in 2017 an investing Revolution began it was not started by Young Guns though but by an
industry Titan the world's largest alternative asset manager Blackstone a company that invests
billions for large institutions like Pension funds insurance companies and a few billionaires but it
had never offered a product to private investors and that changed everything you look like you know
an actual human person the type of assets the fund would invest in was also a total surprise
non-traded REITs that's a murky area of financial markets that Regulators had criticized and had
even published investor alerts it's my [ __ ] company most serious investment firms decided
to stay away from it yet today Blackstone refund b-REIT is the biggest contributor to blackstone's
revenue it's the largest fun of its kind it has over 70 billion dollars in assets
its leverage it controls over 220 billion dollar in properties and it generates over one billion
dollar in Annual fees for the firm it was a bold move that required visual leadership and execution
and brought great success the kind of move that maybe only Blackstone could pull even if others
would follow we're going to explore the rise of blackstone's Reit farm and why This brilliant
fund is currently in a dark spot with the help of an expert feel back the CEO of armada etfs
a firm that specializes in REITs but public ones we're talking about b-ree that's the Blackstone
REIT which is a private fund of non-traded REITs okay so we know these properties we think they've
done a very good job at selecting properties and managing properties with Blackstone enter the
market it brought all its expertise its Salesforce and a simple pricing structure of 1.25 management
fees and 12.5 percent performance fees they describe the fund as an all-weather portfolio that
delivers attractive tax advantage distributions and capital appreciation the performance of this
fund has been great and where we stand today is kind of interesting there are times to be someone
it's high tide performance drives flows and the fun has become bigger and bigger and today this
fund is now standing on the edge of a cliff at a precipice right and not through mismanagement the
opposite right through their success they are in fact a victim of their own success so it's like
be read has become so big that it has carried the whole market and now it potentially has to
sell how did that work well embedded in this fund is a lot of Leverage and they have raised
a tremendous amount of assets 68 billion dollars right and they own about 120 billion dollars worth
of real estate and they've had so much success and so many assets coming in that they've been
buying all along the way and all along at the top and you know while interest rates were you know
artificially suppressed really buying it not only Peak valuations but Peak low financing costs and
and everything else stop today the fomc raised our policy interest rate by a half percentage point
we continue to anticipate that ongoing increases will be appropriate in order to attain a stance of
monetary policy that is sufficiently restrictive to return inflation to two percent over time
in addition we're continuing the process of significantly reducing the size of our balance
sheet and the market turned very very quickly right with the rising rates and inflation and
and everything else commercial real estate market especially really froze up and liquidity kind of
disappeared so the market overall started going down but magically the net asset value the nav or
in other words the valuation of the breed stays flat almost totally perfectly flat and therefore
selling doesn't look like a bad idea and the redemptions came very suddenly more suddenly than
they expected that's where the private nature of blackstone's REITs really start to matter primary
so REITs you know people mostly think of them as publicly traded they're companies essentially that
trade on the exchange and that means that you get a mark to Market you get price Discovery happens
in real time someone's willing to buy it someone's willing to sell it they trade that's your last
price and then you have that every day that is not happening with private rates and the distinctions
only becomes important when you want to sell bind is not a problem and if you have redemptions so
people trying to get out of the fund and people trying to get it great you can offset the two
right no big deal what happened here was all at once you had the Redemption request you had
inflows drying up because people are now concerned they didn't have enough inflows to offset the
redemptions they own a lot of commercial cmbs and different liquid vehicles that they can use
to provide liquidity but they didn't have enough and what you do in that situation like they own
the properties they just sell the properties and then they can use the cash to give people
their money back but they found what everyone in the commercial real estate market knows which
is that liquidity is almost non-existent now with financing costs all of a sudden so high
so they've been unable to meet liquidity demands for a while now at gated the fund which means
that you can't get your money out you can get out now five percent a quarter maximum every time you
put in a Redemption request they fill a little bit you got to resubmit every month resubmit resubmit
to try to get your money out good morning at the end of 2022 the fund was reaching a crisis point
I have an announcement to make about wrongdoing at waystar royco there was a lot of press
talking about it and there was a risk that it could damage the reputation or the firm as a
whole the truth is that my father that's when Blackstone pulled the most incredible trick
saw their plan and my dad's plan was better some have called it hotter in reference to the scene
in Game of Thrones where the heroes are saved by the sacrifice of this big guy Hodor that's
blocking the door they incentivize University of California to invest four billion dollars in this
fund that gave him a preferential waterfall return stream I mean it's outrageous and that
might work for a little bit but what happens next quarter this was quite extraordinary this is the
kind of deal that I've never heard of before and if you're a retail investor in this fund
your money is locked up and you don't have the preferential treatment I wouldn't be very happy
with Blackstone you're telling me that I can't get my money out and you're incentivizing new
people to come in it was a better deal than I get talk about this fund is democratizing you
know access to careers that doesn't sound very Democratic to me at all okay everybody just be
casual relax smile it's quiet at the Press so we don't hear so much about it anymore sure I
get the cheekbone talked about how publicly REITs are traded on the exchange and if price Discovery
happens every day what someone willing to buy it at what someone willing to sell it at they're
fairly liquid very clear what these things are worth the publicly traded REITs have gone down
20 over the last year and these private REITs are up they're up according to the appraisers
according to what Blackstone is putting out this was supposed to be choreographed and Blackstone
is collecting a fee 125 basis points on the NAV the higher the NAV the higher the fee there's a
20 Delta right now between where these things are being marked on their nav and where they
should be based on public market that's about as choreographed as a dog getting [ __ ] on roller
skates so how does the story end you can say that well Blackstone is so smart they're really good
at managing properties but are they 20 better that is an imaginary cat now could you please
[ __ ] off after clearing a 300 basis point annual compounding fee difference between
the private REITs and the public reads that's simply inhuman that's simply not
possible there's nobody that could be one Buffett couldn't do that how do you think the story ends
is there going to be a happy ending or are we going to see a lot more drama? [Music]