The real estate team at The Blackstone Group looks like they have just set a new record. At press time, the New York-based private equity and real estate giant was expected to hold a final closing on $13.3 billion in equity commitments for its latest commingled vehicle, Blackstone Real Estate Partners (BREP) VII. That closing not only makes BREP VII the largest real estate fund that Blackstone has ever raised, but also the largest commingled vehicle the real estate sector has ever seen – even in the years prior to the global financial crisis.
BREP VII is 22 percent larger than its $10.9 billion predecessor, BREP VI, which previously held the record for being the largest commingled real estate fund. In addition, BREP VII is more than one-and-a-half times the size of the next largest fund after that, Morgan Stanley Real Estate Investing’s $8 billion Morgan Stanley Real Estate Fund (MSREF) VI International.
The closing of BREP VII means that one phase of the process is done. Now, the remaining task is to deploy the capital successfully.
Although targets for opportunistic funds generally are in the 18 percent-plus range, a quick glance at performance by some of the largest real estate funds in the market have not come close. However, it should be noted that a number of real estate mega-funds have vintage years prior to the global financial crisis, so funds like BREP V and MSREF VI consequently have wound up seeing lower-than-expected returns.
Indeed, given that mega-funds took off in the days of over-leverage, it is hardly surprising that there is a lingering suspicion that large global diversified funds might have performed worse than smaller targeted ones.
Scant research is available on the topic, although the Pennsylvania Public School Employees’ Retirement System alluded to such research when it agreed to commit $300 million to BREP VII in June 2011. According to the pension plan’s documents, that research showed that the more funds a firm raises and the larger those funds become, the lower returns get and the less likely they are to hit their return targets. In fact, that argument often is used by those in the industry that support investment in emerging managers and first-time funds.
Perhaps it might help explain the fundraising success of mega-funds like BREP VII to consider not only a firm in terms of financial track record but also in other ways that limited partners value. A survey published in May 2011 by Gracechurch Consulting and Hawk Partners suggested that LPs involved in mainstream private equity prized factors such as communication and alignment of interests even more highly than performance track record. That finding flew in the face of conventional wisdom that says historic returns are the most important consideration when considering a fund commitment.
Nevertheless, early indications of the performance of the latest Blackstone fund look encouraging. Having made roughly 20 investments using more than $3 billion of equity, BREP VII has realised a net IRR of 33 percent as of 30 June.
Of course, Blackstone has only just begun investing on behalf of BREP VII. The 33 percent IRR is based on a few early investments that the firm knew to be home runs. After all, the firm’s recent acquisitions of a 10.1 million-square-foot portfolio of US suburban offices from Duke Realty for $1.08 billion and 36 centres from Equity One for $473.1 million on behalf of its seventh global opportunistic vehicle were far from opportunistic investments.
Like Lone Star Funds’ latest real estate vehicle, BREP VII has closed in a completely different economic environment than its comparably-sized fellow mega-funds. Time will tell if Blackstone’s latest and largest fares any better.
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