University of California Invests $4B in Blackstone REIT

Blackstone and the Office of the Chief Investment Officer of the Regents of the University of California (UC Investments) announced a “long-term strategic venture,” in which UC Investments will invest $4 billion in Blackstone Real Estate Income Trust, Inc. (BREIT) Class I common shares at the January 1, 2023, public offering price.  That is the largest share class. UC Investments had previously invested $2 billion in other Blackstone funds for more than 10 years.

UC Investments can ratably redeem the investment in two years after 2028, for an effective 6-year hold. “Outside of the long-term nature of this investment, the Class I common shares to be acquired by UC Investments will be no different from any other outstanding Class I common shares,” the announcement said.

In return, Blackstone will “contribute $1 billion of its current BREIT holdings as part of a strategic venture with UC Investments.”

“Blackstone is committed to bringing the highest quality alternative investment products to individual investors to improve their returns,” Stephen Schwarzman, chairman, CEO, and co-founder of Blackstone, said in prepared remarks. He added that the “$4 billion investment is validation of this strategy.”

A separate strategic agreement provides for a waterfall structure with respect to the total return UC Investments receives on its investment in the Class I common shares. “As part of the agreement, Blackstone will contribute $1 billion of its current holdings in BREIT to support an 11.25% minimum annualized net return for UC Investments over the effective 6-year hold period,’ the announcement said. “In exchange, Blackstone will be entitled to receive an incremental 5% cash promote payment from UC Investments on any returns received in excess of the specified minimum, in addition to the existing management and incentive fees borne by all holders of Class I shares of BREIT.”

Early in December 2022, Blackstone had limited withdrawals from its fund after receiving a wave of redemption requests that rose above the REIT’s quarterly repurchase limits.

Blackstone noted in a letter at the time that it has monthly withdrawal limits of 2% of net asset value and quarterly limits of 5% of NAV. It received $1.8B in redemption requests, or about 2.7% of its net asset value, and has received redemption requests in November and December exceeding the quarterly limit. Blackstone allowed investors to withdraw $1.3bn in November, or just 43% of the redemption requests it received. Blackstone would allow investors to redeem just 0.3% of the fund’s net assets this month.

Starwood faced a similar situation around the same time.

In both cases, Asia — where investors tend to use higher levels of leverage and many-faced margin calls over turns in their domestic markets — was the source of many of the redemption requests. According to a report in the Financial Times, while 70% of the redemption requests to Blackstone came from Asia, non-US investors make up only about 20% of the fund’s assets.