What Investors Can Learn from Blackstone Halting Redemptions in its $69 Billion Dollar Private REIT

Earlier this month, famed investment manager Blackstone made headlines when it announced that its flagship $69 billion dollar private real estate fund (BREIT) had hit its quarterly redemption limit, meaning investors couldn’t pull any more money out of the fund.¹

• Too many redemptions, Blackstone freezes the real estate fund. And Wall Street worries²
• Blackstone’s $69 Billion Real Estate Fund Hits Redemption Limit³
• Last Exit from Blackstone?⁴

This news put downward pressure on Blackstone’s stock (BX) and in response, Blackstone’s Chief Executive Stephen Schwarzman went on a media tour saying that redemptions in BREIT were driven by investors roiled by market volatility rather than dissatisfaction with the fund.⁵

Now, the reason for redemptions and whether these redemptions portend trouble in the US real estate market going forward is open for debate.

BREIT halting redemptions serves as a good case study for any investor looking to learn how to navigate the alternative investment market. There are some important lessons we can all take away from these recent headlines.

Below, we’ll cover some core takeaways.

Understand The Underlying Asset Class and Strategy

Real estate is not liquid.

You can’t sell an apartment building as fast as you can sell Apple stock, currency futures, or treasury bonds. This might seem simple, but a lack of liquidity is both a gift and a curse for real estate as an asset class.

The BREIT portfolio, which contains 55% rental housing and 23% industrial real estate, obviously can’t get to cash overnight, let alone in a quarter.

Most investors know that real estate’s inherent illiquidity will slow or prevent withdrawals, especially in times of stress. A Blackstone spokesperson recently commented that BREIT’s concentration in rental housing and logistics in the Sun Belt leaves it well-positioned going forward.⁶ That also means that invested capital is doing exactly what the fund is expected to do: invest in illiquid real estate.⁷

Knowing the holdings of BREIT, investors should have had an idea of the cyclical economic exposure as well as the potential illiquidity inherent in the asset class.

This takes us to the next important lesson.

Read the offering documents and know core terms

Let’s be honest, few people have the time to read BREIT’s 469-page prospectus.⁸ However, BREIT’s most essential offering terms are available in plain English on its website (https://www.breit.com/offering-terms/).

Knowing these core terms is critical because it can help investors appreciate their exposure to a given asset class, whether the manager can allocate to other assets like cash, how the fund is priced and valued on an ongoing basis, and most importantly, any restrictions on redemptions⁹:

Critically, on that same page you’ll find the redemption rules which are termed by Blackstone as the “Share Repurchase Plan”

These terms mean that investors can only redeem 2% of total Fund value per month and a maximum of 5% per quarter.¹⁰ The NAV for redemptions is calculated, “using the average aggregate NAV as of the end of the immediately preceding three months.”

These details may seem trivial but it is important to understand how your investment functions in both boom and bust times.

Closing the Gate

Looking at these redemption rights, a forward-looking investor might have anticipated that BREIT’s doors might lock fast when other investors rushed for the exits. And, rather than being greeted with an open door the following month or quarter, the line of investors waiting to redeem might just continue growing.

Taking the redemption concept even further, a high NAV for the prior three quarters means holders can redeem more than if the fund had faced a large writedown immediately prior. Accordingly, if the NAV of BREIT falls the total dollars that can be redeemed naturally must fall as well.

This means there’s not only a door that locks investors from leaving, but the doorway gets smaller as the fund loses value in the form of redemptions or mark-to-market losses.

And while Blackstone makes clear "We set up the product with limitations on liquidity," “because we knew at some point there would be a period of volatility, and we didn't want to sell assets at the wrong time under pressure," that doesn’t help investors who need liquidity at this moment and are preventing from accessing their invested capital.¹¹

Liquidity: Hope for the Best, Plan for the worst

This takes us to the most important lesson from these recent BREIT headlines, know your liquidity needs and invest accordingly.

Any investor, regardless of the markets they trade in, needs to make sure they have enough liquid capital to meet their short-term funding needs. Doing otherwise leads to a liquidity mismatch that can prove catastrophic even in the best of times.¹²

Taking Blackstone’s Chief Executive Stephen Schwarzman at his word¹³, its exactly this liquidity mismatch that has investors in BREIT running to the exits: their other investments are down or they are facing capital calls which forces them to look for liquidity in longer-term alternative allocations like BREIT which led to the redemption gate.

You never want to be a forced seller. Always manage your liquidity and have a cushion, if you can.

Conclusion

Investing in alternative assets can be financially rewarding and deliver much-needed diversification to a portfolio. However, alternative assets have some limitations that public-market investors may not be familiar with. Understanding these limitations and differences is critical.

As a rule, investors looking at alternatives should understand the underlying asset class they are investing in, the core terms controlling that investment, and make sure they have ample liquidity to bridge any redemption limitations, capital calls, or short-term funding needs.

Checking these boxes will help investors avoid facing a similar fate to current BREIT investors.

Investing can be challenging, but getting the essential things right, like portfolio strategy and liquidity will go a long way to protecting your capital over the long run.

If you have any questions about alternative markets feel free to reach out to our investment team and we are happy to answer any questions you may have.

Information provided by Upmarket Securities about the company and the financial instrument in this summary is for educational purposes only, and not intended to be nor should be construed or used as, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly in the Company. The source and data of the material are considered to be reliable. However, there is no guarantee of its accuracy or completeness. Upmarket Securities does not endorse the company nor its products, and any offer or solicitation of an investment in the company may be made only by delivery of Offering Documents and documents attached as exhibits to the Offering Documents. An investment in the Company may not be suitable for all investors. For a full list of offerings by Upmarket Securities LLC, please visit our website at upmarket.co.

Notes

1. https://www.investmentnews.com/blackstones-69-billion-real-estate-fund-hits-redemption-limit-229786  ↩
2. https://www.breakinglatest.news/business/too-many-redemptions-blackstone-freezes-the-real-estate-fund-and-wall-street-worries/  ↩
3. https://www.bloomberg.com/news/articles/2022-12-01/blackstone-real-estate-fund-tops-limit-for-redemption-requests  ↩
4. https://www.washingtonpost.com/business/last-exit-from-blackstone/2022/12/02/005156c2-7257-11ed-867c-8ec695e4afcd_story.html  ↩
5. https://www.reuters.com/business/finance/blackstone-ceo-says-financially-distressed-investors-driving-reit-redemptions-2022-12-07/  ↩
6. https://www.investmentnews.com/blackstones-69-billion-real-estate-fund-hits-redemption-limit-229786    ↩
7. https://www.breit.com/performance/  ↩
8. https://www.breit.com/wp-content/uploads/sites/33/2022/03/BREIT-Prospectus-with-previous-supplements.pdf   ↩
9. https://www.breit.com/offering-terms/  ↩
10. https://www.breit.com/offering-terms/    ↩
11. https://www.msn.com/en-us/money/realestate/blackstone-chief-defends-real-estate-fund-amid-rush-for-withdrawals/ar-AA153vS3  ↩
12. https://www.imf.org/en/Blogs/Articles/2022/10/04/how-illiquid-open-end-funds-can-amplify-shocks-and-destabilize-asset-prices  ↩
13. https://www.reuters.com/business/finance/blackstone-ceo-says-financially-distressed-investors-driving-reit-redemptions-2022-12-07/    ↩