Bargaining Matters

(Note: The repercussions of the student-worker strike and settlement might be discussed in this segment.)

Upon end of closed session:

Governance Committee (open session)

Action: Approval of the Minutes of the Meeting of January 18, 2023

G1 Action: Approval of Market-Based Salary Adjustments for Certain Level One Senior Management Group Members, Office of the President as Discussed in Closed Session

G3 Action: Establishment of a Special Committee on Athletics

(Note: The special committee seems to be the result of UCLA's move to the Big Ten and its aftermath.)

G4 Action: Amendment of the Charter of the Special Committee on Innovation Transfer and Entrepreneurship

G5 Action: Amendment of the Schedule of Reports to the Regents

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Thursday, March 16

8:30 am Board (open session - includes public comment session)

Public Comment Period (30 minutes)

Approval of the Minutes of the Meetings of December 14, 2022 and January 18 and 19, 2023

Remarks from Student Associations

9:15 am Investments Committee (open session)

Action: Approval of the Minutes of the Meeting of January 17, 2023

I1 Discussion: Review of Performance for the Second Quarter of Fiscal Year 2022–2023 of UC Pension, Endowment, Blue and Gold Pool, Working Capital, and Retirement Savings

I2 Discussion: UC Investments Real Estate Strategy

(Note: We will see if there will this time be real questions about the financial aspects of UC's $4.5 billion investment in the Blackstone REIT which was experiencing a run on the bank (and according to recent reports still is rationing withdrawals despite UC's investment). The last time the committee met, it focused only on landlord-tenant relations regarding the BREIT, turned into a lovefest related to that topic, and no hard questions were asked by committee members about the investment.)

I3 Discussion: Update on Diversity, Equity, and Inclusion at UC Investments

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Concurrent Meetings

10:45 am Compliance and Audit Committee (open session)

Action: Approval of the Minutes of the Meeting of November 16, 2022

C1 Action: Approval of the External Audit Plan for the Year Ending June 30, 2023

Upon end of open session:

Compliance and Audit Committee (closed session)

Action: Approval of the Minutes of the Meeting of January 18, 2023

Various legal cases are listed including what appears to be the People's Park matter at Berkeley and the UCLA Heaps lawsuits.

10:45 am Public Engagement and Development Committee (open session)

Action: Approval of the Minutes of the Meetings of January 18 and 27, 2023 

P1 Discussion: UC San Francisco in the Community 

P2 Discussion: Federal Governmental Relations Update 

P3 Discussion: State Governmental Relations Update

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12:15 pm Board (open session)

Committee Reports Including Approvals of Recommendations from Committees:

• Academic and Student Affairs Committee
• Compliance and Audit Committee
• Finance and Capital Strategies Committee
• Governance Committee
• Health Services Committee (meeting of February 15, 2023)
• Investments Committee
• Public Engagement and Development Committee (meetings of January 27 and March 16, 2023)
• Special Committee on Innovation Transfer and Entrepreneurship (meetings of January 27 and February 16)

Upon end of open session:

Board (closed session)

Action: Approval of the Minutes of the Meetings of December 5 and December 14, 2022 and January 18-19, 2023

Committee Reports Including Approval of Recommendations from Committees:

   -Compliance and Audit Committee

   -Finance and Capital Strategies Committee

   -Governance Committee

   -Health Services Committee (meeting of February 15, 2023)

Officers’ and President’s Reports:

   -Personnel Matters

   -Report of Interim, Concurrence, and Committee Actions

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Source: https://regents.universityofcalifornia.edu/meetings/agendas/march23.html.

The Blackstone Matter: Let's Have Real Questions by the Regents Next Time: No More Lovefests

Apart from the Blackstone BREIT, which UC bailed out with a $4.5 billion investment, Blackstone seems to be having problems with other real estate investments. See below. So it's time for the members of the Regents' Investment Committee in March to ask tough questions about the financial and legal aspects of the bailout by UC and not just have a lovefest* centered on landlord-tenant relations, as occurred at their last meeting. No more diversions. No more PR. And no more phony anonymous complaints to Blogger about this blog. Just straight, hard questions.

Is it really necessary to point out that the Regents have a fiduciary duty to ask such questions? 

From Commercial Observer, 2-16-23:

The $270.3 million commercial mortgage-backed securities (CMBS) loan on Blackstone’s Manhattan multifamily portfolio has been sent to special servicing,** according to a Trepp alert, CRED iQ data and sources familiar with the transfer. The loan backs the BX 2019-MMP CMBS deal and is collateralized by 11 multifamily properties totaling 637 units in Chelsea, the Upper East Side and Midtown South. “We continue to focus on delivering a best-in-class experience for our residents while we work with our lenders on the capital structure,” a  Blackstone spokesperson told Commercial Observer Thursday, declining to comment further. 

