Blackstone set for $4 billion IPO

The Blackstone Group’s real estate division has been outshining its corporate buyout division over the past 16 years, according to SEC documents filed for its forthcoming €4 billion ($5.2 billion) initial public offering.

A 360-page pre-IPO document filed in New York yesterday said the firm’s private equity real estate funds have delivered spectacular annualized returns of 38.3 percent, easily surpassing the main corporate private equity business, which has returned a nevertheless impressive 30.8 percent.

Since its inception in 1991, the real estate business has raised a total of $17.6 billion and currently has assets under management of $17.7 billion. Although this is approximately half the amount of assets controlled by the core buyout side, real estate nevertheless generated a near equivalent amount of revenues last year, $902.7 million compared to the $1 billion generated by the firm’s private equity business.

In addition, between 2001 and 2006, real estate assets under management grew from $3 billion to $17 billion, a far quicker compound annual growth rate of 41.1 percent compared to 31.4 percent delivered by the corporate private equity wing.

The details reflect not only the rise in importance of real estate to Blackstone, which vies with Morgan Stanley as the most aggressive US global real estate investor, but the rise of real estate generally within private equity firms.

Last year some $60 billion was raised by private real estate firms amid a phenomenal bull-run in property values, according to data compiled by Private Equity Real Estate.

Like many other opportunistic real estate investors, Blackstone began investing in property in the wake of the Savings and Loan bailout in the early 1990s. Since then it has generated its return mainly by betting on office and hotel properties, which make up 85 percent of its portfolio. It made a huge bet on the recovery of the hospitality sector after September 11th by buying $27.4 billion worth of hotel properties.

Reflecting the increasingly global nature of real estate investing, Blackstone’s filing revealed that almost 17 percent of its real estate capital has been invested outside the US over the past three years. Recent deals include the firm’s acquisitions of senior living group Southern Cross/NHP for €2.2 billion and the real estate of Center Parcs, the theme park operator which Blackstone’s corporate private equity division bought for $2 billion.

The real estate team, which is scheduled to open an office in Japan later this year according to the SEC filing, set up its global platform, Blackstone Real Estate International Partners, in 2002. That was two years after the firm opened a London office as a staging post for European buyouts and property deals. In 2004, the real estate group opened an office in Paris and earlier this year opened another one in Mumbai to take advantage of India’s emerging property market.

The current real estate team employs 49 investment professionals in New York, Chicago, Los Angeles, London, Paris, and Mumbai. Led by Jonathan Gray in New York and Chad Pike in London, the senior management is remarkably young with an average age of just 36, excluding chief operating officer Gary Sumers, who is 54.

Although both rising stars, Gray and Pike are also among the longest-serving senior managing directors at Blackstone, with a combined service of 25 years. Both stand to gain personally from the IPO as they have an equity stake in the business like all other senior managing directors.

Together they oversee some $17.7 billion out of the firm’s $78.7 billion of assets under management. That is as much as Blackstone’s fund of hedge funds business, which is part of Blackstone’s fastest growing area called “marketable alternative asset funds.” That division has $30 billion under management.

Earlier this year, Gray led $39 billion takeover of Sam Zelll’s US office REIT, Equity Office Properties. Since then, the firm has sold some $20 billion of property. Other deals include the acquisition of Trizec Properties for $9 billion, CarrAmerica Realty for $5.7 billion and LaQuinta Inns for $3.4 billion.

Since inception, Blackstone has raised six private equity real estate funds and two international vehicles. Blackstone Real Estate Partners V closed last year on $3.4 billion and Blackstone Real Estate Partners International II raised €1.5 billion in the second half of 2005. Nevertheless, the firm has just finished fundraising for Fund VI, which is set to reach a staggering $10 billion.

Blackstone’s revenues have been significantly boosted by fund management fees from its two new real estate funds. However, the group’s wage bill has correspondingly spiralled by $84.6 million, or 30 percent, as a direct consequence of pay rises and new hires to help with the fundraising. In total, Blackstone’s real estate professionals were paid $361.8 million in 2005.

The firm reveals that no single investor has ever been allowed to invest more than 10 percent of any fund. It also reveals that Blackstone has never before used independent firms to value it real estate, or indeed its private equity holdings. However, this is set to change following the IPO.

The firm also sounds a note of caution in the SEC filings. It points out that legislative proposals recently introduced in Denmark and Germany will significantly limit the tax deductibility of interest expense incurred by companies in those countries. Just last week the firm confirmed it had sold the majority of its holdings in German residential company Vitus for $1.6 billion ($2.1 billion) although it made no reference to the tax changes currently before the German parliament.

The firm also points to risks in the UK where the Financial Services Authority has published a discussion paper on the impact that the growth in the private equity market has on the UK and potential moves in the US by the Anti-Trust Division of the US Department of Justice.

Further it also admits that its ability to continue delivering similar returns as a public company might be hampered. It says many of its transactions use debt of at least 70 percent of the value of the portfolio, but warns it may not have access to sufficiently attractive debt deals post-IPO. In addition, it concedes that rising interest rates could put it at a disadvantage compared to other buyers.