Hodor. Source: Hodor. There are a lot of ways to steer a story. If you are a central banke
Join the Pack: You have reached the maximum number of free, long-form articles for the month. Please click to join.

Paid Members can log in here.

To learn more about Epsilon Theory and be notified when we release new content sign up here. You’ll receive an email every week and your information will never be shared with anyone else.


  1. Great piece Rusty. I think fund performance over the coming 6 months or so will be huge in shaping this narrative and whether Blackstone’s attempts at managing it are successful or not. Like you, I believe they’ve done a good job thus far.

    However, if several negative months (regardless of magnitude) are strung together on an investment that investors have ONLY seen reported up month after month after month since it launched then advisors will begin getting calls from clients. The first calls will just be questions, but string a handful of negative months together and those questions could easily change to requests for money. If clients start asking for redemptions (I don’t believe that has happened yet at scale) as opposed to advisors proactively recommending them-that’s when the flood gates could really open, and no amount of narrative control will work.

    Will be interesting to watch

  2. Avatar for rguinn rguinn says:

    Thanks, Johnsoad!

    I think that I agree in general - I mean, of course I agree! You are absolutely correct. With that said, I think that this is the kind of vehicle where Blackstone and its partners retain enough effective control over the marks/appraisals to massage how those negative months manifest. For all the reasons you correctly describe, I fear that moral hazard surrounding the accuracy of the value of the underlying holdings is higher than ever.

  3. Tangentially related, today I received another solicitation for my accredited investors, this time an Exciting :tm:, Cutting Edge :tm: VC fund. I’ve been getting two or three of these a week for the last few months. A year ago I could count on one hand how many I got in a year.

    I wish I could post the deck for this most recent one, it’s…something else. If I wrote half of this stuff out and emailed it to a client FINRA would send Anton Chigurh to my house before the sun set.

  4. Avatar for bhunt bhunt says:

    That’s a quality reference, right there!

  5. Avatar for rguinn rguinn says:

    I trust you know the only reason I even utter the words adverse selection is for everyone’s benefit, D_Y. Advisers, if you didn’t get calls for something you wanted 18 months ago and now you do, let it go to voicemail, and embrace your inner Millennial by never, ever listening to it.

    Just press 7.

  6. Avatar for robh robh says:

    By the time it gets to retail…

  7. I’ve been getting these solicitations, too, en masse, and every mass market asset manager is peddling their credit or real estate fund -a clear sign of the developing tumult. The best one, though, was a pitch to purchase the GP interests of an aging Real Estate LP. I guess they thought we’d feel special and honored. It reminded me of an ERISA plan I ran into once where the plan sponsor (business owner) listed the receptionist as the Plan Administrator. The latter felt so honored with the title. Being a fiduciary sure sounds important!

  8. Avatar for rguinn rguinn says:

    Hah! That’s like four degrees of adverse selection wrapped into one package.

  9. Oh boy, the Endowment Fund. Memories.

    I agree that Blackstone has a huge advantage in this situation in the form of being able to manage the valuations of their properties. I feel like Private Real Estate as an asset class has really mastered the art of BS-ing their marks in a way that I still can’t quite believe their compliance departments let them get away with. Go into a data room for a multifamily development fund and I 100% guarantee that you will not be able to figure out where their portfolio is currently marked because they’ll only show you the projected return for the properties.

    I think the big marks here are the upmarket RIAs that have clients that range from the mass affluent to the low end of HNW–to the advisors who may have grown up managing accounts for people with under $1 million in assets, of course their biggest client who’s worth $10 million seems unfathomably wealthy and sophisticated. They don’t realize that a $10MM client is “retail” to Blackstone and liable to get the worst possible terms to climb onto the lowest rung of private investing.

  10. Avatar for bhunt bhunt says:

    Got this today. An “exclusive event”!

  11. Agreed. This is really one of the key issues surrounding the fund. Are the marks BX is using an accurate reflection of the value of the assets if they were to trade today? And this is precisely why it will be interesting to watch.

    For instance, what happens if Real Estate transaction volumes pick up and it turns out the cap rates on the properties trading are meaningfully higher than the cap rates BX is using to value their properties? Of course there are other factors that affect the value of real estate beyond just the cap rate, but- it’s a lot easier to mark to mirage when there aren’t any comps available.

    I believe transaction volumes will likely pickup by late Q1/Q2 and those comps will either help validate the BREIT portfolio and UC transaction or they won’t.

    If they do, Blackstone was right all along, the structure in place preventing the unnecessary forced selling of illiquid assets to meet redemptions is absolutely the right structure for the fund and everyone can move along to the next great financial catastrophe in waiting that never quite comes to fruition.
    The clearing prices don’t, and if they don’t a new front will open up in Blackstone’s narrative war.

