It is a new year, but it feels like we’re reading the same story. The two closes by Blackstone reported this week continue one of the most prominent themes of 2013: after a crisis-induced lull, institutional capital markets are embracing private equity real estate funds once again. This time, however, fewer managers are reaping the rewards.
At the heart of that theme is what is happening at Blackstone. Having yet again broken the capital raising record for a global opportunity fund in 2012, this week’s news that its fourth European fund has now tipped $5.5 billion (another breaking of its own previous record in the region) and that its first Asian effort has now reached $3 billion, consolidates its global domination further. Only a fool would bet against Blackstone not hitting its $4 billion target for BREP Asia. And it would be a decent bet too that the $5 billion hard cap will also be reached.
These capital pools are growing in tandem with an increasingly glowing reputation amongst investors and peers alike. Indeed, PERE’s futile attempt at playing devil’s advocate on this subject yielded little in predictions of doom from the market. When asked how the wheels might one day come off this runaway train the common answer was that it could happen only if Blackstone lost its investing discipline and became preoccupied by the allure of plumping an already jaw-dropping asset management fee stream rather than chasing a truer alignment of interest with their investors.
The debate about listed private equity firms and the battle of their inner demons when their shareholders stamp as loud as their LPs is perennial and continues for sure. But the intestinal fortitude of Blackstone’s senior managers has thus far been proven in the face of what has been the downward cycle of a generation. The firm floated in 2007 and, fuelled by its $10 billion BREP VI fund a year later and around the time of Lehman Brothers’ demise, had ample opportunity to mindlessly hunt AUM to build up its market capitalization. But instead, as was testified by its huge investment in Equity Office – where the firm unloaded much of the portfolio before closing the deal – and in Hilton Hotels – where it bought company debt to optimize its upside going into the recovery – even its most potentially hazardous transactions have produced results.
Transactions like those have given large investors little choice but to back the firm, particularly as their allocations to the asset class have needed to increase. Since the launch of BREP I in 1994, the firm has invariably met or exceeded its performance targets and nearly always has outperformed peers of comparable size. According to a note by New Jersey Division of Investment, one of BREP Asia’s biggest investors, even its 2006 and 2007 vintage funds are today projecting profits. The investment banks that made up its closest rivals cannot say that and have suffered for it.
An investment officer at a pension with $100 million or more to put to work, but who doesn't want to represent the lion’s share of the fund’s capital, is not going to get fired for backing Blackstone these days. By contrast, there would be much more career risk in putting the money into a bunch of niche strategies with less-proven managers. And let's not forget the power of the herd instinct either: investors like to hunt in packs, and in private real estate the pack clearly chases after Blackstone first. That is a shame for all those talented managers with viable but less proven offerings who will miss out on commitments. It is getting harder for such folk to prove themselves, partly because of Blackstone’s success.
There is little doubt that Blackstone’s choices warrant its position atop of the private equity real estate pile. But there is foundation too in the investors' natural desire to put their capital into hands that are universally considered safe and capable. Indeed, it would take a seismic event and, perhaps, catastrophic human error for its fortunes to change.
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