The loan was still marked as current as of this month, and — according to CRED IQ data— a specific transfer for the special servicing transfer wasn’t given in commentary. The loan was, however, put on the servicing watch list in November for tripping its floating-rate debt service coverage ratio (DSCR) trigger. As the real estate industry continues to grapple with a series of interest rate spikes, plus a scarcity of debt capital, Blackstone is currently facing a couple of struggles specific to the deal itself and the broader market environment. Specifically, sources said the portfolio currently requires higher capital expenditure than expected while the firm simultaneously faces higher borrowing costs associated with floating-rate debt.

One source said that while Blackstone continues to lean into multifamily overall as a high conviction theme, it doesn’t believe the best use of its capital is to continue to fund cash-flow shortfalls within this specific multifamily portfolio. As such, Blackstone transferred the loan to special servicer Mount Street to allow the firm time to work with its lenders and decide how best to move forward in today’s bumpy market environment, sources said...

Full story at https://commercialobserver.com/2023/02/blackstone-cmbs-loan-multifamily-special-servicing/. 

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*http://uclafacultyassociation.blogspot.com/2023/01/still-more-on-regents-blackstone.html; http://uclafacultyassociation.blogspot.com/2023/01/watch-regents-investment-committees.html.

**Special Servicing means the oversight and management of the resolution of Mortgage Loans by workout or modification of loan provisions, foreclosure, deed in lieu of foreclosure or otherwise, and the control of decisions with respect to the preservation of the collateral generally, including property management and maintenance decisions.

Source: https://www.lawinsider.com/dictionary/special-servicing#:~:text=Special%20Servicing%20means%20the%20oversight,generally%2C%20including%20property%20management%20and.

Time to Come Clean - Part 2

Click on image above to clarify.

Yesterday, we called on the anonymous complainer who filed a complaint about a 2018 post on this blog that reproduced a news article about the operations of the office of the UC chief investment officer (CIO) to reveal himself/herself/themselves and apologize. The complaint that was filed indicated that there was a violation of Blogger standards (which, as you might expect, mainly have to do with pornography and such). It meant that anyone who wanted to read that posting had to first read a warning and agree to see the posting despite it. We went back to the post and added language saying that the complaint was invalid, and also requested a review by Blogger. As you can see from the email above, the meritless complaint has been now been voided, after the review.

We continue to wonder whether the anonymous complainer was in fact reacting to our more recent posts dealing with the CIO's investment of $4.5 billion in the Blackstone-BREIT, essentially bailing out that fund which was experiencing a run on the bank. We also criticized the Regents' Investment Committee members for not asking questions about the financial and legal issues raised by that investment and instead focusing only on landlord-tenant relations in buildings owned by the BREIT.

The Run on the Bank at Blackstone Continues

As blog readers will know, UC invested $4.5 billion in Blackstone's real estate investment trust in exchange for a "guaranteed" 11.25% return. The idea seemed to be that if UC showed confidence in the trust, other investors would be calmed and the run on the bank would halt. But that seems not to have happened. From Bloomberg:

Blackstone Inc.’s $69 billion real estate trust hit a monthly redemption limit in January, as the firm’s crown jewel continues to wrestle with a line of investors seeking to get money out. Blackstone Real Estate Income Trust told investors Wednesday that it fulfilled repurchase requests for 2% of its net asset value. That accounted for about 25% of what investors wanted to pull out, according to a letter. January repurchase requests were north of $5 billion, according to Bloomberg calculations.

Blackstone President Jon Gray had previously cautioned that a chunk of redemptions in January involved unfulfilled requests from November and December. January requests were “in line with the aggregate unfulfilled amount for November and December,” Blackstone said in a statement Wednesday. “We expect it will take some time to work through this backlog and that flows will normalize over time as BREIT continues to deliver for investors.” ...

Full story at https://www.bloomberg.com/news/articles/2023-02-01/blackstone-s-breit-hit-monthly-redemption-limit-in-january.

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There are also reports of a management reshuffle at Blackstone in response to the financial turmoil:

https://finance.yahoo.com/news/blackstone-shakes-leadership-key-real-124500444.html.

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At the most recent meeting of the Regents' Investments Committee - as blog readers will know - all the questions focused on the trust's landlord-tenant relations. Nobody asked about the risks involved - risks that are actually demonstrated by the large 11.25% return. Of course, it is quite possible that all will go well and UC will benefit. But that is not the test that fiduciaries - which the Regents are - should be using. They should be asking about risk-return trade-offs and not waiting to see if all turns out to go well. If the trust overall earns less than 11.25%, in one way or another, the payout to UC has to come at the expense of the other investors. Is there a legal risk entailed? No one asked about that. Was anyone even there from the general counsel's office who might have been asked?

