What happens when alternative asset managers chase retail money as well as their traditional institutional clients — then face a down market?
Blackstone Real Estate Income Trust, and other non-public REITs, offer a cautionary tale of how money managers can take a hit when their retail investors try to redeem en masse when times get tough.
The major non-traded real estate investment trust players — Starwood Capital Group, KKR & Co. and Blackstone Inc. — have curbed redemptions from their funds as market volatility increased last year, according to SEC filings by all three non-traded REITs.
That means only a percentage of an investor's money can be returned. All three alternative money managers said in SEC filings that in general they do not satisfy all redemption requests when they exceed the vehicle's policy limits or would place an undue burden on the vehicle's liquidity or operations.
Industry experts such as Kevin Gannon expect those gates to remain in place through the third quarter of 2023 and possibly the remainder of the year.
Mr. Gannon is the Shrewsbury, N.J.-based chief executive officer of Robert A. Stanger & Co. Inc., an investment bank and property funding advisory firm that tracks non-traded REITs.
It was a rude awakening for the mostly high-net-worth investors in non-traded REITs who are used to more liquid vehicles. It's also a letdown for alternative investment managers that have been building businesses serving retail investors, which managers need more than ever as fundraising from their traditional institutional clients has dropped.
For example, in November and December, Blackstone's $70 billion Blackstone Real Estate Income Trust, known as BREIT, said in a March 28 SEC filing that redemption requests exceeded its monthly 2% of net asset value and quarterly 5% of NAV limits. This resulted in BREIT fulfilling 43% of requests in November and 4% of requested repurchases in December. BREIT fulfilled 15% of requested repurchases in March, a Blackstone investor letter said.
In response to Pensions & Investments, Blackstone said: "BREIT is not a mutual fund and has never gated. 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 firm said.
"Strong performance is what matters and BREIT has delivered: 12.3% annualized net return since inception."
"As we have stated numerous times before, BREIT's valuation multiples have been adjusted to reflect the higher rate environment," Blackstone said. "In fact, we have sold more than $6 billion of property since 2022 at a premium to our carrying values."
While industry sources said that some non-traded REITs, including BREIT, have had institutional investors in the past, one investor took advantage of the need for cash to meet redemptions.
In January, University of California Board of Regents, Oakland, invested $4 billion in BREIT shares. However, that capital came with a six-year lockup before the university can redeem, as well as a guaranteed 11.25% annualized net return backed by up to $1 billion of Blackstone's BREIT shares, putting UC in a very different position than BREIT's mostly high-net-worth investors.