Real Estate

Blackstone: the private equity firm next door?


One DD winner to start: Congrats to Hugues Lepic, the head of London-based Aleph Capital Partners, for winning Thursday’s caption competition on the photo of British artist Damien Hirst and former Bank of England governor Mark Carney. Here’s his submission: 

— Look Mark, I turned nothing into money!

— Yes Damian, but I turned money into nothing.

Our runner-up, Rob Butler, scored extra points by adding thought bubbles with his entry as shown below.

© Joe Hage © Damien Hirst and Science Ltd, DACS 2021 as modified by DD reader Rob Butler

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Blackstone makes another huge real estate purchase

This week, Blackstone made its second big bet on US housing in less than a month, buying a $5.1bn apartment portfolio from insurance group AIG after spending $6bn acquiring single-family rental property buyer and operator Home Partners of America last month.

The buildings aren’t especially ritzy. Here’s one owned by AIG in the Brooklyn neighbourhood of Bushwick:

420 Stockholm Street in Bushwick, Brooklyn © Google Street View

AIG originally acquired the building, which is known as Stockholm Manor, as part of a 1999 financing that paid for the renovation of 34 apartments with help from a federal programme known as the Low-Income Housing Tax Credit.

The scheme, which provided funding to all of the buildings that Blackstone is buying, provides subsidies to developers who agree to limit rents to below 20 per cent of local median incomes while also restricting the number of high earners they accept as tenants. 

Blackstone has promised to comply with those restrictions, which typically last for several decades — but their eventual expiry can provide an opportunity for financial investors to juice returns.

Stephen Schwarzman, Blackstone chief executive © FT

In recent years AIG and RiseBoro Community Partnership have disagreed over whether the insurer can be compelled to sell the building under the terms of the contract they signed. 

If not, RiseBoro pointed out, a for-profit owner might eventually start renting out the apartments at market rates.

The matter is now before a federal appeals court. It could have far-reaching consequences for financial investors such as AIG and Blackstone that have provided financing under the LIHTC scheme — and for the long-term availability of affordable housing for low-income families.

The stakes are high enough that New York state attorney-general Letitia James has weighed in. “For private investors to try and skew the terms of this affordable housing programme for their own financial gain is as harmful as it is unethical,” she said in April.

Letitia James, New York state attorney-general © AP

The firm run by billionaire Stephen Schwarzman is one of the biggest owners of US real estate, with a portfolio that includes warehouses and single-family rentals in the suburbs, specialist life sciences buildings in Boston and Cambridge, and the Bellagio resort in Las Vegas.

Blackstone pioneered large-scale investments in US housing in the years after the financial crisis. Now, it’s returning to that lucrative but politically contentious strategy.

Members only . . . but shares for everyone

The key to Nick Jones’ business is discretion. 

Soho House, the private members’ club run by the UK entrepreneur, may have 30 locations around the world but its identity is built on exclusivity. 

But as of this week, investors can now feel like they’re a part of it. The company raised $420m in its trading debut, selling its stock at $14 a share, at the bottom of the range it had pitched to investors.

While Soho House listed at a $2.8bn valuation, the shares dropped 9.6 per cent on the first day of trading.

Soho House’s Nick Jones © Charlie Bibby/Financial Times

“I would never have imagined I would be sitting here with the FT on a Monday morning pre-float,” Jones, who started the club 26 years ago, told the FT’s Alice Hancock. “I was just hoping to survive 1995.” 

Now, celebrities like Kate Moss and the aforementioned NFT artist Damien Hirst frequent its digs. But aside from showing people a good time, it’s difficult to see how it’s business model will thrive.

The company appears to be in a perpetual loop of borrowing money, paying interest and trying to pay down debt. 

Its financials were in the red before the pandemic. Last year revenues dropped 40 per cent to $384m, while losses widened to $236m. 

About 41 per cent of its revenues in the first quarter of this year were used to pay down interest on its $600m debt load. Proceeds from the listing will partially be used to reduce that amount. 

