Blackstone's Property Funds Generate Highest Returns March 23 (Bloomberg) -- Blackstone Group LP, the leveraged buyout firm that spent about $160 billion on acquisitions during the past two decades, earns higher returns from investing in real estate than from its takeover funds.
Real estate has been New York-based Blackstone's best- performing investment since the company started buying property 16 years ago, with net returns averaging 29 percent a year, according to documents for its initial public offering. The private-equity funds rose at an average annual rate of 23 percent a year, after fees, since 1987.
``Blackstone is phenomenal at being able to read the market and seizing the opportunity,'' said Stuart Shiff, founder of Divco West, a San Francisco-based real estate firm. ``There is no sign of an end of capital flows into real estate, and they know how to use financial tools to squeeze the margin out of deals.''
The company, founded in 1985 by bankers Stephen Schwarzman and Peter G. Peterson, plans to raise as much as $4 billion in an IPO, according to a filing yesterday with the U.S. Securities and Exchange Commission. The sale would be the biggest by a buyout firm.
Blackstone's real estate funds had $902.7 million of pretax income last year, or 39 percent of the firm's total $2.3 billion. That's almost as much as the $1.01 billion of income the firm earned from corporate buyouts.
Led by Senior Managing Directors Jonathan Gray, 37, and 35- year-old Chad Pike, Blackstone last month completed the largest real estate takeover when it paid $23 billion for Chicago-based Equity Office Properties Trust, with assumed debt pushing the total value of the deal to $39 billion. A bidding contest with New York's Vornado Realty Trust drove the price up by $3 billion.
Record Funds
Since the transaction closed on Feb. 9, Blackstone agreed to sell at least 112 buildings of the more than 500 that it acquired, raising about $21 billion, as of Feb. 23, to pay down debt.
``I'd buy their stock because they know how to make money,'' said Divco's Shiff. Shares of Fortress Investment Group LLC, which manages buyout and hedge funds, have gained more than 50 percent since the New York-based firm's IPO in February.
Blackstone earned $567.2 million from fees last year before any investment profits, or a quarter of the partnership's annual net income and more than four times the $134.9 million of fee income it earned in 2005, the IPO filing shows.
Fees Rise
As the firm raised ever-larger funds, its annual management fees, charged as a percentage of capital under management, rose 130 percent to $852.3 million in 2006, from $370.6 million in 2005, according to the filing. Expenses, meantime, rose 53 percent, to $553.1 million from $361.8 million.
Adding advisory fees and interest pushed the firm's total fee revenue to $1.12 billion, up 126 percent from $496.7 million in 2005. In some cases, the firm also gets performance fees when returns exceed certain targets.
Blackstone set a record last year by raising $5.25 billion for its fifth high-return real estate fund. It also raised the bulk of what will be a $20 billion buyout fund, the world's largest. As Gray completed Blackstone's takeover of billionaire Sam Zell's Equity Office, the firm was already raising its next real estate pool, targeted at about $10 billion.
Blackstone managed $17.7 billion of real estate funds as of March 1, out of a total of $78.7 billion. The firm managed $31.1 billion of buyout funds, with the remaining $29.9 billion spread among several other asset types, including hedge funds, debt funds and mutual funds.
Asian Plans
The offering comes as U.S. commercial properties are trading at all-time highs, pushing yields to record lows. Blackstone plans to buy more real estate outside the U.S. with its next fund. The firm, which already has offices in Hong Kong and Mumbai, plans to open in Tokyo and elsewhere in Asia and transfer two senior executives as it steps up investments in the Asia-Pacific region.
Being public probably won't hamper Blackstone's ability to make deals, said Dean Frankel, a money manager at Urdang Securities in Plymouth Meeting, Pennsylvania. Frankel's firm owned more than 2 million Equity Office shares before Blackstone's takeover.
``Their business won't change when they're public,'' Frankel said. ``They raise capital from others and make fees and make upside if they do well.''
The lines between private and public buyers of real estate have been blurring. Some public companies such as Brookfield Properties Corp., owner of Manhattan's World Financial Center, acquire real estate through vehicles similar to private equity funds, charging co-investors fees. Goldman Sachs Group Inc. and Morgan Stanley also operate private real estate pools that compete with and invest alongside other funds.
`Incentivized'
Blackstone said each member of its 710-person staff under the 57 senior managing directors will get a stake in the company when it goes public. The offering may help Peterson, 80, and Schwarzman, 60, step aside eventually by allowing them to convert the firm's value into riches for themselves and their successors.
``You want to make sure the people making the deals are incentivized,'' Frankel said.
Blackstone said in the filing that President and Chief Operating Officer Tony James has been selected as Schwarzman's eventual successor. James, 56, joined Blackstone in 2002 from Credit Suisse Group where he was chairman of global investment banking and private equity.
Blackstone's IPO may prompt other fund managers to go public, said Ken Rosen, an economist at the University of California at Berkeley who also runs Berkeley-based hedge fund Rosen Real Estate Securities.
``It's a strategy many private real estate funds will follow in the next couple of years,'' he said. ``If you're public, you have much higher leverage with a broader array of debt alternatives. You can use your stock as collateral.'' http://www.bloomberg.com/apps/news?pid=20601103&sid=afguRzxab2bM&refer=news
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