Rushing for the Exits: When Alternatives "Break"!
By Kelvin Lee, Alonso Munoz
Earlier this month, Blackstone Inc. restricted withdrawals from its private real estate income trust “BREIT”. The curbs came due to a surge in redemptions that hit the fund’s quarterly 5% withdrawal limit. Now, BRIET investors who want all their money back, can’t, and, arguably worse, investors now know that BREIT fund holders are trying to withdraw as well. In similar fashion to the FTX debacle, you have the “run on the bank” risk scenario: investors that think others are trying to withdraw will try to get out first, fueling more withdrawals. This comes as a shock to private markets as Blackstone is one of the world’s largest alternative asset managers with over $880 billion in AUM. BRIET itself is a behemoth $69 billion that accounts for 17% of Blackstone’s earnings. For retail and mass affluent investors, understanding an investments liquidity is a fundamental pillar of sensible investing, especially since this category of folks are the first to rush for the exits during turbulent markets.
Investors, specifically nowadays, are enticed by the opportunity to invest capital into investments that are “uncorrelated” to traditional public markets. This characteristic, and often sales pitch, has caused explosive demand for alternative investments that have been traditionally reserved for the wealthy and sophisticated. The opportunity to get in on “private” deals appeals to the behavioral aspect of investing. Over the last ten years, access to private markets has opened, and has seen large demand from the mass affluent and retail investors. Wall Street is certainly happy to take their money.
Some of the limitations are that most private investments are not valued in live time, and that the valuations are arbitrary. The net asset value is being judged by the issuer and when you buy shares of these funds, you’re trusting that the investments are being valued correctly. The valuations are typically updated only a monthly or quarter basis, so if the fund incurs losses, the investors may not see the damage until the next NAV date.
In contrast, when the fund trades on the open market (publicly), the share price is determined by both the underlying assets and market demand. The share price is updated second by second, with investors choosing a price they’re willing to pay for the investment. BREIT is subject to both. While BREIT, according to Blackstone, is up 9% for the year, the public REIT market is down more than 20%. Higher mortgage rates and recession fears have risen this year, with some price depreciation in the housing sector. Eyeful retail investors might look at this and say,” Blackstone’s NAV is obviously delayed or potentially inflated, and I should get out before it adjusts” or “I should roll my BREIT into the heavily discounted public REITS due to the higher upside potential”. Either way, the result is the same; people want to sell.
No surprise, while the central bank is punishing the system with policy tightening, and with rising interest rates, cash is yielding something again. As a result, people are selling assets to hold cash or to buy other discounted investments. That’s easy with equities. You can sell as much as you want every day and take advantage of some (potentially) huge deals. But not with a private fund like BREIT. These funds have a gate provision which restricts withdrawals, so they don’t have to be forced to sell their property to fund redemptions. Now, we should note that the provision does make sense from the issuer’s perspective; it’s a down market, and no one wants to sell at a loss. But fund buyers don’t have a fee incentive to hold onto BREIT, they’re focused on opportunity cost and defense, especially if we anticipate a recession next year. Most damaged will be people that fled to private assets without considering their cash concerns or liquidity.
We value liquidity for this reason, as well as a sensible investment process. Being nimble ensures that our clients can access the cash they need when they need it. In the meantime, U.S. Treasury Bills are paying north of 4%. Is cash finally “king” again?
To contact the author of this story:
Kelvin Lee at firstname.lastname@example.org
Alonso Munoz at email@example.com
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