Sunday, July 27, 2008

Blackstone, Real Estate Genius?

"What's this pot of money worth now? That's a secret for a few more months, and [Charles] Spiller [of Pennsylvania teachers' fund] isn't releasing any of the communications he's had from the fund operators about their recent results. ... A year ago the most closely studied funds in the U.S. were holding $213 billion in commerical real estate equity, leveraged about 70% on average. ... Many opportunity funds are black holes. ... They're typically unregulated--a recent statement by the Financial Accounting Standards Board leaves it to the funds to address fair value--and private equity groups don't have to file regularly to the [SEC]. ... Say the manager buys a building for $100 million, putting down $30 million of your money and borrowing the rest. Over the next three years it appreciates to $150 million, Interest on the mortgage adds up to 20% or $14 million. Before fees, you made $36 million, a 120% return. That comes out to 30% a year. But the unleveraged return was only 14.5% Which return number 30% or 14.5%, is the one most likely to be talked about? ... 'We don't know how you define "risk-adjusted return",' says Joseph Dear, executive director of the $82 billion (assets) Washington State Investment Board, a heavy investor in opportunity funds. ... 'Risk-adjusted returns? There isn't such a thing,' insists Chicago billionaire Neil Bluhm, whose firm Walton Street Capital is raising its fifth opportunity fund. Comparing the returns of opportunity funds with those of a levered-up REIT index fund is 'for eggheads,' he says.' ... Blackstone ... since 1991 has made 200-plus real estate investments, totalling roughly $160 billion. ... It has leveraged those purchases 85% on average. The firm states that its funds have produced annual returns to investors of 31%", Stephanie Fitch (SF) at Forbes, 21 July 2008.

"The senior investment officer at the Virginia Retirement System was apparently terrified at having to disclose performance for the fund's $3.3 billion in private equity investments that he asked his staff to box up every quarterly and annual report they received from general partners and ship them back. Return them to us when nobody's asking for them anymore, John Alouf, now head of private equity for the pension fund told the managers. ... VRS says one firm with purported 93% annual returns (it won't diclose which one) refused to do business with it because of disclosure concerns", Kai Falbenberg at Forbes, 21 July 2008.

It's debatable how well Blackstone's real estate investments did. SF presents evidence that on an equally levered basis, they did no better than a basket of REITS since 1999. This may explain Stephen Schwartzman's hostility to fair value accounting, my 17 July 2008 post. It might make Blackstone look bad. From time-to-time I've looked at one of these things for a client as a possible investment. I remember one in particular I looked at in 1984. I read one number in the private placement memorandum (PPM) and handed it back to the client saying, "Don't touch this. It's a piece of junk". He was shocked. "That's it"? I told him I would spend as much time with it as he was willing to pay for, but he was wasting his time. The PPM showed a projected 172.2% IRR. Really. I told the client, "if this thing was so great you would never see it. The syndicator would keep it for himself. Or the Big 87654 partners who reported on the projections would have bought it themselves". The PPM contained projections with a Big 87654 firm's review report on them showing a 172.2% IRR. At the client's insistence I dissected the numbers. The syndicator had netted various cash flows to derive the 172.2% IRR, as opposed to separating the inflows and outflows. The projected IRR as I calculated it was about 28%. Not too shabby, but still the "investment" was what I call a "fee generator". This particular real estate partnership went bankrupt in the 1984-87 Texas real estate debacle.

Alouf should be fired. Virginia's Attorney General should see if there is a statute, like obstructing the operations of Virigina's legislature to indict Alouf under. What a fool. If this wonderful fund really makes 93% a year, its managers don't need Viriginia's money.


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Realtor Flyer said...

You have really researched the case well. According to your case study and data, I agree that Alouf should be fired.