    As I have no idea which way the cookie will crumble on this, I say again - will be interesting to watch.

  12. I have always been disturbed that Wall St. has been so comfortable selling products in asset classes that inherently are not liquid and either representing that they are, or glossing over this risk. It’s been a great metagame move to add to the reasons the Fed is constrained in taking the actions it was forced into in 2022. Regarding this particular fund, the assets they hold are close enough to public comps that sophisticated analysis will highlight that the marks are generous relative to similar assets. Any respectable system that is monitoring managers and funds for potential risks will have this fund on a watch list. Experienced advisors will want this holding OUT of client accounts to remove the probability that it will be the “burr under the saddle” every time they meet to review the portfolio. This holding is a minor player in almost any client’s overall asset allocation. Better to recommend sale of BREIT and replacement with similar assets that are now materially cheaper, and don’t have “gotcha” risk, If it ultimately works out for this fund, the client will also succeed with the replacement strategy. If it doesn’t pan out, the advisor could taint the whole book.

    This dynamic is a gale force headwind for BX to ever get to the other side.

  13. Avatar for rguinn rguinn says:

    I hear you! I might personally augment the word *experienced." The yield to broker on this (for the channels with those share classes) is probably higher than 95% of what’s in the rest of those portfolios. I suspect even those who have been burned by inherently illiquid assets and all of the attendant client risks you mention will be sorely tempted to convince themselves that Blackstone is blue chip enough that the FA will skate on accountability if things get hairy again.

  14. You raise two relevant points. The reasons these type of products exist is that they are in the shrinking pile of “solutions” that generate high fees to pay everyone in their ecosystem. Financial incentives matter for advisors pressured by the nearly free exposure available all over the financial markets. This economic dynamic tends to make the “experienced” advisor cohort smaller and more conflicted than clients imagine.

  15. I’m as cynical as anyone about the wealth management industry but in this case I think the fee angle is the wrong one-at least as it pertains to the FA and their decision making. With a 75 bps trail on the brokerage share class it’s hard to imagine it being meaningfully more expensive than the likely aum based fee being charged on the rest of a clients’ 1-5 million portfolio which is precisely the level of wealth BX is targeting here.

    Blackstone’s incentive fee on a ridiculously low hurdle of 5% is another story, but I’m not sure Advisors will be keeping it on their books in order to keep the lights on at BX.

  16. Ruh-roh!

    The article is behind a Bloomberg paywall, but this chart is behind the rush to exit private, glacially marked down real estate.


    The conclusion of the story:


  17. Most of the guys managing the actual underlying real estate are/were not managing like an owner would. It’s really tempting to lower the interest rate by taking short term money. And of course there’s tons of financial models and business schools preaching the virtues of IRR to every MBA. And then there’s the personal bonuses to the manager for goosing the cash flows via financialization.

    There was very little incentive for a manager of real estate to lock in 10-15 year money. Especially if it meant a slightly higher interest rate. Double especially if they had 15 years experience or less. That also meant that the life insurance guys had to offer some really, really aggressive rates.

  18. Hey, he paid $250k according to sources I’ve read for that stage to pitch his book! Did anyone else notice that he seemed to forget to dye his actual remaining hair? The hairpiece seems to be a shade from years back. I know that is a cheap shot, but the video is cringe-worthy for a dude worth 10-figures.

  19. Now KKR gating. Is everyone’s reading their prospectus’ tonight. I’m sure some vague language about gating is in all of them.

  20. Avatar for rguinn rguinn says:

    I can’t say for sure for that particular fund, but in my experience it’s often quite the opposite! The formal docs themselves usually trip over themselves to refer to limited liquidity, gating provisions and the risk that you may never get your money out. Sometimes in big, capital, underlined letters. It’s the marketing deck and the communication between FA and client where I think that message starts to break down. YMMV.

  21. Great article. The additional thing to consider is how much the flows into this and similar vehicles were driving the underlying asset prices.
    I have a long time friend that markets multi-family privates (fairly sizeable deals with $20-$50 million in equity per deal - financed with 5-year interest only mortgages). They are still churning out new deals - but for how long?
    Once the inflow dries up, who will buy at optimistic projected 4-5% cap rates in today’s interest rate environment?

  22. Thanks Rusty. Hodor could become the meme of 2023.

  23. I just got two separate emails for NNN pad sites. Everything on the list was 5.5 to 6% cap rates. Meanwhile 7 yr commercial loans in amounts to buy those assets are around 6%. The loans have gotten much more expensive. The cap rates on the underlying NNN haven’t budged. Meanwhile money market rates have skyrocketed.

