Illustration: Aïda Amer/Axios
A turbulent market has highlighted just how difficult it is to provide retail investors access to illiquid investments like real estate and other private assets.
Why it matters: Raising funds from the “mass affluent” has become the next big growth area for private equity (PE) firms that historically tapped institutions and the uber-wealthy.
Driving the news: In recent months, a spate of redemption requests by investors in the Blackstone Real Estate Income Trust (BREIT) is proving to be something of a test for the relatively new “semi-liquid” fund structure created for individual investors.
- Notably, it’s a legacy-PE-style institutional investment announced this week that may help shore up confidence — and liquidity — in BREIT, the premiere consumer-focused fund.
The back story: Semi-liquid funds are a recent innovation, with lower minimum investments and more withdrawal options than traditional private market funds. Firms like Apollo and Starwood manage these types of vehicles, too (the latter has also faced high redemptions in a real estate fund).
- Since BREIT’s assets — like residential real estate and warehouses — can’t be bought and sold on demand to meet daily redemption requests, the fund caps withdrawals at 2% of net asset value per month, and 5% per quarter.
- In terms of the ability to pull your money out, these funds sit between traditional private market funds that require (usually) very large and rich investors to lock up their money for years at a time, and the daily liquidity of stocks and mutual funds.
The intrigue: Over the last several months, BREIT redemption requests exceeded the fund’s withdrawal limits, so some investors in need of cash couldn’t take all their money out.
- Just 43% of requests were approved in November; the fund was up about 9% year-to-date at the time, the FT reported.
- The $68 billion fund was sitting on $9 billion of cash as of December — more than enough to handle a quarterly withdrawal of 5% for at least a couple of quarters, though perhaps not indefinitely.
- The fund can raise cash by selling assets — as it did in November — but that process takes time.
The latest: The University of California’s endowment is investing an eye-popping $4 billion dollars in BREIT.
- The cash injection is most notable for how it reaches back to the classic PE playbook: the massive size, institutional origin — and a six-year lock-up period.
But, but, but: Unlike traditional PE, the endowment will receive a minimum 11.25% annual return, with any shortfall (up to $1 billion) backstopped by Blackstone itself — quite an incentive.
zoom out: When BREIT investor redemptions exceeded the cap, the fund’s structure worked exactly as it was supposed to — and as investors knew (or at least, should have known) that it would. There are pros and cons to this, of course.
- Cons: Investors who wanted or needed their money couldn’t get their hands on all of it immediately.
- Pros: This is the whole point of private market funds. The lack of immediate and total liquidity prevents a doom loop of selling that sinks asset prices.
What to watch: How much more demand for withdrawals BREIT faces in the coming quarters — and whether the fund will want to scare up more institutional support. That will be eye-opening for an industry that’s plowed resources into new products designed to reach the masses.
