Private Investment Illiquidity
Over the last several years, private investment vehicles have grown in popularity. While proponents of these vehicles suggest that investors can earn higher returns for taking on illiquidity, also known as the “illiquidity premium”, skeptics like AQR argue that in reality there is an illiquidity discount because investors prefer the “volatility smoothing” that comes from not having a daily mark to market. AQR writes, “Conventional wisdom is you get an expected return premium for bearing illiquidity. Illiquidity is a bad thing, and, all else equal, you need to be paid extra for taking it on. But, what if this is backwards? What if investors will actually pay a higher price and accept a lower expected return for very illiquid assets?” These vehicles are now increasingly raising funds from individual investors . This dynamic is not new: in the later innings of a cycle, after an investment strategy has experienced a period of high returns, sophisticated institutions often target retail investors, pitching them as providing access to a strategy usually reserved for institutions.
These ideas about illiquidity and private investment vehicles have come into focus recently. Last week, Blackstone’s mega 69 billion in AUM non-traded real estate investment trust, BREIT, made headlines by announcing it would limit withdrawals after receiving redemption requests in excess of 5% of it’s net asset value. As the article points out, there is a curious divergence between BREIT's 2022 returns and the returns of the publicly traded REIT comparable universe. "Blackstone has reported a 9.3% year-to-date return for its REIT, net of fees, a contrast to the publicly traded Dow Jones U.S. Select REIT Total Return Index (.DWRTFT) 22.19% decline over the same period." Those redeeming from the fund are likely looking to lock in this material divergence between BREIT and publicly traded REITS.
(Dow Jones US Select REIT Total Return 2022 YTD through December 6th, 2022)
This week, Blackstone announced via a filing that its flagship private credit vehicle, BCRED, a $50B behemoth, hit its redemption limit. Like BREIT, BCRED total returns in 2022 have outperformed the BDC (Business Development Corporation) universe significantly. Per the Financial Times, BCRED is marked at approximately flat year-to-date while Blackstone’s own publicly listed BDC was down roughly 28% over the same period.
During this recent period, the price of Blackstone stock (BX) has severely underperformed financials, REITS, the Dow Jones Industrial Average, and the VanEck BDC income ETF - suggesting that market participants have concerns about recent developments.
(Returns of BX, XLF, DIA, IYR, and BIZD from November 11th, 2022 to December 6th, 2022)
The Bottom Line
The question investors in these funds should be asking themselves is whether they believe the current asset valuations at BREIT and BCRED are justified. If not, performance of these private vehicles will likely converge with their public market comparable universe that is down significantly year-to-date.