Everybody Wants to Be Jon Gray, and Here’s the Proof

Try and stop us. (Cornell.edu)

One of the keys to Blackstone real estate wizard Jonathan Gray‘s success has been his and the firm’s first mover advantage, launching a real estate fund early on and innovating along the way. It took nearly two decades, but almost everyone else in the private equity business has finally taken note and is flooding the market. Whether they can ever overtake Blackstone is another matter.

As The Observer reported in this week’s cover story, Blackstone founders Peter Peterson and Steven Schwarztman sought to diversify their business in the early 1990s, starting a real estate fund led by John Schreiber, a quiet force in the industry. Mr. Gray would be the first junior staffer there. With the guidance of Mr. Schreiber and others and his own uncanny analytical skills, Mr. Gray would transform the fund and the firm. As one Blackstone executive noted with glee, Reuters no longer refers to the firm simply “Blackstone, the private equity powerhouse,” but instead “Blackstone, the private equity and real estate powerhouse.”

A lot of the Wall Street banks, like Morgan Stanley, Lehman Brothers and Goldman Sachs used to compete against Blackstone, but many of them have since died away. Now, rival private equity firms have begun to nip at the firm’s heals. Kohlberg Kravis & Roberts, Apollo Investments, TPG and others have all launched funds in the past year or two.

“Real estate is a huge part of Blackstone’s business,” one Wall Street executive told The Observer earlier this week. “I think the other P.E. firms that were not historically in real estate, it would seem to me, have woken up and realized this is a good way to expand, and expand our franchise.”

Just how many firms are going this route? A lot, and fast. Bloomberg ran a story yesterday about three major firms, Fortress Investment Group, Colony Capital and Starwood Capital, launching real estate funds. But here’s the interesting nugget. They join 438 other firms getting in on the Jon Gray act, half of whom got there start only within the past two years:

There are 441 private-equity firms raising real estate funds, 63 more than a year ago and almost twice the number in 2008, according to London researcher Preqin Limited. Companies including Related Cos.—the developer founded by Stephen Ross—and asset manager AllianceBernstein Holding LP have wooed investors and almost completed fundraising, said two of the people, who asked not to be named because the process is private.

Managers, many still suffering losses on funds raised from 2005 through 2008 as property prices peaked, are back in the market because some pools are winding down after the typical three-year commitment period, said David Hodes, managing partner at Hodes Weill & Associates. With firms seeking $150 billion for real estate, some are offering lower fees and committing more of their own capital, according to Preqin Limited’s August report.

So opportunities abound, but these firms may still want to think twice about going up against Blackstone’s size—both its global workforce and gigantic checkbook, which has two $10 billion funds in the bank. As the Wall Street executive explains:

As a result of what they’ve done, they have enormous credibility. Enormous. Put aside today. Today, the landscape is so much different then it was, and they’re the 800-pound gorilla. A lot of their comp are no longer around, or if they are, they’re much smaller versions. Now, they’ve got a huge scale advantage. They’re raising a huge new fund, they have massive scale around the globe, buying stuff in Australia, Asia, all over the globe. Now they can act very quickly, they can do all the same things they did before, but they can also write a big check.

Funny that a guy who prefers to work behind the scenes would be considered an 800-pound gorilla, too.

mchaban [at] observer.com | @MC_NYC

Everybody Wants to Be Jon Gray, and Here’s the Proof