SEC Begins To Ask Questions As Blackstone’s Flagship Funds Hit Redemption Limits

Blackstone Inc.’s stock is down 42% year-to-date. The $68 billion Blackstone Real Estate Income Trust (BREIT) informed investment advisors and portfolio managers last month who plowed money into the fund that redemption requests in November and December would be capped. Recall BREIT’s redemption request policy is 2% of NAV can be redeemed per month or 5% per calendar quarter. This was the first-time BREIT faced redemption limits, spooking money managers. Then the Blackstone Private Credit Fund (BCRED), one of the largest investment vehicles with a portfolio of corporate loans, was subjected to redemption limits as now the Securities and Exchange Commission investigates. 

BREIT and BCRED enforcing redemption limits have been the chatter on Wall Street. Earlier this month, we shared a “BREIT Advisor Guide” that was emailed to money managers with a Q&A section to keep their clients calm and prevent a further run on the fund.

Over the last several years, the non-tradeable funds have been massive outperformance vehicles for wealthy clients. Now there’s a sense of panic given the challenging macro conditions as the Federal Reserve risks sending the economy into a hard landing in the second half of 2023 due to overtightening. Investors fear these non-tradeable funds could become illiquid despite good performance and are pulling out funds and asking questions later. 

BREIT’s Advisor Guide to money managers blamed the increased redemptions on Asia.

 Bloomberg noted the same thing:

BREIT’s success has started to complicate its future. It’s attracted investors from all over the world, meaning it is exposed to the trends in a wider array of markets. In Asia, the strong dollar caused BREIT to become a bigger position in leveraged portfolios of wealthy Asians. When home markets tanked, a slew of Asian investors faced margin calls and turned to the parts of their portfolios that could be readily turned to cash — including the Blackstone trust.

Now the only issue is that someone yelled fire, and investors are panicking, which has caught the attention of the SEC, according to people familiar with the matter. Here’s what they told Bloomberg:

The regulator 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, one of the people said. The inquiries aren’t any indication that either firm is under investigation or committed any wrongdoing.

Here’s a timeline of BREIT’s redemptions via a recent note by Barclays.

Problems for Blackstone are worsening. Financial Times, citing sources, said the New York-based investment manager could delay the launch of the Blackstone Private Equity Strategies Fund, or BXPE, due to the unresolved issues surrounding BREIT and BCRED, dismal fundraising conditions, volatile financial markets, and an aggressive Fed tightening monetary conditions to tame inflation. 

These issues are “casting a shadow over the entire industry,” said Sheldon Chang, president of CrowdStreet Advisors. He said, “it will prompt a review of semi-liquid funds and their structure. People will tend to get overly conservative.”

Blackstone has sent its top executives to financial media outlets to counter the redemption panic. President Jon Gray went on CNBC the other day to calm fears. At a conference, Steve Schwarzman, Blackstone’s chief executive officer, said that BREIT’s redemptions were due to investors needing liquidity for other reasons rather than issues with the fund. 

What appears to be happening is that investors are exiting hard-to-trade assets ahead of the possible recession next year. People are building cash as the risk now is that the Fed could cause a hard landing.