Blackstone offers €200mn return guarantee to fund UK railway arch deal
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Blackstone Group has offered a guarantee on returns to attract a large cash infusion into a property fund that is limiting withdrawals amid heavy redemption requests for a second time in less than three years.
Blackstone in March gave the special €200mn guarantee to a large Asian investor to win a €1bn investment in its evergreen property fund in Europe, according to securities filings and people familiar with the matter.
The arrangement is similar to a controversial deal struck with the University of California to manage a flood of redemptions in 2022.
The New York-based private capital giant offered a 9.25 per cent annual return promise through 2030 backed by €200mn of its assets to entice the investment in its Blackstone European Property Income Fund, which suffered heavy but declining redemptions and has limited withdrawals in recent years, according to corporate filings.
The cash was used to purchase a 50 per cent stake in 5,000 UK railway arches from TT Group for €630mn, giving the world's largest private capital group full ownership of the brick arches under London's railway lines. Blackstone and TT Group bought the properties from National Rail for £1.5bn in 2019.
Blackstone struck the unusual return promise because its evergreen funds across Europe have little money to make new investments as they face high ongoing redemption requests, according to people briefed on the matter.
But Blackstone believed the opportunity to buy the railway arch stake for less than the price it paid for the other 50 per cent, and the size of the commitment, was worth offering special incentives, according to people briefed on the matter. Read More How to handle buying a leasehold property in England and Wales
The €1bn investment set aside €300mn of cash for BEPIF, which has about €625mn in net assets, to make new investments, turning a fund that has bled assets into a buyer in what Blackstone believes are undervalued European property markets, the people said.
'This transaction consolidates our ownership in the ArchCo at an attractive valuation, while providing us with substantial capital to deploy in an opportunity-rich environment for European real estate, benefiting all shareholders,' Blackstone said in a statement.
Blackstone recently raised a record €9.8bn for its flagship European institutional property fund.
But the deal puts Blackstone's own money at risk and courts controversy by granting special incentives to just some of its investors.
It is similar to a large, controversial $4.5bn investment Blackstone received from the University of California three years ago to stem a crunch at its flagship Blackstone Real Estate Income Trust, Breit, as it suffered a wave of redemptions.
In that deal, Blackstone pledged $1.1bn of its own Breit shares against a promise that the fund would return 11.25 per cent annually through January 2028. The promise helped to attract billions in fresh investment into Breit as other investors were pulling money out, which raised the risk that the fund would need to fire sale properties to meet withdrawals.
Many followers of Blackstone and property funds criticised the deal as offering unusual terms to a single investor. Breit's other investors do not have any assets supporting their returns.
But they believe the deal helped Blackstone manage one of the biggest crises in its near 40-year history.
Since the UC's investment, redemptions at Breit have almost disappeared and the fund no longer has restrictions on investors seeking to exit. Blackstone has also been collecting regular management fees on UC's investment.
But Breit's performance has tailed off after an almost uninterrupted string of large gains. It lost money in 2023 and only posted a 1.95 per cent return in 2024, though it still has made 9.4 per cent annual returns since 2017.
That has meant that Blackstone's risk of eventually handing over its Breit shares to UC has risen substantially.
As of March 31, Blackstone has recorded a $1bn liability to UC, according to securities filings. The accounting entry signals that unless Breit's returns improve in coming years it could be forced to hand over virtually all of the assets it pledged against its return promise to the UC.
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