The Blackstone Group will need to secure additional equity capital outside of its existing private equity real estate fund in order to fund the $36 billion (€28 billion) acquisition of Equity Office Properties.
Under the terms of the merger agreement, released yesterday, Blackstone Real Estate Partners will invest $3.2 billion of equity into the transaction. According to John Ford, a Blackstone spokesperson, part of the equity will come from the private equity firm’s existing real estate vehicle, Blackstone Real Estate Partners V, which closed on $5.25 billion earlier this year. However, the amount of equity required would necessitate additional capital, which the firm declined to discuss in detail. Private equity firms are usually prohibited from investing more than a given percentage of a fund’s total capital, typically 20 percent, in any one deal.
“Rest assured, it’s not as concentrated as it looks,” Ford said.
Blackstone has already invested a significant amount of its existing real estate fund in the acquisitions of CarrAmerica and Trizec Properties, among other deals. One option for Blackstone would be to raise co-investment capital from some of its limited partners, which include some of the largest pension funds in the US such as New York State Teachers, Pennsylvania Public School Employees’ Retirement System and Virginia Retirement System.
None of the equity for the Equity Office acquisition will come from Blackstone’s separate private equity fund, which closed on $15.6 billion earlier this year. According to Ford, the firm has already committed approximately half of the capital for that fund, Blackstone Capital Partners V. Blackstone has re-opened the fund in an effort to raise an additional $5 billion.
In addition to the equity provided by Blackstone, the Equity Office transaction includes a bridge loan of $3.5 billion and debt financing of $29.6 billion provided by a consortium of lenders including Bear Stearns, Goldman Sachs and Banc of America.
Regardless of how Blackstone funds the acquisition, it will almost certainly need to raise a new private equity real estate fund in the near future. The firm declined to comment on the potential size of the future vehicle, but the current trend in the industry is towards larger and larger pools of capital. Morgan Stanley, for example, is currently marketing an $8 billion vehicle, which would surpass BREP V as the largest private equity real estate fund ever. Thus far in 2006, Morgan Stanley has already closed on more than $8 billion for three different real estate vehicles. Lone Star Funds, which raised $5 billion two years ago, is currently mulling a $6 billion private equity real estate fund, according to one industry placement agent. And earlier this year, Fortress closed on $3 billion for its fourth real estate vehicle.
Private equity firms are not the only ones cashing in on the current appetite for real estate. Sam Zell, the founder and chairman of Equity Office, will see a substantial windfall following the sale of the company. According to documents filed earlier this year with the Securities and Exchange Commission, Zell owns approximately 5 percent of the company, both directly and through various trusts, a stake that is now valued at approximately $1 billion.