Blackstone Gains During Downturn
BREDS CIO Cites Consistency, Opportunity
by Michael Mack
Posted April 29, 2011
"We have buyers remorse after every deal we do," said Michael Nash, Chief Investment Officer of Blackstone Real Estate Debt Strategies (BREDS). This would be an unremarkable statement were it not coming from a Senior Managing Director of The Blackstone Group, a company that during the worst recession in living memory has both gone public (NYSE: BX) and has expanded dramatically into global markets.
Obviously Blackstone's brand of buyer's remorse has paid off. But how has the company weathered the downturn so successfully?
On April 20th, Michael Nash offered a snapshot of his company as part of the Leaders in Real Estate lecture series presented by the MIT Center for Real Estate. Speaking at MIT's new LEED Silver-Certified Brain and Cognitive Science Center, Nash shared the principles and practices that have guided his firm's phenomenal success.
Nash began with an overview of The Blackstone Group, a company that was founded in 1985, and that went public in 2007, the year Nash arrived. "We're one of the world’s leading investment and advisory firms," he said, "with about 1400 employees globally, and with assets under management totaling about $128 billion."
The company's Real Estate Group was established in 1992, and now has offices in New York, Chicago, London, Paris, Mumbai, Tokyo, Hong Kong, and Shanghai. Its ten real estate funds have raised over $29 billion since inception. And currently the group has real estate fee-earning assets under management totaling about $24 billion, with $9.5 billion of available capital to invest – a remarkable fact given the recession.
"Blackstone has weathered the economic crisis better than all our major competitors," Nash said. "A lot of companies have shrunk during the crisis – or even been completely dismantled. We've grown dramatically."
Blackstone now has the world’s leading hotel portfolio, as well as one of the largest portfolios of office buildings in the United States. Nash ticked off an impressive list of brands (Hilton, La Quinta, Equity Office Properties) and luxury properties (the Waldorf-Astoria, Boca Raton Resort & Club, and the Trianon Palace in Versailles) that are now included in its holdings.
Clearly the company is healthy and profitable. But how did it perform so well in this recession? "We lived through the crisis because of the strategies we employed," Nash said, and he underlined the principle of consistency.
"Our senior team has been very consistent throughout the history of the business," Nash said. "It's one of the main reasons we've done extraordinarily well. The investment committee process is consistent and rigorous in everything we do."
This commitment to steadiness has been a company mainstay. "We've had the same people, the same investment strategies, the same principles…. and we really haven't had style trends. If you want to be in the investment business, you should know what you want to do and close your mind to those fads that don't feel right. Easier said than done when people are making money doing things you're not comfortable doing. But you should hold back and appreciate what you do well and what you don't do well."
One of the ways the company maintains internal consistency is through enterprise-wide meetings – in person or by phone – at Blackstone's New York headquarters each week. "We meet as a global group every Monday at 10:30 a.m. New York time," Nash said. "All the principals get briefing materials on Friday night, read them on Saturday, and on Monday we come together. Not just to make investment decisions… it's about winning the day strategically."
Key to the strategy for winning the day is diversification. Blackstone's real estate division is broadly composed of two efforts – its opportunity investing ventures and it's debt products and services.
The "opp" funds were the real estate company's focus when the firm began. "Our real estate opp fund is now the largest in Europe," Nash said, adding that Blackstone has also recently increased its presence in Latin America.
In 2010 the company made a dramatic move into Asian markets as well: "We took over the management of the Merrill Lynch / Bank of America's Asia Fund," he said. Blackstone previously had only a modest presence in Asia, and the company was wrestling with how best to invest in that market.
But the recession brought opportunity. "During the economic downturn, all the banks – Lehman, Goldman Sachs, Morgan Stanley, Merrill Lynch – started de-emphasizing or dismantling their fund management businesses in real estate and other products," Nash said. "With the Asia transaction, we inherited both an asset base and a lot of high quality people. In one fell swoop we got a lot smarter in the region."
For Blackstone, business is about people. "It's not just knowing this street corner from that street corner, it's about knowing the people in the industry," Nash said. "At the end of the day, this is very much a people business. You do deals based on your reputation and on your longstanding relationships with counterparts on the other side."
Blackstone now has about $2 billion in assets under management in Asia, with primary concentrations in China and Japan.
What is Blackstone Real Estate's strategy for opportunity investing? Nash again cited consistency. "We've had the same philosophy in our opp funds for 20+ years," he said. "We don't like building things. We don't believe in taking the long-cycle risk that development entails. We like buying existing real estate at a discount to its replacement cost."
Blackstone prefers the good markets, and the good assets in those markets. "The quest for us is how to get exposure to good assets as cheaply as possible, and drive a return," Nash said. "In the opp fund, the return we're selling to our investors is not 8%... it's 20%. We try to double their capital over 4 to 5 years. That's the goal."
