Blackstone may delay equity fund launch after investor withdrawals

Blackstone has warned of the risk of delays in launching a new private equity fund designed for wealthy individuals, while it faces heavy withdrawals from investors in two other funds, real estate and credit, aimed at a similar clientele.

The New York-based investment manager is preparing to start a fund called Blackstone Private Equity Strategies Fund, or BXPE, which would become its main strategy for wealthy individuals to participate in its private equity deals. Blackstone has historically served institutional clients such as pension funds.

In recent days, Blackstone has informed wealthy investors and their financial advisers that they can wait for fundraising conditions and financial markets to improve before launching the BXPE, according to people familiar with the matter. Customers of Blackstone’s other “retail” products told the Financial Times that they expected the fund to launch in early 2023.

The possible delay comes days after the group capped withdrawals from its $69 billion Blackstone Real Estate Income Trust following a series of bailout requests from its wealthy individual investors. In 2021, Blackstone launched a similar product aimed at credit applications that also received redemption requests.

Restrictions on withdrawals from the real estate fund raised concerns about its future growth and hit Blackstone’s share price. Blackstone declined to comment.

The company has also told clients it will not raise new capital for vehicles known as Blackstone Total Alternative Solutions funds, which were conceived nearly a decade ago when they initially sought to attract assets from wealthy individuals.

BTAS funds have a lifespan of ten years and are collected annually. Instead, Blackstone plans to direct interested clients to the BXPE, which is designed to be a perpetual vehicle, which does not return capital at the end of the fund’s life. BXPE clients would commit their capital when investing initially, rather than on a deal-by-deal basis.

Since the years just after the financial crisis, Blackstone founder Stephen Schwarzman has been looking for ways to make the buyout business available to a broader range of investors beyond the pension, endowment and sovereign funds that have traditionally been the firm’s clients. .

BXPE is being created to invest in corporate buyouts and equity-oriented strategies, including late-stage venture investments, music royalties and the purchase of stakes in other private equity firms or their funds.

The fund is expected to be Blackstone’s most complex product yet. Unlike Breit and sister credit fund Bcred, which generate a significant portion of their returns from regular cash distributions to investors, BXPE will not pay dividends.

Investors will earn their returns from episodic and unpredictable sales of assets, or from the complex and often subjective appreciation or depreciation of the quarterly net asset value of their holdings.

That structure could run into trouble if investors start withdrawing their money when markets fall or financial conditions become stressed, said Kevin Kneafsey, senior investment strategist at Allspring Global Investments.

“The mechanism will have a problem when people are withdrawing money and there is a need for a valuation of the underlying assets,” said Kneafsey, who noted that if Blackstone valued the portfolio too low it could fuel redemptions. If the assets go up too high, investors bailing out of the fund at inflated prices would be “effectively taking money away from people who aren’t bailing out,” she added.

“Valuations of BXPE’s assets may differ from the liquidation values ​​that could be realized if BXPE were forced to sell assets,” the BXPE prospectus warns.

Since last spring, investors have been pulling out of Breit at an increasing rate, hitting limits Blackstone set to hedge against the risk of being forced into a liquidation of illiquid properties to meet redemptions.

Breit allows 2% of total assets to be redeemed by customers each month, with a maximum of 5% in a calendar quarter. This quarter, both Breit and Bcred reached their redemption limits, although withdrawals were not capped for the latter.

BXPE will allow investors to commit monthly but only allow withdrawals each quarter up to a 5% cap. BXPE will invest up to 80% of its assets in equity-oriented strategies and up to 20% in debt securities, according to filings.

When launched, BXPE will compete with products run by competitors including Partners Group, Hamilton Lane and StepStone Group.

Executives at those funds conceded that Breit’s recent withdrawal caps and higher volatility could slow new commitments from wealthy investors. But they expressed confidence in the market’s long-term prospects.

Bob Long, chief executive of StepStone Private Wealth, told the Financial Times that equity-oriented funds may not suffer the same redemption risks as Breit because there are no obvious ways to gain public market exposure to private equity strategies, unlike real estate or credit, where investors have access to dozens of publicly listed vehicles.

Collaborated with Sujeet Indap, in New York