Blackstone Group has attracted New York State Teachers’ Retirement System (NYSTRS), US insurer MIRAS and a South Korean government employees’ fund to its latest real estate debt fund in which the private equity giant is aiming to raise $1 billion.
The new fund, reportedly Blackstone Real Estate Debt High Grade, will buy senior mezzanine debt secured by commercial real estate with a focus on North America, betting on higher US interest rates. The New York-based firm is known to pitch the fund with target returns of 5~7% a year.
The Public Officials Benefit Association (POBA), a South Korean savings fund for government employees, has recently decided to commit $50 million to the fund, according to investment banking sources on Jan. 13. The investment amount will be finalized upon approval of the association’s investment review committee within this month.
NYSTRS will commit $200 million to the fund as an anchor investor of the first batch of the fundraising. MIRAS is known to have confirmed the commitment of about $40 million to the fund. South Korea’s insurance companies, including Hanwha Life Insurance Co. Ltd. and KB Life Insurance Co. Ltd., are reportedly considering investing in the fund.
The world’s largest private equity firm plans to complete the first-round fundraising for the amount of $600 million in the first half of this year.
Blackstone began the fundraising around the end of last year as US interest rates has been on the rise. In the wake of the election of Donald Trump and the Fed’s rate hike late last year, the yield on five-year US Treasuries, the benchmark for US mortgage rates, has climbed to 1.9% a year from around 1% last summer. Higher interest rates dent returns for subordinated property debt holders, but give room for further gains to senior debt holders.
“We cannot help but favor senior loans and mezzanine-type investment which bolster stability and improve profitability, for the time being,” said a source of a Korean savings fund which is contemplating investing in the latest Blackstone fund.
The fundraising comes after Blackstone’s Real Estate Debt Strategies III fund, which raised $4.5 billion in 2016, attracted 1 trillion won ($851 million) from South Korean institutions, including the National Pension Service, Korea Investment Corporation and POBA. The fund marked the third largest real estate fund raised last year, after Brookfield Strategic Real Estate Partners II of $9.0 billion and Lone Star Real Estate Fund V of $5.9 billion, said Preqin, a research firm, in its recent report.
NO PERFORMANCE FEE
Real estate debt strategy funds have attracted keen interest because of strong performance in recent years. In 2016, North America-focused real estate funds raised a total of $53 billion, dwarfing the $22 billion raised by Europe-focused funds in the same period, according to Preqin.
But local institutional investors contacted by the Korea Economic Daily showed a cautious attitude toward the new real estate debt fund of Blackstone. They said it seemed difficult for the new fund to drum up as strong interest as its prior funds did, citing growing uncertainty over the US interest rate policy and US real estate under the new administration of Donald Trump.
As Korean asset owners’ interest in US properties showed signs of cooling, Blackstone is known to suggest that it will not charge performance fees for the fund, unlike its prior funds.
Vogo Fund, a domestic private equity firm, is marketing the fund in South Korea. It also acted as a placement agent for last year’s real estate debt fund of Blackstone.
By Daehun Kim and Donghun Kim
<Edited by Yeonhee Kim>