Blackstone raising $3bn RE debt fund

Following the record $13.3bn close for its global real estate opportunity fund, the New York-based private equity and real estate giant is now targeting another major real estate capital raise, this time in the debt arena.

In a continuing expansion of its real estate debt business, the Blackstone Group is in the market with its latest real estate debt strategies fund, the firm’s president revealed yesterday.

In an earnings call, Tony James said that firm was currently raising a new real estate debt fund that is targeting $3 billion in commitments. While he did not provide further details on the new offering, James said that the vehicle so far had been well-received by investors. The announcement of the new fund, called Blackstone Real Estate Debt Strategies (BREDS) II, comes on the heels of the final close for Blackstone Real Estate Partners VII, which at $13.3 billion is the largest global real estate fund ever raised.

The firm held a final close of $2 billion last year on Blackstone Real Estate Special Situations Fund II, a value-added real estate debt fund that targeted non-controlling debt and equity investments globally. That fund, which is nearly fully invested, is now known as BREDS I. BREDS II will focus on high-yield lending and purchases of legacy loans from banks and insurance companies and is expected to invest up to 30 percent of its capital outside of the US, primarily in Europe. The fund is expected to hold a first close in early 2013.

The new fund is the latest development in the Blackstone Real Estate Debt Strategies business, which was launched in 2008 and currently has more than $4 billion in assets under management. BREDS primarily invests in opportunities in mezzanine debt; recapitalizations; legacy debt investments; listed equity and debt securities; and preferred equity in the US and Europe. The BREDS team currently consists of 20 professionals in New York and five in the UK.

Late last month, the firm announced its acquisition of the investment management arm of real estate finance REIT Capital Trust for $20 million, a transaction which, upon closing, would add $2.4 billion of assets under management to the BREDS business, according to Blackstone’s third-quarter 2012 earnings report.

“Capital Trust gives us a presence in high-grade real estate debt business and the ownership of a special servicer,” James said during the earnings call. “We serve many of the same limited partners already, but interestingly, they bring us some new relationships where Capital Trust is managing money.” The hope is to have the new limited partners invest in Blackstone’s other products, he said.

James said Capital Trust would be “an avenue for future growth” within the real estate business. “We have an awful lot of growth opportunities in the real estate sector,” he said. “It’s huge, it’s untapped.”

Blackstone reported economic net income (ENI) of $622 million for the third quarter, its third-best quarter since going public in 2009, and a dramatic rebound from a $380 million loss during the same year-ago period. Total assets under management (AUM) rose 30 percent year-over-year to a record $205 billion. The firm performed strongly across all of its alternative asset classes, which included real estate, private equity, credit and hedge funds.

Nearly half of the firm’s third-quarter profits came from real estate, which recorded ENI of $288.7 million during the period, swinging back from a loss of $65.4 million during the third quarter of 2011. Investments in the asset class reached $34 billion, up 4.9 percent for the quarter and 11.6 percent year-to-date. Real estate revenues surged to $464.7 million from a loss of $15.2 million during the third quarter of 2011, driven by a substantial increase in performance fees, which had an accrued net total of $1.2 billion at the end of the third quarter. Total AUM in real estate was $53.5 billion at the end of September, up 32 percent from the third quarter of 2011.

Private equity was the second-largest contributor to overall profits, with $189.2 million in ENI during the third quarter, up from a loss of $317.7 million during the same period a year ago. Private equity funds appreciated 7.1 percent in value during the quarter, and as with real estate, year-over-year revenues in the asset class rose on increased performance fees and investment income. Significant performance fees came from Blackstone Capital Partners IV, as well as Blackstone Capital Partners VI and Blackstone Energy Partners, the firm’s first-ever dedicated energy fund, which completed fundraising on $2.4 billion of total commitments during the third quarter. Total AUM in private equity was $50.2 billion at the end of the third quarter, up 17 percent from the same year-ago.