From the Internal Revenue Service: [excerpt]

Fiduciaries are in a position of trust with respect to the participants and beneficiaries in the plan. A fiduciary’s responsibilities include:

• acting solely in the interest of the participants and their beneficiaries;
• acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
• carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with the matters;
• following the plan documents; and
• diversifying plan investments.

The responsibility to be prudent covers a wide range of functions needed to operate a plan. Since you must carry out these functions in the same manner as a prudent person, it may be in your best interest to consult experts in such fields as investments and accounting.

Source: https://www.irs.gov/retirement-plans/retirement-plan-fiduciary-responsibilities.

More on Blackstone

As blog readers will know, there has been controversy surrounding UC's investment in Blackstone's real estate investment trust (BREIT). UC had $2 billion in BREIT. It added another $4 billion to stem a run on the bank. And, more recently, added another $500 million. There have been objections to its performance as a landlord raised by tenant and other groups at a recent meeting of the Regents' Investments Committee. This blog additionally raised the issue of risk. UC was guaranteed a (very high) rate of return of 11.25% by BREIT. No regent raised any questions about the risk entailed. All the focus was on the landlord issues. Blackstone had representatives at the meeting who portrayed BREIT as a good landlord and the meeting turned into what we described as a lovefest.* 

A more realistic assessment recently appeared in the Financial Times. Excerpt below:

Blackstone steps up tenant evictions in US with eye on boosting returns

Hundreds affected as one of biggest US landlords calls time on long period of pandemic forbearance

Mark Vandevelde   1-29-23

Blackstone has filed eviction lawsuits against hundreds of tenants across the US as it winds down one of the real estate industry’s most generous pandemic-era forbearance programmes, in a move that executives say will boost financial returns at the company’s redemption-hit real estate fund. Court records from Georgia and Florida show that companies owned by Blackstone have commenced legal proceedings against dozens of tenants every month since August, launching more cases in a typical week than the total for the first seven months of 2022. At the same time, consultants working for Blackstone have been calling local politicians in California to warn of a probable uptick in evictions in areas of the state that have significant numbers of delinquencies, said people familiar with the conversations.

The outreach from Blackstone points to the delicate task confronting the private equity group, one of the biggest landlords in the US, as it seeks to maximise returns while operating under far more public scrutiny than local property owners in what has historically been a fragmented market. Blackstone bought billions of dollars worth of apartment buildings, suburban houses and other residential assets during the pandemic. Many of those acquisitions were made by Breit, a $69bn fund aimed at wealthy individual investors that last month imposed limits on withdrawals to curb a rush of investors trying to pull their money out.

During a global video call for employees last month, Blackstone’s real estate chief Nadeem Meghji sought to reassure staffers about the fund’s performance. He pointed to a resumption of evictions as a reason to have “confidence in [the] cash flow growth” of its housing portfolio, according to details passed to the Financial Times after the event. Meghji told the employees that Blackstone was “seeing a meaningful increase in economic occupancy as we move past what were voluntary eviction restrictions that had been in place for the last couple of years.” Federal law prevented landlords from evicting tenants for failing to pay rent in the early months of the pandemic, although that moratorium — like the longer-lasting versions imposed by some local governments — has been off the books for more than a year.

There is no national registry of evictions in the US. But data collated from local court records in nine states by researchers at the Eviction Lab at Princeton University suggest that many landlords returned to normal rent collection months ago. Eviction cases quickly picked up in the summer of 2020 after coming to a near-halt in the early weeks of the pandemic. The weekly number of eviction cases recorded by the Princeton researchers steadily increased during 2021 before stabilising last summer at a rate slightly below the pre-pandemic norm. In contrast, Blackstone’s voluntary programme of assistance for needy tenants started earlier and extended far longer than those required by law. It was also more extensive than the help offered by most residential landlords. The company waived credit card fees and penalties for late payment, allowed residents to break leases or add new roommates and did not evict anyone for failing to pay rent for more than two years.

Despite those costly support measures, Blackstone’s real estate business has outperformed publicly traded peers — helped, executives say, by a bet on rising interest rates and a focus on fast-growing population centres in the country’s west and south. BREIT reported returns of 8.4 per cent last year, even as a broad basket of public real estate investment trusts tracked by index provider MSCI lost about one-quarter of its value. Unlike public REITs, which trade on the stock market at fluctuating prices, BREIT offers investors the opportunity to sell a limited number of shares each month at a price reflecting the value at which investments are carried on the fund’s books. But the large number of redemption requests submitted in December prompted Blackstone to impose the restrictions on withdrawals...

Full story at https://www.ft.com/content/5ac750a5-c454-485d-8974-17627c47ea20. 

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*https://uclafacultyassociation.blogspot.com/2023/01/more-on-blackstone-lovefest.html; https://uclafacultyassociation.blogspot.com/2023/01/watch-regents-investment-committees.html.