The University of California and Blackstone agreed to form a $4 billion strategic partnership in early January, a move that is expected to provide Blackstone Real Estate Income Trust (BREIT), a public non-listed REIT, with increased balance sheet flexibility and capital.
BREIT was originally designed by Blackstone to provide individual investors with access to the private equity firm’s institutional real estate investment platform.
Under the terms of the partnership, University of California (UC) Investments, which manages the university’s investment funds, will provide BREIT with $4 billion in cash, subject to a minimum 11.25% net preferred return over a six-year holding period that will be backstopped by $1 billion of Blackstone’s BREIT shares.
“Blackstone is committed to bringing the highest quality alternative investment products to individual investors to improve their returns,” said Stephen Schwarzman, chairman, CEO, and co-founder of Blackstone. “UC Investments’ $4 billion investment is validation of this strategy, and we are proud to add the UC system to the more than 200,000 investors already benefitting from BREIT.”
“In exchange for the cash, the University of California will receive the common equity, [or] the normal fee-paying shares, of BREIT that will be contributed into a separate vehicle,” Green Street’s Jared Giles said. “This new entity will also receive $1 billion of BREIT shares that Blackstone already owns.”
Giles said that if BREIT returns are less than 11.25% net over the next six years, then the Blackstone shares will be used to make up the difference until they are exhausted.
“It is possible that the University of California will end up with less than an 11.25% net return, but the downside protection provided in the new structure insulates its investment,” he added.
BREIT explained that the transaction will take place in two steps: the University of California first acquired $4 billion of BREIT Class I common shares at the Jan. 1public offering price; and Blackstone and UC Investments then entered into a separate strategic venture with a waterfall structure for returns received by UC Investments on its BREIT shares.
According to a fact sheet that BREIT provided to its stockholders, UC Investments has invested with Blackstone for more than 15 years.
“We consider BREIT to be one of the best positioned, large-scale real estate portfolios in the U.S., managed by one of the world’s top real estate investors,” Jagdeep Bachher, UC’s chief investment officer said in a statement issued by Blackstone.
This atypical investment structure will provide BREIT with cash to meet redemption requests—and also demonstrates the power of the Blackstone brand, according to Green Street’s Giles.
