Blackstone illiquidity tests

Blackstone Tests Mom and Pop's Thirst for Illiquidity: Gadfly

(Bloomberg Gadfly)—Ever since credit markets seized up eight years ago, individual investors have placed a premium on being able to enter and exit their investments quickly.

Blackstone is betting they may now be willing to give up some of that flexibility in return for more reliable long-term returns. The world's biggest alternative asset manager is seeking to raise $5 billion for its first nontraded real estate investment trust, which has relatively illiquid shares and will most likely be marketed to retail buyers.

This is interesting for several reasons. First, it highlights Blackstone's steady push toward catering to individual investors rather than just institutions. And second, it hints at a broader belief across markets that there's more value to be found in less-active assets, including real estate, rather than just plowing into bonds and stocks that many fear are incredibly overvalued.

Blackstone opened its first fund targeting retail investors in recent years as it sought to attract wealthy individuals as clients to diversify from just relying on pensions and other institutions. It has doubled down on that effort, boosting the share of its assets that come from individuals rather than big organizations.

Blackstone is now choosing a vehicle that has been losing some popularity but caters to the growing sentiment that there's little value left in the most-popular assets.

The Blackstone Real Estate Income Trust, which hasn't bought any assets yet, aims to focus on income-producing commercial properties, according to a filing reported by Bloomberg's Hui-yong Yu. It comes in the wake of regulatory rule changes aimed at increasing transparency in the nontraded REITs, which has about $100 billion of assets under management.

Indeed, regulators do seem concerned about these kinds of funds, with the Financial Industry Regulatory Authority putting out an investor alert about them that was last updated earlier this year. Among Finra's worries?  "Nontraded REITs are generally illiquid, often for periods of eight years or more," according to the alert.

The lack of trading in these funds' shares may have been a discouraging factor in the past. But Blackstone is betting that many may find the lack of liquidity a benefit given the current backdrop of fast money chasing ultralow yields. After all, it's hard to be enthusiastic about U.S. equities at record high values or Treasuries with near record-low yields.

Meanwhile, investors are increasingly viewing commercial real estate as a proxy to bonds because apartments, shopping centers and hotels all offer stable rental incomes that are often higher than what they can earn from relatively safe debt. The problem is that you can't buy buildings as easily as public stocks and bonds. That makes it challenging to give retail investors access to these investments without locking up their money for longer periods or creating a potentially perilous situation should real estate values drop. (See U.K. property funds from earlier this year for a prime example.)Blackstone is wagering that individuals are more willing to trade their mobility for steadier income. Retail buyers will be taking a gamble as well.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Lisa Abramowicz in New York at [email protected] To contact the editor responsible for this story: Daniel Niemi at [email protected]


© 2016 Bloomberg L.P

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