FEATURE: A manager’s dream

How does a company privately raise $10 billion in only a few months? For The Blackstone Group, the world’s largest private equity real estate firm, the answer lies in employing a new tactic that has yet to catch on with the rest of the industry.

PERE broke the news in late January that the New York-based firm was poised to haul in approximately $10 billion for its latest global opportunistic real estate fund, Blackstone Real Estate Partners VIII. Most of the private equity real estate industry was in disbelief. After all, Blackstone only had begun marketing the fund – which has an equity goal of at least $13 billion – less than two months prior. Compare that with the average closed-end private real estate fund, which currently takes approximately 18 months to reach a final close and has a size of about $500 million, according to industry estimates.

No other real estate fund manager has come close to collecting so much capital so quickly, not even Blackstone itself. The firm currently holds the record for the largest-ever real estate fund, Blackstone Real Estate Partners VII, which collected $13.3 billion at its final close in October 2012. But Blackstone raised only $4 billion for BREP VII’s first close, and took nine months to reach the $10 million mark. 

A new approach

A key to speeding up the fundraising process was to hone in on one of its most time-consuming aspects: due diligence.

Blackstone, along with most other fund managers, has traditionally met one-on-one with investors that wanted to do due diligence on a particular fund. Over multiple meetings, a prospective limited partner asks the general partner any questions it may have about the firm, the new fund and its investment strategy. Additionally, the manager typically is required to answer lengthy questionnaires, which themselves can be a time-consuming process, since LP questionnaires still are not standardized in the US and therefore can vary widely in terms of the information requested. 

“For a long time, it’s been a manager’s dream that they can have just one session, and fill in one questionnaire that could work for everybody, says Dev Subhash, partner at StepStone Real Estate, which currently is reviewing the new Blackstone fund.

With BREP VIII, however, Blackstone tried a new approach. Rather than holding hundreds of individual meetings that could potentially span many months, Blackstone chose to gather most of the interested parties into two very large group due diligence sessions that each took less than a day.

The first of the sessions took place in December at Blackstone’s Park Avenue headquarters in New York, right after the firm had launched its marketing period and issued its private placement memorandum. There, the Blackstone Real Estate Partners team, led by global head of real estate Jonathan Gray, gathered with investors at the firm’s largest conference room on the 43rd floor, according to people familiar with the session. The room was configured to include about a dozen tables with approximately four to six people per table. A light breakfast and lunch was provided while various Blackstone professionals made presentations relating to the fund. The session, which lasted from morning to early afternoon, was “a very straightforward presentation of materials,” says one attendee. “It was no-frills, there was no wining or dining.”

To host the remaining investors that were underwriting BREP VIII, Blackstone followed up the next month with a second group due diligence session at the Waldorf Astoria hotel, which is located a few blocks away from the firm’s headquarters. Held at one of the hotel’s lobby-level ballrooms, the scene looked quite similar to one of Blackstone’s annual investor meetings, which are typically held at the hotel. Rows of tables with materials and bottles of water filled most of the room, while a podium and a large projection screen with slides was installed in front. Close to 100 investors listened as a succession of Blackstone professionals took turns at the podium: first Gray, then the heads of the different real estate sectors and geographies, followed by people from the firm’s finance, compliance and tax departments.

Despite the Waldorf Astoria’s lavish reputation, the due diligence session at the hotel, which ran from 8 am to 2 pm, was equally as subdued as the prior session. There was no table service or hot food, only a refreshments table at the back of the ballroom, according to people in attendance. The breakfast offerings, for example, included coffee, croissants, muffins and fruit. 

A matter of efficiency

It was said to be Blackstone’s own idea to hold group due diligence sessions in lieu of individual meetings. A group session format was viewed as being more efficient, since it would significantly cut down on the time needed for the relevant executives at the firm to speak with its many current and potential limited partners. Instead of having their schedules occupied with due diligence meetings, Blackstone’s investment professionals in particular would be freed up to focus on sourcing and executing new deals. 

