SPECIAL REPORT: Blackstone’s evolution

In his 1859 book, On the Origin of the Species, Charles Darwin made a scientific argument for the theory of evolution, centred on the principle of the survival of the fittest. In the private equity and real estate world today, The Blackstone Group could be considered living, breathing proof of Darwin’s thesis. 

As the 900-pound gorilla of the industry, Blackstone arguably has more than just survived. While the New York-based alternative asset manager has seen lower returns on investments by suboptimal vintage funds and recently has offered various concessions to attract capital from investors, it is regarded as having outperformed rivals. As one general partner wryly said recently, the firm seems able to “walk on water.” He was referring to its latest global real estate fund, Blackstone Real Estate Partners (BREP) VII, which has raised more than $8 billion as of last month and is on track to become the largest closed-end real estate fund ever.

According to Jonathan Gray, Blackstone’s global head of real estate, the firm’s dominance in the industry has a lot do with the staying power of its staff. Gray himself marks his 20th year at the company this August. After joining Blackstone in 1992, he worked for a year in the corporate advisory services and private equity groups before switching to real estate in 1993. “One of the remarkable things…is just how much continuity we’ve had in the business,” he says.

Of the 16 partners, or senior managing directors, at Blackstone Real Estate Advisors – launched in 1992 by Pete Peterson, Steve Schwarzman and John Schreiber – 14 have been at the firm for more than a decade. “It’s a business that’s had a lot of people around for a long time, which is one of the reasons why it’s important that you have a natural evolution,” adds Gray. 

Theory into practice

That natural evolution came to a head recently in the form of a raft of promotions that Blackstone announced to investors at the end of 2011. Most significant were those of Gray and Chad Pike, who had served as global co-heads of real estate since the departure of president and chief executive officer John Kukral in 2005. Kukral himself was Blackstone’s first co-head of real estate with Tom Saylak until the latter left in 2002. Under their new roles, Gray is now sole global head of real estate, while Pike serves as vice chairman of Blackstone Europe, focusing not only on real estate but all of the firm’s business lines, including private equity, credit and hedge funds in that region.

In other changes, Ken Caplan, senior managing director, has been named head of real estate in Europe, taking over some of Pike’s previous day-to-day management and administrative duties. Caplan has led Blackstone’s acquisitions in Europe over the past two years, which included 10 transactions and more than $1.5 billion in equity commitments last year alone. 

Meanwhile, Christopher Heady officially was named Blackstone’s Asia head of real estate, formalising a role he already had been assuming for the past couple of years. Alan Miyasaki, who runs Blackstone’s real estate business in Japan, was promoted from managing director to senior managing director, as was Anthony Myers, who is based in New York and one of three partners responsible for acquisition activities for the firm’s global opportunity funds series. Myers led the transaction last summer to acquire 18 real estate debt and equity interests in properties in the US, Europe and Latin America from Bank of America Merrill Lynch, with BREP VII investing about $600 million of equity in the deal.

“When you have a group of hard-working, highly motivated and ambitious people, you have to constantly make room and open up opportunities for these folks,” says Gray of the promotions. 

In an earnings call last month, Tony James, Blackstone’s president and chief operating officer, said the firm was “big on succession planning and grooming the next generation.” Those that demonstrated strong managerial skills would “get more and more managerial responsibility and, over time, less and less deal responsibility, so it’s a smooth transition.”

Oasis of stability

Blackstone is said to have one of the most stable real estate teams in the industry at a time when many of its competitors, including Starwood Capital Group, Morgan Stanley Real Estate Investing and Apollo Global Real Estate, have had higher levels of turnover. 

From 2002 through 2005, however, Blackstone Real Estate Advisors had gone through a turnover phase of its own. That period was marked by the departures of Saylak, who joined Fortress Investment Group and later Merrill Lynch; Kukral, who started his own firm, Northwood Investors, in 2006; and managing directors Stavros Galiotos and Steven Orbuch, who went on to co-found Och-Ziff Real Estate, the real estate investment and advisory affiliate of Och-Ziff Capital Management. 

Preserving its current stability, therefore, is critical to Blackstone, as the continuity of the team has been part of its appeal with investors. Indeed, the Pennsylvania Public School Employees’ Retirement System cited a “consistent team” as one of the top reasons for making a $300 million commitment to BREP VII last June. The “eight most senior investment professionals have an average tenure at Blackstone of 17 years,” the public pension plan stated in support documents.

Of all of the promotions, it is Pike’s role in the firm that appears to have changed the most – although Gray emphasises repeatedly that Pike will continue to spend the majority of his time on real estate. “The opportunity set in Europe today is very large given the distress that exists there, and it goes beyond pure real estate,” he says. “The financial institutions obviously are going to be active sellers, so we think there’s going to be a fair amount of activity on a range of asset classes in Europe.”

James called Pike “one of our most creative, most entrepreneurial and most innovative guys.” Expanding Pike’s responsibilities in Europe was the result of his being “a very high-impact player with senior people in the European banks,” he said during the earnings call. “We want him in front of them.”

New tactics

Beyond Pike’s increased focus on Europe, “we’ve got him particularly involved” with tactical opportunistic investing, James noted. “We want him looking not just at Europe, but around the world, for new opportunities.”

The tactical opportunities mandate is a new product offering that will be structured as a series of separate accounts and cut across all of Blackstone’s business lines. The State of New Jersey is the first investor in the globally-focused mandate and has set up two separate accounts with the firm to “invest in time-sensitive or opportunistic ideas across asset classes and geographies. Targeted investment opportunities will not fall within any of Blackstone’s existing fund mandates and have varying expected holding periods,” according to a summary on the separate accounts from the state’s Division of Investment. In a strategic relationship announced in December, the pension fund agreed to commit up to $1 billion to the two accounts, BX-NJ Tactical Private Equity Opportunities and BX-NJ Tactical Real Assets Opportunities.

In its summary, New Jersey said the separate accounts would have a dedicated Tac Opps team of six to eight professionals, led by David Blitzer, Blackstone’s co-chair of private equity, to identify and evaluate investments. In addition, two people from each business group – real estate, private equity, credit and hedge funds – will assist the team with sourcing and due diligence. Blackstone declined to provide further details about the tactical opportunities mandate at the present time. 

Just a formality?

Some PERE sources suggest that, while there had been two global co-heads of real estate, Gray had been the decision maker for some time, and the significance of the December announcement to investors was to formalise the fact that he was running the show. James’ comments in last month’s earnings call appear to support this: “Of our real estate business, Jon has always run the global business. At the end of the day, Jon was always the first among equals there.”

Regardless of the reasons, Gray will be presiding over one of the largest businesses in the private equity real estate industry, with approximately 200 investment professionals and counting. About 80 individuals were just added over the past two-and-a-half years, largely from Blackstone’s takeover of Bank of America Merrill Lynch’s Asia platform in 2010 and the launch of its real estate debt strategies business.

“It’s fair to say that Blackstone has aggressively grown its headcount in response to the environment, which a lot of people might say was a risk – just like it was a risk to go out and deploy capital,” says Gray. “We [however] saw it as a great time to extend our reach and build our business and our team.”