Blackstone’s real estate empire keeps leaking

In today’s newsletter:

• Blackstone’s deepening property problems 

• Big Oil rakes in big cash

• Franklin Templeton charts a comeback

Schwarzman and Gray protest Blackstone pessimism

During the post-Covid bull market, an army of retail investors who flooded into the stock market labelled sceptics of soaring valuations as promoters of “FUD” — fear, uncertainty and doubt.

Blackstone’s Stephen Schwarzman and Jonathan Gray, long considered among the savviest investors on Wall Street, appear to be adopting similar lingo as they seek to attract their own retail investors.

On a fourth-quarter earnings call, Schwarzman and Gray spent a lot of time criticising the media for what they labelled as an overly negative “narrative” about the Blackstone Real Estate Income Trust, or Breit. (That’s their open-ended property fund launched in 2017 to attract money from wealthy individuals, as DD readers may remember).

Gray said of Breit: “Our returns in the face of adverse markets and adverse media are proof of concept and our disciplined approach,” said Schwarzman in scripted remarks. “[The] media has created a different narrative, but the customers are fundamentally happy.”

Breit has been the envy of the alternatives industry, attracting tens of billions of dollars from wealthy investors and becoming the biggest source of fee growth inside Schwarzman and Gray’s empire. Bolstered by such perpetual funds, Blackstone’s assets have quickly marched towards $1tn and its stock price has soared above $100bn in value.

Last spring and summer, however, investors began to redeem from Breit amid fears over property valuations and a need to raise cash. Redemptions in December exceeded a 5 per cent quarterly cap and Breit limited withdrawals, a manoeuvre that has cast doubt over the future asset and fee growth of the fund. Blackstone’s now on the defensive.

But the group got some good news in the form of University of California’s recent $4.5bn investment. UC invested its money into Breit, the fund built for “retail” investors, instead of Blackstone Property Partners, or BPP — perpetual funds Blackstone designed for institutions such as pensions and endowments.

Blackstone guaranteed a minimum annual return of 11.25 per cent over six years, giving UC a sweet deal. And even though Blackstone could forfeit more than $1bn of Breit shares it owns to UC if the returns fall short, the group thinks the deal is a winner. It will be profitable if Breit returns 8.7 per cent annually, less than its historical average.

A new wrinkle, though, came on Thursday when Gray said on an earnings call that investors in BPP had requested more than $5bn of redemptions. Their liquidity follows a “country club” model: only when new money comes in, is money allowed out.

Since UC invested in Breit and not BPP, redemptions at the latter pool remained unfulfilled.

“We haven’t really heard much from our clients in the institutional world around BPP vis-à-vis Breit and the [UC],” Gray said when asked if investors had complained about the arrangement.

After Blackstone went public in 2007, it spent years simplifying itself to attract a broad shareholder base. Opening Blackstone’s once exclusive funds to “retail” investors has been one roaring success.

Schwarzman and Gray learned when Blackstone’s stock languished in the years following its IPO that keeping an ever-broadening mass of investors on script is an enormous undertaking. So is controlling the FUD.

Oil majors see green

Over the past year, western oil supermajors have bent to the pressure to herald a future less reliant on fossil fuels and focused on deals that bolstered their low-carbon businesses. (Saudi Aramco . . . not so much.)

The unexpected victory of little-known activist hedge fund Engine No. 1 in securing three seats on the board of ExxonMobil was meant to usher in a new era of climate action, and recent deals have reflected that.

As our friends at Energy Source point out: “Chevron’s largest deal last year was a $3bn acquisition of biofuel producer Renewable Energy Group. BP splashed out $4.1bn on landfill gas developer Archaea Energy. Shell last week spent $169mn to buy Volta, which operates a network of electric vehicle chargers across the US. Washington’s new incentives for renewables, hydrogen, biofuels and carbon capture in the Inflation Reduction Act will only accelerate these businesses.”

But if earnings forecasts tell us anything, it’s that recent M&A deals only make up a tiny sliver of the colossal piles of cash Big Oil gleaned from the spike in prices after Russia’s full-scale invasion of Ukraine.

As the top five western oil producers (ExxonMobil, Chevron, BP, Shell and TotalEnergies) unveil their financial results over the next few weeks, it’s expected that they’ll report a record $200bn in combined profits for 2022.

Where is the majority of that cash going, you may ask? Mostly in shareholders’ pockets.

The oil majors are rolling out massive share buyback programmes. The latest to shower their investors with cash is Chevron, which announced this week that it will repurchase $75bn of shares over an unspecified number of years. And there’s more where that came from.

