Blackstone Group LP, manager of the world's biggest leveraged buyout fund, raised a record $10.9 billion to invest in property as the U.S. housing slump pushes global real-estate prices lower.
The fund, the New York-based firm's ninth property pool, brings to $25.7 billion the capital it has gathered since 1992 to buy real estate, Blackstone said in a statement today. The company is starting a separate fund of more than $1 billion for Western Europe.
Blackstone and other so-called opportunity funds are raising capital to take advantage of a drop in asset prices following the collapse of the U.S. subprime-mortgage market. These funds, seeking returns of about 20 percent or more, started in the early 1990s after the U.S. savings-and-loan crisis. The foundering of more than 1,000 thrifts that speculated on real estate in the 1980s forced the federal government to sell defaulted mortgages at discounts.
``There are a lot of parallels between now and the early '90s,'' said Nori Gerardo Lietz, chief strategist for private real estate at Switzerland's Partners Group, which manages about $24 billion. ``There was abundant lending and a lack of discipline on the credit side so the values of buildings went to stratospheric heights.''
LBO Market Frozen
Blackstone is expanding real-estate investing as the market for corporate buyouts remains all but frozen. Its real-estate funds have delivered an average annual return of 31 percent after fees since 1992, higher than private equity or hedge funds, the firm said in government filings prepared for its initial public offering last year.
Funding for large LBOs evaporated last July as debt investors, stung by record subprime losses, resisted buying bonds and loans for buyouts. Announced private equity deals dropped 63 percent in the second half of 2007 to $202 billion from $542.9 billion in the first six months, according to data compiled by Bloomberg.
Another opportunity fund, Dallas-based Lone Star Funds, is raising as much as $10 billion to invest in real estate. Lone Star plans to buy residential mortgages and lenders and commercial properties such as office buildings and hotels.
``This is as good a distressed environment as we've seen in a long time,'' Lone Star managing partner John Grayken told the Oregon Investment Council during a fund pitch on Jan. 30. ``It's a race among a number of different lenders to play this.''
Impaired Assets
Prices in U.S. commercial real estate fell 0.6 percent in January from December for the third straight month-to-month drop as the scarcity of credit slows investment, Moody's Investors Service said on March 19. The credit-rating company has forecast a drop of as much as 20 percent during the next few years in commercial-real-estate values.
``Opportunity funds raising capital to invest in the U.S. today will ultimately fare far better than some of those that raised capital in 2006 and 2007,'' said Lietz in a telephone interview from her San Francisco office today. ``By definition, they should be buying on distress, and there wasn't any during the preceding periods.''
Blackstone, led by Stephen Schwarzman, last year completed the biggest-ever buyouts in the real estate and hotel industries. It acquired Sam Zell's Equity Office Properties Trust for $39 billion including debt in February 2007 and quickly resold more than $28 billion of the buildings to pay down debt. Blackstone bought Hilton Hotels Corp. for $26 billion with assumed debt last October.
With the new fund, ``there should be attractive investment opportunities for this capital, given the market dislocation that exists today,'' Jonathan Gray, senior managing director and co-head of Blackstone's real-estate group, said today in a statement.
Blackstone shares rose 51 cents to $16.39 in New York Stock Exchange trading at 1:28 p.m. Eastern time. The stock is selling for about half its June 2007 initial public offering price of $31.
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