Breakingviews: Blackstone shows scale is also a curse

Blackstone is an exemplar of the benefits and perils of scale. Though missing a goal of gathering $1 trillion in assets in 2022, it became a goliath by amassing investors from pension funds to workaday wealthy individuals. That breadth gives it formidable tools to defend against downturns – but recent wobbles exhibit the tensions of pleasing both public and private investors.

Fourth-quarter earnings released Thursday show the firm’s profits available to be distributed to shareholders tumbling 41% year-over-year, as opportunities to sell assets withered. That’s partly a consequence of public equity market valuations. As they slump, Blackstone has a hard time offloading private companies, and without those exits, it’s hard to crystalize the value they have created.

But the big issue came in its large real estate fund, the Blackstone Real Estate Income Trust. BREIT was part of Blackstone’s transition into recruiting individual investors, a necessary jump from institutional clients after it had become a giant in the private asset-gathering market. The fund was launched in 2017 and accrued a wave of retail cash, which helped Blackstone more than double its assets under management to $975 billion by the end of last quarter. The rich fees it charges helped lead to fee-related earnings of $4.4 billion for 2022, nearly quadrupling from five years ago.

Public investors loved this growth, pushing shares up 350% from 2017 through to the end of 2021, versus 112% for the S&P 500 Index. But last year, the formula showed cracks. To tempt retail investors, BREIT offers some liquidity, allowing a small amount of withdrawals, up to a cap. In December, Blackstone said that redemptions had breached those caps.

It attributed initial withdrawals to BREIT’s popularity in Asia, where falling markets meant customers carrying leverage had to quickly cash out. But that would make the $125 billion fund a victim of its own success: It is now so large that it is vulnerable to not just the vagaries of the U.S. real estate market, but a downturn half a world away.

Boss Steve Schwarzman’s vast resources give him ways to respond. In early January, it nabbed a $4 billion investment from the University of California for BREIT, essentially drawing on its institutional weight to calm retail panic. It upped that investment to $4.5 billion this week.

But BREIT’s size means it still faces $3.6 billion of unfulfilled redemptions to cash out from December alone. While Blackstone talks up the possibility of making new investments, President Jonathan Gray said on its earnings call that jumping back into the market depends on flows into the fund picking back up.

In the meantime, public shareholders still expect growth. Assets under management jumped just 11% in the fourth quarter of 2022 from the year prior. Between 2020 and 2021, that growth was more than 40%. Blackstone may well be able to marshal its vast resources to stabilize its funds. But it must also keep feeding more than one beast.