Report: SEC Probes Blackstone, Starwood Limits on Fund Withdrawals

The Securities and Exchange Commission is taking a close look at the limitations on investor withdrawals that were imposed by non-traded real estate income trusts Blackstone and Starwood in response to a November surge in redemption requests.

According to a report in Bloomberg, the SEC has reached out to both companies for more details about the circumstances surrounding the redemption limits and how they were applied, specifically asking them if affiliates got redemptions before clients.

Quoting “people familiar with the matter who asked not to be identified,” Bloomberg’s report said the SEC “is trying to understand the market impact and circumstances of the events and asked how the firms met redemptions and if affiliates sold before clients.”

In announcing the withdrawal limits, both REITs said that November’s redemption requests exceeded monthly and quarterly thresholds established by the funds to avoid forced selling of assets, a situation precipitated by a stampede of Asian investors who are trying to pull their money out.

Blackstone Real Estate Income Trust, the largest fund at nearly $70B, said in a Dec. 1 letter to investors that redemption requests in November exceeded the 2% of the net asset value monthly limit and the 5% quarterly threshold.

BREIT said it had received $1.8B in redemption requests in November, or about 2.7% of its net asset value, and had received redemption requests in November and December exceeding the quarterly limit.

Blackstone allowed investors to withdraw $1.3B in November, 43% of the requests it received; the company said it would allow investors to redeem just 0.3% of the fund’s net assets this month.

In a letter to investors that was forwarded to Barron’s, Starwood Real Estate Income Trust—a $15B fund also known as SREIT—said it fulfilled 63% of investor redemption requests in November after the repurchase requests exceeded a 2% limit, reaching 3.2% of net asset value.

SREIT told its investors that any redemption requests that weren’t fulfilled in November would have to be submitted again this month.

In Asia, the strong US dollar has made funds like BREIT and SREIT to become a bigger position in leveraged portfolios of wealth Asians, Bloomberg’s report said. When Asian markets started collapsing, Asian investors facing margin calls rushed to liquefy assets that could provide ready cash, included non-traded holdings in the REITs.

According to Bloomberg, BREIT’s top executives, CEO Steven Schwarzman and the fund’s president, Jon Gray, each injected $100M of their own money into the fund in recent months in an unsuccessful effort to quell the clamor for redemptions.

After the redemption limits were announced, Gray told CNBC the limits were needed to prevent forced selling; Schwarzman emphasized that the stampede for withdrawals had nothing to do with the BREIT’s performance but were spurred by investors who needed liquidity for other reasons.

The withdrawal limits announced by BREIT and SREIT, which have been widely interpreted as a flashing red warning sign of an impending global recession, have drawn new scrutiny from regulators to the packaging of illiquid assets like real estate into funds that offer cash back at the request of investors, the report said.