Blackstone brings BoA Merrill Lynch ‘third party’ exit closer

In the latest sign that the investment banking sector is withdrawing from managing private equity real estate funds, Bank of America Merrill Lynch has agreed a deal to hand over the management of the assets in its $2.65 billion Asian Real Estate Opportunities Fund and other real estate assets to The Blackstone Group.

Bank of America Merrill Lynch has signalled its exit from managing third-party real estate investment capital after agreeing a deal which sees it hand over the management of its large Asia fund to New York-based private equity and real estate giant, The Blackstone Group.

The merged business of Bank of America and Merrill Lynch has effectively outsourced the management of its $2.65 billon Asian Real Estate Opportunities Fund, which closed at the end of 2008, as well as other real estate assets in the region, to Blackstone in a transaction expected to complete in the third quarter.

The deal comes more than a year after the platform, then under the management of Merrill Lynch prior to the merger, was put up for sale. A shortlist of prospective bidders, that included Blackstone at one stage, was whittled down to a final two – ING Real Estate Investment Management and LaSalle Investment Management.

However, the bidding process was shelved amid concerns over selling the platform into a better performing market and in the immediate aftermath of the merger with Bank of America.

The decision to outsource the management of the assets to Blackstone was greeted by certain parties as something of a half-way house between a complete sale and retaining the business.

PERE understands that the deal effectively sees Blackstone inherit the asset management function of the platform with BoA Merrill Lynch retaining the general partner and fund manager functions. As a result Blackstone's headcount in Asia stands to increase significantly. 
The agreement with Blackstone does not necessarily signal a departure from opportunity real estate investing for the bank but rather an exit from managing third-party capital. The bank currently manages approximately $2 billion in equity in the assets within the fund and on its balance sheet. It invested about $800 million in the vehicle and is expected to remain an LP.

There has been a general withdrawal by the banking sector from private equity real estate-style fund structures following the global economic downturn. One of the criticsms levered against the banks relates to investing too much of their own capital in such high risk strategies.

Another Wall Street bank in the process of withdrawing from the sector is Citigroup which agreed to sell its Citi Property Investors platform to private equity business Apollo Global Management earlier this year. That deal is expected to complete over the coming months.