While The Blackstone Group is the 800-pound gorilla in both private equity and real estate, the latter business is the one that it would choose to highlight.
“I don’t consider us a private equity firm,” said Tony James, Blackstone’s chief operating officer, during an earnings call today. “To say that we’re a private equity firm just isn’t right. Call us a real estate firm if you want; that’ll be closer to the truth. That’s our biggest business.”
Blackstone, which was founded by Stephen Schwarzman and Peter Peterson in 1985, launched its first private equity fund in 1987 and established its real estate group in 1992. To date, its private equity funds have raised $53.5 billion, while its 10 real estate funds have raised $38.7 billion. “I love private equity, it's a great business,” said James. Still, he noted that private equity is the alternative asset manager’s fourth-largest business, accounting for less than 20 percent of its total assets.
While limited partners are allocating more capital to alternatives in general, “the strength of the fundraising environment varies somewhat by asset class,” said James. “In general, it’s pretty tough in private equity today,” reflected by much smaller funds currently being raised in the market and less favourable terms for GPs. However, “in real estate, we’re finding good success,” he said. “There’s a lot of appetite by investors for hard assets and assets that have an inflation hedge.”
One case in point is the firm’s latest global real estate fund, Blackstone Real Estate Partners (BREP) VII, which closed on more than $10 billion in February. While fundraising for BREP VII is largely complete, the fund is expected to collect an additional $2 billion this year, which would make it the largest real estate opportunity vehicle ever raised.
The successful fundraise of BREP VII and the start of its investment period drove a 38 percent surge in real estate assets under management year over year. Fee-earning assets under management were $36.6 billion at the end of the first quarter, compared to $26.5 billion during the first quarter last year.
Meanwhile, Blackstone reported that it invested $1.14 billion of limited partner capital in real estate during the first quarter, nearly double the $654 billion of LP capital invested during the same period one year ago. Additionally, its real estate funds had $654.8 million of LP capital that was committed but not yet closed at the end of the quarter.
“Deal flow is robust, as the investing environment has remained favourable, given the amount of distressed assets that need to deleverage around the globe,” said Schwarzman in the call. “Although improving, debt markets are still constrained in real estate and, in addition, competition for large complex transactions remains limited, which is a good thing for us.”
Overall, Blackstone reported economic net income (ENI) of $432.3 million for the first quarter, down $138.7 million from the first quarter of 2011, as a result of a lower rate of increase in the carrying value of assets during the first three months of the year.
Similarly, ENI for real estate fell to $267.2 million during the first quarter of 2012, from $361.9 million the same period one year ago, principally because of declining revenues. The decrease in revenues – from $555.6 million in the first quarter of 2011 to $427.2 million in the first quarter of 2012 – was driven by declines in performance fees and investment income, which partially was offset by a 55 percent increase in base management fees.