(Bloomberg) — Blackstone Inc. dealmakers and executives earned 51% less in their share of profits tied to sales of bets than they did a year ago, underscoring a tough stretch in real estate.
The share of so-called carried interest that dealmakers and executives earned from profitably selling assets in 2023 fell to $896 million, from $1.8 billion in 2022. It declined the most in real estate, where the carry pool fell by 89% to $123.3 million.
Real estate makes up nearly a third of Blackstone’s $1 trillion of assets. Commercial real estate has been under pressure as rising interest rates eat into property valuations. While Blackstone seeks to bet on markets where it projects rising demand will run into constraints, the world’s largest commercial property owner wasn’t immune to the effect of rising rates.
“If we don’t deliver as much for investors, we earn less,” President Jon Gray said in an interview, speaking broadly about carried interest. “That’s the business model. That alignment is very important to investors.”
Gray told Wall Street analysts on the firm’s earnings call Thursday that he wouldn’t expect a big surge in realizations in real estate in the first half of the year.
“When the environment gets better, we think we’ll have the kind of things that the market wants — and we do it when we think values are appropriate,” he said.
Read More: Blackstone Profit Up as Jon Gray Sees ‘Virtuous Cycle’
Real estate strategies were the only part of Blackstone’s business that depreciated in value last year, with opportunistic bets down 6.3% and core investments — designed to produce steady yields over time — down 4.3%.
In private equity, the profit share known as “realized performance compensation” increased just modestly, by 3%. Buyout firms held back from selling bets, sending deal volumes plunging in the past year.
The carried interest pool rose 120% for credit, reflecting the growing clout of financiers and the returns they’re making on the back of still-elevated rates.
Bottoming Valuations
While last year was tough for real estate, Gray said he sees valuations bottoming.
In a separate interview with Bloomberg Television, he said that with the 10-year Treasury rate shifting, this could buoy real estate values. He warned that troubled assets financed in the lower-rate era will face challenges.
Still, he expressed confidence that a decline in new construction that could curtail supplies of properties in sectors like logistics will set a “foundation for a recovery.”
The firm’s real estate trust for wealthy investors notched a 0.5% loss in 2023, meaning it fell short of a threshold that would allow the asset manager to partake in profits. The Blackstone Real Estate Income Trust’s profits aren’t part of the carry pool tied to sales because it’s designed to hold bets for the long haul.
BREIT’s peers fared even worse. Starwood Capital Group, Brookfield Asset Management Ltd., and KKR & Co. reported total returns of -8.6%, -6.7% and -6.25% respectively.
–With assistance from Sonali Basak, John Gittelsohn, Erin Fuchs and Katherine Chiglinsky.
