Nov 2, 2018

Don't bury Blackstone over Prop 10 just yet

Property owners looking at a home for rent in California. Photo: Jane Tyska/The Mercury News via Getty Images

I came today to bury The Blackstone Group. But after learning a bit more, I'll just throw a shovel at it.

The quick version: Blackstone is helping to defeat a proposition to increase rent control in California, while simultaneously raising money from the state's public pensioners.

There have been numerous reports this week about how investment giant the Blackstone Group is helping to bankroll opposition to Proposition 10 in California, which would allow cities to expand rent control. More specifically, Blackstone has been doing so via real estate investment funds whose limited partners include California public pension funds — i.e., groups that represent some of the very people who could benefit from expanded rent control.

  • At first glance, it appears that Blackstone is calling capital that is then funneled to political groups. And that's indeed what some media outlets have suggested.
  • But a deeper reading of the disclosure documents shows that it's Blackstone portfolio companies footing the bill, with the Blackstone funds listed first on disclosure documents only because they are the portfolio companies' ultimate owner (admittedly, the docs are needlessly confusing).

One could certainly argue that this is a distinction without more than a legal difference, but Blackstone portfolio companies do have a fiduciary duty to... well, themselves. And any limited partner in a generic real estate investment fund should expect that portfolio companies will take actions to maintain/increase the value of its properties (whether directed by the PE owner or not).

It's also worth noting that a Blackstone spokesman emailed:

"We agree steps should be taken to address housing affordability in California, but virtually all independent economists agree this measure exacerbates California's existing shortage by discouraging new construction and reducing new investment in affordable housing.”

So why the shovel? First, because the above rhetoric is empty. There are three other ballot initiatives aimed at increasing affordable housing in California, and Blackstone portfolio companies donated to none of them.

The bigger picture: I see no evidence that Blackstone warned the public pensions that it might indirectly lobby against the immediate interests of pensioners — let alone that it had done so — and the firm is savvy enough to know that most public pension oversight of PE investments is inadequate at best. Just because LPs should know something doesn't mean they do, and that goes triple for public pension LPs.

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