By Miriam Gottfried
Individual investors have become one of Blackstone Group Inc.'s biggest sources of growth, a departure for an alternative-asset giant built on relationships with the world's largest institutions.
Blackstone has built a $571 billion asset pile primarily by selling institutional investors products like leveraged-buyout funds and big real-estate investment pools. But with an eye toward nearly doubling assets in six years and securing a more predictable stream of fees, Blackstone is expanding its horizons to include products like a real-estate offering aimed at less-well-heeled investors that has had outsize success.
Blackstone last year drew in a record $26 billion from individual investors, a category it defines as spanning everything from people with millions to invest to those committing as little as $2,500. That is just under 20% of its total fundraising haul in a year when the firm finished putting together the industry's biggest-ever private-equity and real-estate pools, at $26 billion and $20.5 billion, respectively, suggesting the retail business could represent an even larger proportion of inflows in the coming years.
The market Blackstone is going after is enormous.
The firm believes that investors with $1 million to $5 million in liquid assets -- a group it is targeting with its recent efforts -- represent around $30 trillion or 44% of the global individual-investor market. It is primarily reaching that group through arrangements with wealth-management powerhouses such as Morgan Stanley and Bank of America Corp.
The private-equity giant joins a gaggle of Wall Street firms looking to a segment of the market it once turned its back on. Firms like Goldman Sachs Group Inc. and Morgan Stanley have increasingly sought to tap individual investors, savers or consumers as part of a diversification push after the financial crisis.
A sizable chunk of the individual-investor pickup came from Blackstone Real-Estate Income Trust, right now the centerpiece of the firm's retail strategy. The three-year-old vehicle, a so-called nontraded REIT, closed out 2019 with $13 billion in assets, nearly triple the total a year earlier. BREIT, as the vehicle is known, added another $1.4 billion on Jan. 1 alone as it kicked off relationships with new distribution partners.
Blackstone isn't alone taking in gobs of money for its nontraded REIT, but it is the dominant player in the market. BREIT received 73% of new inflows for the asset class in 2019, according to investment bank Robert A. Stanger & Co. These vehicles, which tout annual dividends of 5% or more, have enjoyed a resurgence in popularity as investors seek out higher yields in an era of low interest rates.
BREIT owns what Blackstone deems stable, income-producing properties in growing markets -- mostly apartments and warehouses. It recently struck multibillion-dollar deals to buy the real estate of the MGM Grand, Mandalay Bay and Bellagio Las Vegas casinos.
In a sign of its growing importance, Blackstone President Jonathan Gray said in October that BREIT has the potential to become one of the largest economic contributors to the firm.
"For a lot of people, BREIT is the first alternative investment they put in their portfolios," Joan Solotar, Blackstone's head of private-wealth solutions, said in an interview. She said the firm, which now offers a variety of credit, hedge-fund and real-estate vehicles to individual investors, aims to launch about one new product a year.
Individual investors are notoriously fickle and any willingness to invest with Blackstone could stop short when the bull market ends or if interest rates rise. Blackstone's fees are high compared with passive-investment strategies that have exploded in popularity. That could quickly turn off new investors if returns don't measure up. So far, BREIT has posted annualized returns net of fees since inception of around 10%.
BREIT has garnered an average investment of around $130,000, according to people familiar with the matter, a tiny fraction of the tens or hundreds of millions of dollars pension and sovereign-wealth investors commit to Blackstone funds. But unlike a typical private-equity fund, BREIT cash never needs to be fully returned to all investors. That is a recipe for the predictable, long-term revenues Blackstone's public shareholders prize.
Long-term capital has been a focus for publicly traded private-equity firms, whose share prices have skyrocketed in recent months following decisions to ditch their partnership structures in the wake of the 2017 tax law. Blackstone's market value now stands at around $75 billion, putting it in range of Goldman, the Wall Street giant worth $85 billion.
To help sustain their momentum, private-equity firms are promising investors a growing stream of locked-in fees. Blackstone said 18% of its assets, or $103.7 billion, were "perpetual" at year-end. The New York firm aims to grow that percentage as it climbs toward a goal of $1 trillion in assets by 2026.
Such vehicles typically command fees that are lower than those of traditional buyout funds. BREIT charges 1.25% a year plus 12.5% of the annual return, providing it exceeds 5%.
So far, Blackstone's traditional private-equity offerings are off limits to all but the wealthiest individual investors. Current regulations restrict smaller investors from owning funds containing more than a certain percentage of illiquid equity.
Some of those restrictions may be poised to loosen, however. The Securities and Exchange Commission is looking at ways to expand the number of people allowed to invest in private securities offerings, hedge funds and private-equity funds.
At an SEC event last month, Blackstone Chief Legal Officer John Finley spoke about one of the proposals the agency is weighing: allowing target-date retirement funds with longer investment horizons greater flexibility to invest in illiquid assets. That could bring Blackstone into the biggest investment pool of all, the 401(k).
Write to Miriam Gottfried at Miriam.Gottfried@wsj.com