Some of those present at the sessions viewed the new approach favorably, despite some initial skepticism that Blackstone would be able to provide the level of detail that investors desired. The team was “very thorough,” addressing questions such as what opportunities it was examining in the current environment, and new potential businesses within real estate, according to one participant. “It was back-and-forth, as due diligence sessions generally are,” he relates. “It wasn’t just someone talking on the podium.”

Following the sessions, separate meetings and calls were arranged for those investors that had follow-up questions. All told, approximately 200 investors participated in the two sessions, either in person or by speakerphone. PERE understands that the vast majority of those investors are anticipated to commit to BREP VIII, and all are trying to get into the first close. In fact, Blackstone could potentially raise more than $10 billion in the initial closing and ultimately amass as much as $15 billion for the fund, according to sources familiar with the fund.


Not everyone is on board with the group session concept, however. “Honestly, I am shocked that LPs would be willing to accept that approach,” says one fund manager that also has successfully raised large funds. “I’ve talked to some LPs who are super-offended by the idea, but they feel like they have no choice with Blackstone.” 

Anthony Breault, senior real estate investment officer at the Oregon State Treasury, agrees that the concept is not popular with all investors. “I have no doubt that some investors are offended by the group session format,” says Breault, whose organization is not planning to invest in BREP VIII. 

However, he points out that because 80 percent of the due diligence fact-finding is common to all investors, the group session is an efficient manner for the general partner to address significant demand from the investor community. Additionally, Breault has found that GPs are still receptive to supplying additional information upon request, conducting follow-up meetings if needed, and addressing any other needs that may not have been satisfied in the group session.

“In our opinion, investors still are afforded the option to conduct 1:1 dialogue with the GP,” he says. “However, the trade-off is that the quality time with the GP may be shorter since the discussion is usually limited to specific requests.”

 Subhash also notes that the type of interaction with a manager during a group due diligence session differs from that of a one-on-one meeting. “The information that a manager presents to a room of current and prospective investors, it’s more polished, it’s more positive,” he says. Also, “there may be questions that investors are not comfortable asking in front of a large room. So it’s not great for an investor to get more expansion on topics that concern them.” 

However, Subhash adds that there are advantages to being in the same room as a group of other investors. “There’s some benefit to hearing the questions that other people ask,” he says. Also, “you can have a good idea who’s coming into the fund beside you, especially if you’re a new investor. With a one-on-one session, oftentimes you don’t know who else is going to be in the fund.”

Staggering numbers

Still, while the group sessions certainly contributed to Blackstone’s ability to raise so much capital so quickly, other factors also played a part. For one thing, the firm offered both fee and capacity incentives to limited partners. First-closers would have no asset management fees during the first four months of commitment, and also would receive fee breaks based on a sliding scale: investors that committed $300 million, for example, would pay a fee of 1.25 percent, compared with the typical 1.5 percent fee, while limited partners that wrote $500 million checks would see the fee further reduced to 1.15 percent. 

But these terms were identical with those of BREP VII, whose fundraising pace was not nearly as rapid as BREP VIII. One institution that is planning to invest in the new fund acknowledged that such incentives did encourage investors to commit early and in larger amounts. But a far bigger selling point, he asserts, is Blackstone’s track record: BREP VII – thanks to blockbuster exits such as the sale of IndCor Properties to GIC Private Limited for $8.1 billion– was generating a net internal rate of return (IRR) of 27 percent as of December 31. Meanwhile, the firm’s real estate business was producing an overall since-inception return of 18 percent. “Those are staggering numbers,” the investor says. “Their track record is nothing short of spectacular.”

Wider implications

Blackstone, for its part, is said to pleased with the success of its first group due diligence sessions, and is expected to adopt a similar approach with its future fundraises. PERE understands that others such as Lone Star Funds adopted this approach in their fundraising. It could catch on.