Blackstone seeks to fulfill its opportunity goals in a three-step approach: "Buy it, fix it, and sell it."
Buy It. "You can make a lot of money at the closing table – often just because you have more confidence in your underwriting, more experience, more belief. I want to dispel the notion that you get lucky out there. To invest capital in real estate, you have to believe more than the next guy. That belief comes from knowing what you know, knowing what you're good at, and trying to avoid those things that are less familiar to you."
Fix It. "We like complication – that's where the high returns come from. If a deal is simple and straightforward – a fully leased building in Boston – it's not for us. We need complexity to drive our returns."
Sell It. "We don't fall in love with our assets. We could because we own some great real estate, but that's not our mandate. We're here to buy it right, fix the mess (we call ourselves plumbers), and then sell it to more natural long-term holders. If we do that well, we drive good returns."
Leveraging Blackstone’s extensive real estate experience, the real estate group expanded in 2007 to take advantage of investments in real estate debt. Until then, the firm was focused on opportunistic real estate – owning real estate, buying debt to get real estate, and buying public companies to get assets it wanted to own long term.
"A lot of what the company could have done in debt-related products they hadn't tried. They hired me to build that business," Nash said.
With Nash at the helm, Blackstone's real estate debt platform became a diverse portfolio that includes mezzanine debt, recapitalizations, distressed investments, listed equity and debt securities, and preferred equity. "We do everything imaginable in real estate debt," Nash said. "And we run the opp and debt businesses adjacent to each other.
But make no mistake: the businesses are distinct. "On the debt side, our job is not to own real estate," Nash said. "That's the mandate of the opportunity fund. Our debt business is not loan to own, but loan to loan. We want to start as a lender to stay as a lender."
Blackstone's debt business provides liquidity in over-leveraged situations. "We're here when firms are holding assets they bought at too high a price and probably borrowed too much money to make it work. We're here with new capital, new ideas, new structures."
LPs Are Key
A theme Nash echoed throughout his talk was Blackstone's commitment to its limited partners. "Everyone at the firm wakes up thinking one thing – we have to do a great job for our LPs," he said.
The firm has more than 1,150 limited partners in 45 countries, including public and corporate pension funds, academic endowments, charitable institutions, sovereign wealth funds, and other leading global institutional investors.
"We need to be a great fiduciary, invest wisely, invest with confidence, and avoid conflict. We try to avoid any notion of conflict with our LPs. If we buy an asset from an LP, how will it be perceived? We're never on both sides of a transaction."
Serving the interest of its limited partners has been a guiding principle at Blackstone since its founding, and the firm aligns itself with its LPs by putting its money where its mouth is. "The people in our company making the big decisions commit significant portions of their net worth to these funds," Nash said. "It's the best way to align interests because we go home every night thinking about our money and their money in the same breath."
Working at Blackstone
During the post-talk Q&A, Nash was asked what opportunities might be available for MSRED grads, and he described what Blackstone seeks in a candidate. "You have to be smart, of course, but not necessarily brilliant. More important than what you learn in a classroom is how you navigate life. You need extraordinary common sense."
And what qualities would he personally look for? "For me, I gotta see passion – that this is what you want to do," he said. "I gotta see someone who can handle stress, who has a sense of humor, someone who is a good person."
He returned again to the idea that real estate is about people. "You won't just be staring at computer models. We deal with people in everything we do, whether they are investors, borrowers, folks on the other side of the transaction, your internal colleagues…. This is very much a people business. You have to have that kind of personality."
Michael Nash is a Senior Managing Director of The Blackstone Group and the Chief Investment Officer of Blackstone Real Estate Debt Strategies. He is also a member of the Real Estate Investment Committee for both Blackstone Real Estate Debt Strategies and Blackstone Real Estate Advisors. He is based in New York.
Prior to joining Blackstone, Mr. Nash was with Merrill Lynch from 1997 to 2007 where he led the firm’s Real Estate Principal Investment Group - Americas. Investment activities encompassed high yield debt opportunities (mezzanine, preferred and bridge equity) and equity investments in real estate assets and real estate operating companies on a direct basis and with clients of the firm.
Prior to joining Merrill Lynch, Mr. Nash was a Senior Vice President at Barclays Bank where he worked from 1991 to 1997 in the bank’s loan restructuring group. Prior to Barclays, he originated and structured real estate loans for Bank of Nova Scotia. Additionally, Mr. Nash also worked at Deloitte & Touche serving brokerage and other institutional clients.
Mr. Nash received a BS in Accounting from State University of New York at Albany, as well as an MBA in Finance from the Stern School of Business at New York University.