Blackstone launches first-ever open-ended fund

The New York-based private equity and real estate firm is targeting a first close for its debut core-plus real estate vehicle for later this year and also is gearing up for a successor to BREP VII.

Less than a year after rolling out its core-plus real estate business, The Blackstone Group has hit the fundraising trail with its first US commingled fund targeting the new strategy. The fund represents the firm’s first open-ended vehicle in any of its asset classes and therefore does not have a specified target. Indeed, core and core-plus real estate funds typically are structured as open-ended, with no designated end date, given the long-term holding strategy associated with such assets.

In an analyst call today, Blackstone chairman Steve Schwarzman announced the launch of the fund, which follows a number of separate accounts that the firm already had created on behalf of its core-plus strategy. Schwarzman did not provide further details on the fund, but PERE understands that the firm is anticipating a first close of at least $1 billion before the end of the year.

The new fund will be focused on US investments, so Blackstone initially plans to invest in core-plus deals in Europe and Asia through separate accounts, according to sources familiar with the matter. To date, the firm has closed on four one-off transactions in the US and Europe – including a $968 million investment in the retail company Edens and the purchase of the Alban Gate office complex in London for £300 million (€378 million; $514 million) – with a fifth deal currently in negotiations.

The total equity committed or invested in the core-plus business is now close to $2 billion, although Schwarzman said the platform could exceed $5 billion within a year. “We believe it’s going to grow a lot bigger from there if the trends remain consistent,” he added.

Indeed, Blackstone president Tony James believes the platform potentially could become one of the firm’s largest. “In my time at Blackstone, I don’t think I’ve ever seen as many new products and new initiatives as we have today,” James said in the call. “When I look forward, some of the new things that we have can be the biggest businesses that we have in terms of AUM. Core-plus real estate, for example, can be gargantuan.”

Blackstone also has other new real estate fundraisings on the horizon, most significantly its next global flagship fund. The current vehicle, Blackstone Real Estate Partners (BREP) VII, is the largest property fund ever raised, with a record $13 billion in commitments at its final close two years ago. Because the firm has the ability to recycle capital in the fund, however, the fund itself has invested nearly $15 billion – and $16 billion with co-investment capital, Schwarzman noted.

“It will likely grow further,” Schwarzman said. “At our current investment pace, we are likely to be back in the market with our next global fund early next year, which gives that fund a deployment life of 2.5 years.”

Among its existing fundraisings, Blackstone’s Asia real estate fund collected $1 billion during the second quarter, bringing its total equity haul to $4.4 billion to date. That vehicle is expected to hit its $5 billion hard cap. Additionally, the firm raised $226 million for its core-plus business and $858 million for debt strategies.

“As a firm, we’ve moved away from the episodic fundraising of years’ past, which caused AUM to ebb and flow somewhat,” James noted. “Now, given the breadth and balance of our product line, we’re always in the market. We have much steadier inflows today than we’ve ever had in the past, and I would expect that to continue.”

Outside of fundraising, Blackstone reported a strong quarter in real estate in terms of realizations, with a record $6.7 billion in capital returned to investors. Much of the realization activity came from the firm’s partial sales of its holdings in Hilton Worldwide and Brixmor, both of which it took public last year.

BREP VII was generating an internal rate of return of 28 percent and a 1.5x multiple on total investments as of June 30, according to the firm’s second-quarter results. The core-plus business has not yet reported a net IRR, but it currently has a 1.0x multiple on total investments.

Blackstone’s economic net income (ENI) in real estate rose 32 percent to $489 million from the same period one year ago as a result of strong real estate fundamentals globally, including rising rental and occupancy rates across the firm’s property portfolio. Total AUM for the asset class increased to $80.4 billion from $63.9 billion in the second quarter of 2013. The firm’s overall ENI surged 89 percent to $1.3 billion from the same year-ago period, while total AUM hit a new record of $279 billion, up 21 percent year-over-year, despite $50 billion of capital being returned to investors over the past 12 months.