Blackstone’s Liabilities to UC Rise as Fund Loses Value

The saying about the best laid plans of mice and men applies all the way up and down the economic ladder. And after a complex set of investment and owed return, Blackstone Real Estate Income Trust is getting deeper in the hole with the University of California, according to the Financial Times.

“The world’s largest alternative asset manager promised UC an 11.25 percent annual return from the property fund, called Blackstone Real Estate Income Trust, or BREIT, as part of a deal to draw $4.5 billion in new investment,” the paper wrote. “But as the fund lost value last year, Blackstone’s liability to UC has grown to $560 million.”

How things got here starts just over a year ago when BREIT, Starwood (SREIT), and KKR’s KREST fund, all non-traded REITs, had seen massive redemption requests. BREIT needed to add backing to the fund. In early January 2023, Blackstone and the Office of the Chief Investment Officer of the Regents of the University of California (UC Investments) announced a “long-term strategic venture,” in which UC Investments would invest $4 billion in BREIT Class I common shares at the January 1, 2023, public offering price. That is the largest share class. UC Investments had previously invested $2 billion in other Blackstone funds for more than 10 years.

UC Investments can ratably redeem the investment in two years after 2028, for an effective 6-year hold. “Outside of the long-term nature of this investment, the Class I common shares to be acquired by UC Investments will be no different from any other outstanding Class I common shares,” the announcement said.

Near the end of January, the University of California increased its investment by $500 million as BREIT conceded that limits it placed on investor withdrawals in November and December had not stopped an exodus from its $69B fund.

But, as the FT noted in the new story, Blackstone had taken risk by promising high returns on the investment — 11.25% annualized returns over six years. It also pledged $1.1 billion in BREIT shares that it owned as guarantee of the returns.

But the fund had fallen behind on its obligations to the school as the fund’s value fell when Blackstone marked down some property values — not unusual in CRE given falling asset prices. That left Blackstone recording a liability in the fourth quarter, raising it from $260 million in the third quarter of 2023 to $560 million in Q4.

A statement from Blackstone said that “over the last seven years, since its inception, BREIT has delivered 11% annualized net return for Class I investors” and claimed that in 2023, it “outperformed non-traded REIT peers by [approximately] 600 basis points.”