Blackstone raises another landmark property fund

Blackstone Group LP said Wednesday it closed the largest real estate opportunity fund ever, corralling $13.3 billion in commitments from 250 investors for Blackstone Real Estate Partners VII.

The fundraising highlights Blackstone's status as the unrivaled king of real estate private equity. Led by 42-year-old Jonathan Gray, the firm's real estate group has come to dominate the field the way that Kohlberg Kravis Roberts & Co. LP lorded over corporate leveraged buyouts in the 1980s.

The fund is 22% bigger than Blackstone Real Estate's previous, then-record-setting $10.9 billion fund, raised four years ago. Of Blackstone's active funds, only its $16.1 billion flagship corporate PE fund is larger.

The new vehicle, which Blackstone started marketing 13 months ago, is 35% invested, the company said. Recent deals include a $1.9 billion buyout of the Motel 6 chain and sinking a reported $1 billion into thousands of foreclosed homes. Blackstone has also bid on troubled European properties and mortgage portfolios.

Unlike "core" property funds that hew to safe, blue chip holdings, opportunity funds seek above-market returns buying and fixing up troubled and undervalued assets. Gray's unit has succeeded in spades, pulling in 63% of Blackstone's earnings last year. Through June 30, the new fund posted a 33% internal rate of return.

Blackstone raised its fist real estate fund in 1993. Its $50 billion in managed real estate assets dwarf those of private equity peers Apollo Global Management LLC and KKR, which got into real estate only lately in an effort to diversify beyond the buyout trade. Carlyle Group, another PE titan, oversees about $30 billion in the sector.

Gray took the helm of Blackstone's U.S. real estate operation in 2005, and quickly gained notice for his deft timing and big-ticket takeovers. In 2007 he masterminded the $39 billion LBO of Equity Office Properties, the second-largest buyout in history. In a tour de force after the deal closed, he and his team unloaded two-thirds of EOP's assets for sky-high prices just before real estate values cratered.

Most rival players weren't as prescient. Hit with heavy losses, Citigroup Inc. and Bank of America Merrill Lynch exited the business and Goldman, Sachs & Co. and Morgan Stanley scaled back. As competitors melted away, Blackstone gathered might.

Recently appointed to Blackstone's board, Gray is widely viewed as a strong candidate to one day succeed Blackstone co-founder and CEO Stephen Schwarzman or president Tony James. Other younger stars on the short list are Joe Baratta, named head of corporate PE in July, and David Blitzer, who runs Blackstone's new tactical opportunities platform.