As the muted reaction to the IPO may suggest, Soho House — aka Membership Collective Group, as it was renamed for the IPO — has not been profitable in its 26-year history.

The expansion of Soho House

Instead, the group has charted an aggressive growth strategy with the help of deep-pocketed shareholders like the US billionaire Ron Burkle and hospitality tycoon Richard Caring.

The company is hoping to woo investors with its aggressive expansion as it presses forward with plans to open houses in Nashville, Portland, Palm Springs and more.

Soho House in LA © Soho House

Nevertheless, MCG aims to be net profitable by 2022, though we’ll believe it when we see it.

The bizarre tale of a crypto king

Giancarlo Devasini is likely not someone you have heard of. 

But after careers in plastic surgery, trading computer hardware and building a healthy-eating food delivery service, Devasini is now famous for something entirely different: creating an empire at the heart of a boom in global cryptocurrency.

Unlike the typical crypto vanguard, he shies away from the mainstream press, and keeps his online presence to a minimum.

Giancarlo Devasini’s ‘merlinmagoo’ Skype account gives São Tomé and Príncipe, an African island nation close to the equator, as his location © Ulrich Hollmann/Getty Images

Nonetheless, the elusive chief financial officer of cryptocurrency “stablecoin” Tether and big crypto exchange Bitfinex is a central figure in the wild west of unregulated finance.

Sceptics, including New York attorney-general Letitia James and Eric Rosengren, the president of Federal Reserve Bank of Boston, have made it clear that Tether poses a risk to financial stability.

Line chart showing how Tether has retained its dominance over other stablecoins by showing Market capitalisations

But the eclectic entrepreneur, who goes by the alias “Merlin”, has no shortage of fans, either, as Tether — an essential financial lubricant for investors moving in and out of more volatile cryptocurrencies — explodes in popularity.

Our FT colleagues Kadhim Shubber and Siddharth Venkataramakrishnan chronicle the Italian crypto character’s spellbinding rise in this must-read piece.

Job moves

  • Linklaters has named Paul Lewis as the new firmwide managing partner, succeeding Gideon Moore. He was previously the head of Linklaters’ finance division and co-head of the innovation group. 

  • Corporate restructuring lawyer Jon Henes is leaving Kirkland & Ellis to start a strategic advisory firm focused on business, law, politics, social justice and diversity. He has worked at Kirkland in New York since September 2001. 

Smart reads

WeCrash Adam Neumann dreamt up a run-of-the-mill real estate plan into an empire SoftBank’s Masayoshi Son once prophesied would reach $10tn by 2028. Looking back, the red flags were always there, recount Eliot Brown and Maureen Farrell in their new book, The Cult of We. (FT)

Breaking barriers Racial disparity is rampant across M&A law firms, with data showing that only 2 per cent of partners are black and less than 1 per cent are black women. Those who have broken the mould have begun to make way for a future of diverse dealmakers. (BBG Law)

Back to the Bay Tech workers swore they’d never return to San Francisco after fleeing to larger and cheaper spaces during the pandemic. But the allure of Silicon Valley has proven harder to shake than they thought. (NYT)

News round-up

Driverless car start-up Aurora to go public in $11bn Spac merger (FT)

Jack Dorsey says Square will launch bitcoin DeFi platform (FT)

Revolut valued at $33bn after $800m fundraising (FT + Lex

Deutsche Bank’s Spanish mis-selling scandal widens (FT)

UK-listed cybersecurity group Avast in takeover talks with NortonLifeLock (FT) 

Sydney Airport rejects $17bn bid as investors target infrastructure (FT) 

US regulator under fire for delays to delisting Chinese stocks (FT)

Intel Is in talks to buy GlobalFoundries for about $30 billion (FT) 

Prospects dim for merger of UniCredit and state-owned rival MPS (FT)

SoftBank invests $1.7bn in Yanolja ahead of IPO (BBG)

Morgan Stanley wealth unit revenues offset trading slowdown (FT)

Boom times for Silicon Valley’s elite investors (FT Opinion) 

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