Investors are still betting on real estate for the high-performance beta on offer

Japan’s GPIF is the latest institution to look to private real estate’s mega-managers for making proxy plays at any point in the cycle.

It is a well-worn analogy: backing Blackstone or Brookfield is as safe a bet for institutional investors as buying shares in technology firm IBM is for stock pickers. But under the current market conditions, where soaring inflation and interest rates have rendered most real estate business plans somewhere on a spectrum between stressed and broken, finding a sure thing has taken on a whole new level of resonance.

That is why few should be surprised that the first direct real estate fund commitment made by Japanese public pension Government Pension Investment Fund was to Blackstone. The Japanese pension giant disclosed in its latest annual report that it had committed $500 million to Blackstone Real Estate Partners X, PERE reported this week. The organization had previously only invested in private real estate through its “multi-manager strategy,” launched in 2017.

While past performance should never be considered a guarantee for future results, Blackstone has demonstrated a consistency on which institutional capital has become accustomed to depending. The firm’s BREP series has generated a 16 percent net IRR across more than $100 billion of capital commitments since 1991. Investors’ interest in the series was most recently reflected in BREP X’s $30.4 billion close in April, breaking the firm’s own fundraising record despite a turbulent economic environment.

Meanwhile, Brookfield Asset Management, Blackstone’s closest competitor and the first runner up behind Blackstone in the PERE 100 ranking, has also demonstrated consistent performance, with a 19.5 net IRR since 2006.

Blackstone and Brookfield have dominated industry fundraising with a combined $107 billion over the past five years. This accounts for around 15 percent of the aggregate $722.2 billion of capital raised by the entire PERE 100. While these two are considered alpha in terms of performance, they essentially play the role of beta as the go-to managers for large institutional investors seeking real estate exposure.

For limited partners, the importance of gaining access to top-tier funds has become more pronounced given market sentiment. Real estate is currently perceived by investors as the least attractive asset class due to challenges in the office and retail sector, according to Invesco’s latest Global Sovereign Asset Management Study. And investors are increasingly selective of their managers, as recent valuation corrections have unmasked performance disparities among funds and assets.

Few areas of private markets have such starkly visible managers capable of covering so much ground like private real estate has with Blackstone and Brookfield. They have generated consistently high returns at sufficient-enough scale to meaningfully impact the performance of an institution’s overall sector exposure.

While both firms reject the notion that they should be considered proxy plays as they focus only on big secular convictions at any given time, it is clear institutional money considers them fundamental building blocks for a modern-day real estate portfolio. Just ask the folks at GPIF, whose first direct fund commitment looks as safe as backing IBM.