How does BlackRock make its real estate offering relevant?

It is perplexing how the largest asset manager in the world cannot seem to get its global real estate business to grow.

PERE reported this week that BlackRock intends to double its $24 billion in real estate assets under management within five years, and then double that number again. “Fundamentally, BlackRock intends to build a much larger real estate business,” Jim Barry, head of real assets at the New York-based asset management giant, told PERE.

That sounded familiar. BlackRock expressed similar growth ambitions in an interview with PERE four years ago, shortly after the New York-based company acquired Singapore-based private equity real estate firm MGPA. Back then, its real estate AUM was $23.5 billion, or 0.5 percent of its total $4.52 trillion in AUM. That exposure to real estate, while minuscule on a relative basis, has proportionately shrunken further since then, as its overall portfolio has now grown to $6.4 trillion but its real estate holdings have stagnated at $24 billion – 0.38 percent of total assets.

Today, like then, BlackRock expresses intentions to launch both new products and follow-on vehicles to help drive an aggressive expansion plan in real estate. The firm has indeed launched many new funds over the past five years, but they have consistently failed to meet fundraising expectations. For example, the firm held a final close for its Asia Property Fund IV on $500 million this year, falling short of its $1 billion target after four years in market.

Where BlackRock has struggled, then, is not in creating new products, but getting investors to commit sufficient capital to those vehicles. This is surprising when you consider that, at the time of the MGPA acquisition, BlackRock was calling on more than 500 relationship managers to talk to clients about its real estate offerings, as one former senior MGPA executive told us in the interview. Another told PERE the reason the firm went for BlackRock over other suitors was its impressive distribution network.

However, that distribution network, not unlike the senior leadership at BlackRock Real Estate, has seen a fair amount of turnover in the past five years, which has not gone unnoticed by potential investors. One, which has yet to commit to a BlackRock property fund, observed the firm’s capital markets group has changed its global head twice since 2014.

The investor said both lackluster performance and the smaller size of some BlackRock funds have also factored into why his organization has not backed the manager to date. Overall, he said there has not been a compelling reason to commit, calling the firm “just middle of the pack.”

BlackRock declined to comment on performance data, but PERE understands that as of Q2 2018, Europe Property Fund IV was generating a net internal rate of return of 35 percent and net equity multiple of 1.3x, whereas Asia Property Fund IV produced a net IRR of 9 percent and net equity multiple of 1.1x.

Another investor, which also is not a BlackRock limited partner, had a more favorable view of the firm, noting its offerings have always been both “competing and relevant.” But with a crowded marketplace and many investors having reduced their manager relationships over the past few years, capital raising has been difficult for many firms, he said.

For certain BlackRock investors, however, the manager has compared favorably with other managers. One investor we spoke to chose to invest in one of the firm’s European funds after doing its due diligence on several potential candidates.

But while it is respected by many investors, BlackRock’s real estate offering does not seem to stand out among enough institutions for the firm to meet its fundraising expectations. Of course, times may well change. And today’s iteration, as part of a real assets platform run by infrastructure head Barry, might be just the tonic required. He took over in 2016 after presiding over a business that has grown from zero to $23 billion in seven years, with its Global & Energy Power Infrastructure Fund II generating a since-inception net return of 53.3 percent as of December 31, according to August meeting materials from the Sacramento County Employees’ Retirement System.

As for real estate, as it seeks again to launch new strategies, BlackRock would be well-advised to more clearly develop and define what differentiates its property business and strategies from other managers that often are pitching very similar products. To fail to do so would be allowing history to repeat itself.