Hodor
January 10, 2023·39 comments·Money
When fund managers acknowledge that a non-traded investment product can no longer be freely redeemed, they believe they're protecting existing investors. But that acknowledgment itself becomes the trigger that transforms confidence into panic. Blackstone's billion-dollar intervention in BREIT suggests they understand something most fund sponsors only learn too late: the moment you confirm the story has changed is the moment you lose control of it entirely.
• Non-traded funds operate in two states: normal (everyone believes it's liquid) or broken (everyone knows it isn't).Once fund managers publicly restrict redemptions, that shift becomes irreversible. The legal justification doesn't matter. The disclosures don't matter. The story has changed.
• The Endowment Fund discovered this in 2011-2012. Years of underperformance created redemption pressure. When managers restricted withdrawals to stay compliant, they triggered a cascade: distribution partners froze the platform, sales teams shifted to crisis management, and the product's entire viability collapsed within months.
• Restricting one product damages the sponsor's entire relationship with distributors. Advisors begin questioning other products. Compliance teams field regulator calls. The institutional energy spent managing fallout far exceeds the cost of preventing it. This is why Blackstone paid $1 billion to UC Regents specifically to avoid this moment.
• By timing the UC Regents deal before visible withdrawal pressure, Blackstone reshaped the narrative as a "vote of confidence" rather than a liquidity rescue. Whether advisors and investors accept this framing is uncertain. Performance determines everything from here.
• Property valuations are controlled by fund sponsors and flexible in higher rate environments. A string of negative returns triggers redemption requests, and no narrative strategy survives that moment. The real question is whether performance holds long enough for the story to stabilize.
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Comments
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
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.
Tangentially related, today I received another solicitation for my accredited investors, this time an Exciting
, Cutting Edge 
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.
That’s a quality reference, right there!
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.
By the time it gets to retail…
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!
Hah! That’s like four degrees of adverse selection wrapped into one package.
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.
Got this today. An “exclusive event”!
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