So many investors tried to withdraw their money from Blackstone’s large private property fund (BREIT) in December that the 5% quarterly cap is limiting how much can be withdrawn until March, when investors can renew their requests to take out their money. However, UC Investments, the University of California’s endowment, poured $4 billion into BREIT for the next 5 years followed by a limited withdrawal period for 2 years. If Blackstone fails to earn 11.25% every year (after fees), it can use up to $1 billion to pay UC Investments back—a deal that could offer shareholders a winning return, contends an article in The Wall Street Journal.
Since launching in 2017, BREIT has kept its focus on warehouses, data centers, and Sunbelt housing, generating even stronger returns than the UC investment promises. However, the fund’s value decreased last fall, and rents would likely be impacted by a recession. But the investment demonstrates the confidence UC has in BREIT, and the money offers a bit of a safe haven if the fund underperforms, though it won’t guarantee the 11.25% return if the fund’s holdings fall behind. Concerns that BREIT is valuing its properties at more than they’re actually worth and that it could experience something like a run on a bank have been swirling recently, and the investment offers some reassurance in the face of those worries. UC Investments did its due diligence on the fund, according to Blackstone, and while that isn’t a guarantee against overvaluing or the impact of a possible recession, it is a further check of reassurance, the article contends.
The influx of $4 billion means BREIT will have the cash to cover withdrawals for longer and makes a run on the bank much less likely. However, it still doesn’t solve the issue of so many investors demanding their money back; last month, investors wanted 5.44% of the fund, but only 0.23% was available to withdraw because of the hefty withdrawals in the previous two months. And the UC Investment money won’t alleviate the cap on withdrawals. In fact, that cap could remain for quite some time if the fund’s outlook worsens. Those investors who are content to leave their money in the fund alongside the university’s for the long haul can gain some peace of mind, but anyone wanting their money out this year might run into trouble, The Journal warns.
Given how high interest rates are, liquidity is at a premium, and UC Investments just paid the premium price of underwriting 11.25% for $1 billion in return for a 6-year term. That’s not cheap, and investors should take it as a warning before investing in a fund where it may become difficult to get your money back.