South Carolina notes Blackstone’s ‘more expensive’ fees

The $29.05 billion pension plan said that the New York-based private equity firm’s core-plus fund has higher fees than similar funds.

The South Carolina Retirement System Investment Commission (RSIC) has committed up to $300 million to The Blackstone Group’s core-plus fund, Blackstone Property Partners (BPP). The commitment will consist of $100 million to $150 million in the fund’s first close, plus an additional $150 million to $200 million for other potential opportunities.

The $29.05 billion pension plan made the commitment despite the higher costs of investing in BPP. “BPP’s fund structure is more expensive compared to other core-plus funds,” RSIC’s real estate consultant, AONHewitt, noted in a review of the fund. BPP has an asset management fee of one percent, which is fairly standard for a core-plus fund, and limited partners that agree to invest more than $300 million to the vehicle will see that fee reduced to 0.85 percent.

However, investors also must pay an incentive fee of 10 percent carried interest, over a low preferred return of seven percent, with a 50 percent catch-up to Blackstone. The overall expected fee for the fund therefore actually falls in the 200 to 250 basis point range, the review said.

By contrast, other core-plus funds that charge an incentive fee do so with a higher preferred return hurdle or only on investments that have been fully realized. Most core-plus funds typically have total fees of less than 200 basis points, AONHewitt added.

BPP also will have a greater focus on larger assets than other core-plus vehicles. To date, its sole investment was the acquisition of a Manhattan office property for $310.5 million last December. Through the fund, Blackstone will focus on the four traditional core property types of office, retail, residential and industrial in gateway cities in the US and Canada. Fund assets will be properties that already are income-producing and require minor capital expenditures or management restructuring to generate higher yield. BPP has a total net return target of nine to 11 percent, with approximately half of the return expected to come from current income.

Additionally, AONHewitt observed that Blackstone was new to the core-plus space, and that BPP was its first open-end fund. One mitigating factor, however, is the hiring of two firms to bridge the differences between the firm’s closed-end vehicles and its new open-end offering. Altus, a valuation advisory firm that works on many open-end vehicles, will oversee and coordinate the internal and external valuation process, while State Street Global Services will serve as fund administrator.

Meanwhile, South Carolina also committed $75 million to Brookfield Asset Management’s latest global property fund, Brookfield Strategic Real Estate Partners (BSREP) II, which is focused on distressed and restructuring opportunities involving high-quality assets, as well as large and complex platform-level investments. Brookfield is expected to invest 50 percent of BSREP II outside of the US, because it “has identified more true deep value or distress opportunities in markets like Europe, Asia and Brazil,” AONHewitt wrote in its fund review.

Brookfield is targeting $7 billion for BSREP II, and made a GP co-investment of $2 billion, or nearly 30 percent of the fund, during the first close in March. A final close for BSREP II – for which Brookfield is targeting a net investment multiple of at least 1.8x and a net internal rate of return of at least 16 percent – is anticipated for the fourth quarter of this year.