In an era of net zero pledges and “ESG” plastered across corporate America, DD can see why some lawmakers — including Joe Biden, who called the buybacks unacceptable “during a time of war” — aren’t happy about the dividends.

But companies have signalled that they’ll boost spending from 2022 levels, and what’s a better way to assuage critics than to plough more money into green-tinged deals?

Be sure to sign up for Energy Source to get the latest in your inbox every Tuesday and Thursday.

Franklin Templeton’s dealmaking dash

In an industry where things move notoriously slow — Jenny Johnson, the third-generation heiress chief executive of Franklin Templeton — has been making acquisitions at a breakneck pace.

The money manager, which has been run by her family for decades, is buying because it has to.

Allow DD to take you back to about eight years ago, when the money manager’s star bond trader, Michael Hasenstab, was at his peak.

Hasenstab, an avid mountaineer, was among the group of investors including Bill Gross who climbed to fame by taking unusually aggressive bets on bonds. He was buying up global debt by the hundreds of millions, his Templeton Global Bond Fund reaching as high as $111bn in 2014.

But when a series of bad bets led to torrential outflows, suddenly the tide was out, and the undiversified Franklin found itself swimming naked. “2014 was our most profitable year ever, but it was also a tough lesson in the need for a resilient company to be diversified,” said Johnson.

That need to reinvent itself — and fast — was what led to the fateful phone call between Johnson and activist investor Nelson Peltz, as the FT’s Madison Darbyshire details in her latest Big Read.

Before buying Legg Mason, the largest deal in Franklin’s 75-year history, the asset manager picked up alternative credit firm Benefit Street Partners for $683mn. Since Johnson took over in 2020, Franklin has bought digital wealth advisory AdvisorEngine, indexing provider O’Shaughnessy Asset Management, investment firm Lexington Partners and private credit and debt specialist Alcentra.

It will be years before Franklin will know if its efforts have paid off. The acquisitions have helped push Franklin’s assets to $1.4tn by the end of 2022, but the old-school stockpicker is still a minnow compared to passive whales such as Vanguard, which holds $7.2tn in customer assets.

There’s a chance that Franklin’s past chasing risky bond deals wasn’t for nothing: inflation, rising rates and growing volatility have fuelled whispers of an active management comeback.

Job moves

• Capital Group has tapped Mike Gitlin, its head of fixed income, to become its next chief executive, as the world’s largest active asset manager continues expanding beyond its roots in US equity funds.

• First Abu Dhabi Bank has hired Lars Kramer as its chief financial officer, replacing James Burdett. He’ll join in May after stepping down as finance chief of Dutch lender ABN Amro. M&A head Karim Karoui will serve in the role in the interim.

• Former UK chancellor Philip Hammond has taken on a role as chair of crypto firm Copper.

• EY Germany is planning to cut 40 partners and shed 380 staff as the Big Four firm attempts to improve profitability after the damage caused by the Wirecard scandal.

• Akio Toyoda is stepping down as president and chief executive of Toyota as the world’s largest carmaker battles to keep up with new disrupters.

• Craig Coben, a former senior investment banker at Bank of America, has joined financial witness firm SEDA Experts as a managing director and expert witness.

Smart reads

Bulbs, Birkins and bored apes The famous Scottish scholar Charles Mackay’s financial observations weren’t always correct. But they do cast wisdom on speculative market bubbles, which are harder to spot than you think, the FT’s Tim Harford writes.

AI showdown Microsoft’s multibillion-dollar investment in OpenAI poses a big challenge to rival Google. But the search giant has a problem: it develops much of its own technology, and it’s already under regulatory pressure to curb its power, the FT reports.

Redemption tour After years of risky lending, trading fouls and even scandal, European banks have earned their reputations as the enfants terribles of global finance. But investors should give them more credit, Reuters’ Breakingviews argues.

News round-up 

 PwC accused of leak during Quindell deal talks (FT)

Rolls-Royce’s new chief warns company is a ‘burning platform’ (FT)

Tesla shares jump after Elon Musk signals ‘potential’ for 2mn car sales this year (FT)

‘No margin for error’: Bank of Japan’s next chief faces daunting challenge (FT)

Stripe sets one-year timetable to decide on going public (Wall Street Journal)

Former Janus Henderson analyst charged with insider dealing (FT Adviser)

Provident Financial to ditch 140-year-old name (FT)

LVMH lifts dividend as record profits defy downturn (FT)