  24. I know a Home Equity loan rate is tangential to this discussion, but I was at Bank of America this afternoon and was a captive audience for their ads in line. Their HELOC is 8.65% and variable after a 6 month teaser at 6.24%! Credit conditions are restrictive in this important segment. The median income consumer is getting boiled with the upticks in all of these consumer interest rates.

  25. Blackstone reported earnings overnight. This gave Jon Gray a 10 minute interview slot on Bloomberg TV this morning. The BREIT questions start in earnest just before the 5 minute mark on the clip. Unfortunately, he spent 2 minutes not answering the questions about how $500 million from Cal will be used or when redemptions will stop. The reporter let him off the hook. Given the rebound in markets, he stayed on message and is so far getting away with it. Parent company BX has rebounded sharply from the Dec lows.


  26. Not much meat other than a Bloomberg headline that BREIT redemption requests continued to exceed monthly limits in January. Since they admitted to a backlog, maybe that isn’t news. But, details on whether this is expected to be cleared in February will not be forthcoming. Caveat emptor.

    Oh, and I saw on Twitter that Jim Cramer says we are in a Bull Market now. January has done good work forcing cash and defensive positioning back into risk.

  27. Got an email yesterday for the Neuberger Berman NB Private Markets Access Fund.

    Private Markets Access

    When you look at the structure it’s just a closed end fund full of portfolio companies and PE sponsor partners. And a shitload of fees.

  28. Investors were so anxious to get Access to all of these clubs. I believe the primary motivation was the inability to generate 3-4% from something they understood at a nominal fee like a CD, money fund, or T-bill. These vehicles were sold to investors who were desperate for something to replace a nominal risk free return. Not many woke up and said let me find a strategy that has some form of lockup, charges high fees, uses leverage, and effectively exposes me to markets that are publicly available in some form without all of that baggage. The juicy fees and slick marketing decks meant the whole system marshalled its resources to make sure everyone was shown Access.

    Now that the CD, money fund, T-Bill yields are back, a large chunk of the audience no longer wants to hear the pitch and just wants out.

  29. Avatar for rguinn rguinn says:


    And given that, as some others have noted, the “I’d rather just be in cash!” narrative still seems to be in its infancy, I think some of those effects are still in their early innings.

  30. I’ve talked to senior commercial lenders from 4 banks this week. Every one of them expects cap rates to rise 1-1.5% over the next 6 months to make up for the rise we’ve seen in interest rates. All of them very hungry to lend. I get the feeling they are eager to start lending at these rates, but they’re just not seeing the deal flow they’re accustomed to for their commissions.

  31. Is their expectation due to rents rising, asset prices going down or a combo of the two?

  32. Strictly on the interest making them less profitable at the same rents.

  33. This dropped yesterday, it’s been a few months since we kept score on BREIT redemption requests. The Bloomberg story reported the fund has posted a 5.7% trailing 12 month return thru February… The rush to exit shows no sign of being sated.

    Blackstone Inc.’s $70 billion real estate trust for wealthy individuals faced higher withdrawal requests in March and restricted redemptions for a fifth straight month.

    Shareholders asked to redeem $4.5 billion last month from Blackstone Real Estate Income Trust “in a month of tremendous market volatility and broad-based financial stress,” the company said Monday in a letter. BREIT allowed about $666 million to be withdrawn, or about 15% of what was requested.

    Investors asked to pull more than in February, when they tried getting $3.9 billion out. A Blackstone spokesperson pointed to the fund’s performance as a positive and said March redemptions were 16% below the January peak, when investors sought to withdraw more than $5 billion.

    The firm restricts withdrawals to about 5% a quarter. BREIT had already hit 2% monthly limits in January and February, leaving investors with a narrower path out in March.

  34. Raccoons at play? Blackstone announces the close of a $30 bil. global property drawdown fund, Blackstone Real Estate Partners X. This brings to $50 bil. the amount it has raised in this opportunistic strategy. Raised to purchase assets in distress due to the higher cost of capital in the sector. Focused on rental/student housing, logistics, data centers, etc - the same set of assets BREIT owns that are definitely NOT in any distress. Conspicuous in its absence is capital allocated to pick up the bargains in the office and retail sectors. BTW, the real estate industry has roughly $1.5 trillion in maturities to refi between now and 12/25.

  35. Ho Hum. Another $4.5 billion requested out of BREIT last month. BX obliged on $666 million so the waiting list to exit this roach motel grows ever longer.

Continue the discussion at the Epsilon Theory Forum

1 more reply


The Latest From Epsilon Theory


This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.

Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.