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Blackstone: real estate trumps private equity

Tony James told a London audience Wednesday night that Blackstone's real estate investment business had ‘several advantages’ over private equity.

Hamilton “Tony” James, The Blackstone Group’s president and chief operating officer, highlighted the importance of the firm’s real estate business compared to its other business lines.

“Real estate is our best business,” he  said during an on-stage interview in London Wednesday. “The advantages are several-fold.”

James cited the “less efficient” market – which allows Blackstone to generate better returns – and the larger “investment universe” as drivers behind the business line’s success. He also noted the fact that one acquires “hard assets” in real estate, unlike in private equity.

Tony James

James went on to note that in the real estate investment management space, the firm’s largest competitors – investment banks – had either disappeared altogether (Lehman Brothers and Bear Stearns being prime examples) or suffered significant mark-downs on their portfolios.

Blackstone has $128.1 billion in assets under management, of which $109.5 billion is fee-earning. The firm has four different business lines: private equity, real estate investment, credit and advisory services.

As of the end of September 2010, the private equity and real estate businesses had $24.3 billion each in fee-earning assets under management, while the credit business had $55.6 billion.

James’ remarks were made at a London School of Economics and Political Science event during an onstage interview conducted by Felda Hardymon, professor of management at Harvard Business School and a partner of Bessemer Venture Partners.

Blackstone's confidence in the real estate sector was demonstrated earlier this month when it revealed it  had hit the fundraising trail targeting a similar amount to its $10.9bn opportunity fund, Blackstone Real Estate Partners (BREP) VI.

Reporting a 69 percent increase in its real estate fund valuations over the past year, the New York-based firm said it was 70 percent invested in the fund, with expectations the 2008 vintage vehicle would be fully invested within “a deal or two”.

James said on the firm's earnings call: “Our target would be to do something similar. It’s a tough fundraising environment so there will be some investors clearly not able to do the size [they were] once able to do.” He added that any fundraise for BREP VII would “certainly take us into next year”.

Blackstone had $9.1 billion of real estate dry powder as of the end of 2010, according to its fourth quarter and annual earnings report, having called $4.1 billion of LP capital and invested $5 billion of capital – an almost 80 percent increase on 2009 equity deployment levels, most of which came in the final quarter of the year.