Blackstone, the world’s largest private equity firm, has drawn attention to one of its funds, the Blackstone Real Estate Income Trust (BREIT), sparking debate over its valuation. It currently holds a valuation of $59 billion, a figure that has raised eyebrows among critics.
Critics attribute BREIT's resilience in adverse market conditions to its valuation technique. In a market where many other real estate funds have declined in value, Blackstone’s fund has managed to average a 10.5% return since the fund’s 2017 launch. The valuation technique employed by Blackstone is at the forefront of this debate.
According to a report by DealBook’s Andrew Ross Sorkin and Michael de la Merced, "the vast majority of large firms value their funds through third-party appraisers" to instill trust in investors and ensure unbiased assessments. While Blackstone also employs the use of third-party appraisers and outside auditors, the firm has the ultimate decision on valuations. Blackstone has stated themselves: “These assumptions are determined by the Adviser, and reviewed by our independent valuation advisor.” They further defend their approach, saying: “Our process requires us to use monthly property valuations that have been assured by a third-party; we have never overridden these in BREIT’s history,” the firm told DealBook in a statement.
This raises questions about the extent to which companies should control the valuation of their own assets, particularly considering the potential for inflated valuations to drive up management fees and revenues. Higher property appraisals lead to elevated management fees and boosted revenues, offering great incentive to value properties to the maximum.
Blackstone contends that their approach is more accurate and financially prudent due to their data being more current and their fast-acting nature in tracking changes in valuations. Additionally, they note that their portfolio boasts a higher caliber of properties such as high-growth sectors like data centers and student housing. Their approach has been criticized by some, with Craig McCann, the president of the financial consulting firm SLCG Economic Consulting, saying bluntly: “We think there’s something wrong.” Others, like Kevin Gannon, CEO of Robert A. Stanger, an investment bank that tracks REITs, perceive them as consistent with industry standards.
Regardless of the debate surrounding its valuation, BREIT remains a significant component of Blackstone's portfolio and financial performance, contributing $839.8 million in net management and advisory fees last year. It remains to be seen whether their unique approach to valuation will continue to receive scrutiny or perhaps spark change in how others assess their funds.
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