It's not just BREIT

WSJ article in the Friday paper: "Property Funds In U.K. Delay Redemptions"


RE professionals, please explain if this is a larger problem while trying to set aside your obvious bias.  We saw this happen with BREIT, but this appears to be a much larger industry phenomenon i.e., not an isolated occurrence.


At the minimum, I think this will hamper fundraising for these funds down the line as investors get frustrated with the redemption delays. Yes, we all know this is what the investors/LPs signed up for, but I have a hard time believing most of them thought something like this would happen on a larger scale.


I think the most optimistic scenario is these funds can hold off redemptions long enough until rates come down with the hope that RE & other asset classes make a come back and alleviate the redemption pressure.


By no means am I a RE/fund flows expert, so curious as to what your (unbiased as possible) thoughts are.

 
Most Helpful

I'm an incoming sa, so feel free to consider me a complete idiot but here's how I've been thinking of it.I think this breit/Starwood/other story has been blown completely out of proportion. Think of it this way:

There are three levels of liquidity for investors:

Daily liquidity: i.e. the public markets, where you can effectively become liquid whenever you'd like, regardless of the ramifications to stock price, etc.

Illiquid assets: i.e. private equity/vc/hf stakes, where you will only become liquid when the gp says so (obviously with exceptions, but I'm trying to generalize here). This leads to a lot of what we saw this year in managers refusing to mark-down their portfolios in the hope of a small recession and also, as well as many mangers refusing to return capital with the exception of out-performers like citadel.

Semi-liquid product types: I.e. the non-traded reits which were intended to be a blend of 1 &2.

The long-winded key takeaway here is that if you're an investor in a private equity fund and you have some kind of special clause allowing you to liquidate (or you could sell on the secondaries market), and the manager is not meaningfully marking their assets to market, you want to get out ASAP before your stake loses value. For real estate, everyone knows what's happened with the public reits and how they are trading at a massive discount to nav because the public markets have priced in a massive recession while private real estate is slow to price this in. If I was an investor in a non-traded reit, I would immediately want to liquidate my stake which is still reflective of private real estate valuations and put it to work in the public reit space, where they are due for a massive pop because their share price has already bottomed or close to it.

Give credit to blackstone, they've already raised their overall portfolio cap rate to something like 5.4% from 4.8% (don't quote me on this), a 12.5% value erosion and ahead of their peers as well as most of the private real estate space. This number will certainly continue to rise when q4 numbers come out, so it makes complete sense for people to try and yank their money before blackstone continues to honestly appraise their real estate.

Also true that asian investors had a liquidity crisis causing them to need to liquidate their stakes but to me that's less the focus here.

Anyway, hope this was a helpful ramble! Let me know your thoughts!

 

Great job, especially for an incoming SA.

The public markets allow the market to set the price. The non-traded REITs set the price themselves - this is an issue. And when they set this price, if it is too high, they are hurting remaining investors and if it is too low, they are hurting selling investors. 

The question is what is NAV supposed to be - value of the assets if sold today (not a fire sale but marketed processes without flooding the market)? Then BREIT's value is too high. Discounted cash flows, including an exit at a cap rate that you're kind of making up? That's BREIT's NAV.

I think this is akin to a hedge fund marking their NAV higher than the sum of their underlying publicly traded securities - BREIT's portfolio has enough public market assets (take privates) and is so large it should largely track.

In the hedge fund example, holding off on redemptions until values bounce back would help fix the problem, but obviously that's really not the right thing to do

 

This is all very well said. There is a key part you are leaving out, however.BREIT and others in their semi-liquid space have been earning HUGE inflated annual fees based on inflated NAVs.

Maybe the semi-liquid investors are waking up to this fact.So while you point out a cyclical reason for the redemptions, there may be structural issues if/when investors lose trust in these vehicles (as they should).

 
[Comment removed by mod team]
 

More than 10% of all the capital invested in the ODCE funds is sitting in a redemption queue. That dwarfs the issue BREIT is experiencing. The RE secondaries market has ground to a halt. What has transacted has done so at 15% or greater discounts (for core OE funds) and larger discounts 35%+ for CE funds. In no way shape or form is this limited to BREIT. The odd phenomena is that property level fundamentals are still pretty strong, but valuations are down due to rising interest rates and cap rate expansion. Things will normalize, but who knows how long that will take. 

 

Illiquid assets in a liquid wrapper? Who would have thought there would be issues..

A few points that might be of interest (I have worked at firms that have gated open ended funds more than once):

  1.  Limiting redemptions is unavoidable during times of market stress. Liquidity mismatch.
  2. Illiquidity of the underlying is not the only issue. Managers have to ensure that they return capital in a timely manner without disadvantaging existing investors ie dont sell off all the good assets on the cheap just to meet redemptions.
  3. Gating has happened a number of times in the UK and it has now just become a feature of the open ended fund market. Some have taken to running with outsized cash balances or allocating to REIT funds as a liquidity buffer. Ultimately once NAVs start being marked down, redemption queues will quickly shrink.
  4. The higher the % of retail (HNWI) in an open ended fund, the more prolonged the redemption cycle will be. We lost a number a number of private bank/wealth manager mandates to BREIT last year as the lower vol was preferred to our listed strategies. The speed of the listed market repricing seen in 2022 meant investors never had a chance to redeem. Markets moved before they could redeem and while unhappy about the losses experienced, investors are now constructive on the outlook from here.
  5. On fundraising - open ended funds will likely struggle in the short term but value add or closed ended funds raised now will be a successful vintage. BREIT gating will not remove capital from the sector in the long run.
  6. While any sane person can point out the flaws in the structure of these funds, demand will still exist. UK funds gated in the GFC, at the start of Brexit, at the end of Brexit and then now. They still exist. German funds gated during the GFC and at points around the Eurozone debt crisis - no sign of decreasing demand. French funds have somehow remained impervious and raised fresh capital in 2022.

In terms of capital raising, the biggest headwind will be the terrible performance a number of closed ended funds will now be having. Buying in on record low cap rates with debt which was also super cheap and often not fixed is not a good set up..

 

Quo ea quia est aperiam quia quo voluptas molestiae. Iure quo excepturi qui ex. Officia temporibus facere omnis quis. Rerum aut deserunt reprehenderit fugit omnis.

Molestiae quo est sequi eos quibusdam qui. Doloribus qui consequatur odio incidunt. Est quia saepe aut.

Career Advancement Opportunities

April 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. New 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

April 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

April 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

April 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (14) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (205) $159
  • Intern/Summer Analyst (145) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Secyh62's picture
Secyh62
99.0
5
dosk17's picture
dosk17
98.9
6
GameTheory's picture
GameTheory
98.9
7
CompBanker's picture
CompBanker
98.9
8
kanon's picture
kanon
98.9
9
bolo up's picture
bolo up
98.8
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”