Coverage: Blackstone flexes muscle on GE deal

Blackstone is making its move. As many others in financial services regroup and downsize, the private-equity giant is making a big move in real estate. The announcement last week that they would buy GE’s real estate portfolio cemented them as one of the largest players in the market.

Landon Thomas, Jr. had this follow-up story on the deal for The New York Times:

As Blackstone’s top executives fan out across the globe, pitching their services at elite gatherings of investors, they invariably tell the crowd: Hope you guys like this hotel, because we own it.

When it comes to real estate, Blackstone owns a lot more as well. The private equity firm, while better known for its huge buyouts in the deal boom before the financial crisis, is the largest private sector landlord in the United States. And that was the case even before General Electric announced on Friday that it would sell a $14 billion chunk of its real estate assets to Blackstone’s fast-growing property division as part of the conglomerate’s retreat from finance.

Blackstone’s bold bet on real estate is worldwide: skyscrapers in New York and Chicago, sprawling malls and luxury hotels in Europe, Asia and the Middle East and, recently, close to 50,000 rental homes across the United States.

The transaction signifies how the real power on Wall Street has shifted since the financial crisis from risk-averse investment banks to asset managers, which have been inundated with cash from investors desperate for higher returns amid super-low interest rates.

The G.E. deal also crystallizes what many market analysts have come to accept as fact: Blackstone may have started out doing mergers and acquisitions in the 1980s and moved on to record-setting private equity deals in later decades, but these days the really big money is being made in real estate.

The Wall Street Journal’s Eliot Brown wrote that real estate has become the biggest part of Blackstone’s business:

Blackstone, formed as a small advisory shop for corporate mergers and acquisitions three decades ago, has become enthralled with property. Real estate is the single largest profit generator for the firm, bringing in $1.9 billion of income in 2014 from investment returns and management fees.

The business has grown rapidly under Mr. Gray, aided by its relatively strong performance during the downturn, in part because it sold a lot of property just before the real-estate market turned and pumped in more money at its nadir. Given his record, Mr. Gray is seen by observers as an eventual prospect to become chief executive.

The GE deal comes just a few weeks after Blackstone finished fundraising for its $14.5 billion flagship property fund, the largest closed-end fund ever raised for real estate. Blackstone also raised the second-, third- and fourth-largest funds, according to industry tracker Preqin. Its closest private-equity competitors include Carlyle Group LP and KKR & Co., which also invest in real estate, but nowhere near the scale of Blackstone.

Aiding the firm is its wealth of specialized funds formed in recent years for property investments around the globe.

Blackstone is taking GE’s $5.3 billion portfolio of office buildings and other properties spread through the U.S. and Europe, paid for with its flagship fund and a European fund. Those properties include a heavy concentration of suburban office buildings in Southern California, where Blackstone has been focusing, as well as midsize office buildings in the Seattle area and western Chicago suburbs.

The Reuters story by Greg Roumeliotis and Herbert Lash pointed out that Blackstone can skirt some regulations that its banking competitors can’t:

This move away from finance operations will allow GE to break free from the regulatory constraints that came from its designation as a systemically important financial institution (SIFI).

The Financial Stability Oversight Council, a panel of regulators created after the financial crisis, has already labeled four non-bank financial firms such as large insurers as SIFIs. It has now set its sights on the asset management industry, reviewing whether activities and products offered by firms such as BlackRock Inc and Fidelity Investments may pose risks to the broader economy.

Blackstone, however, is smaller than such traditional asset managers. It said in its latest annual report it considers it unlikely it would be designated a SIFI.

Major financial institutions such as Morgan Stanley, Goldman Sachs Group Inc and American International Group Inc have all scaled backed their real estate investment operations since 2007.

Blackstone stepped into the void. Its real estate business grew from $18 billion in assets under management in 2007, a year before a housing market bust triggered the crisis, to $80.9 billion as of the end of last December.

Blackstone’s move into real estate so far has been highly lucrative and is making a lot of rich people richer. The deal also helps cement the firm as more than just private equity. It is a major holder of assets at a time when more regulated companies aren’t able to have as many on the books because of capital constraints and new rules.