How Blackstone cheated GIC of USD$675 million in 4 years

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An honorable member of the Coffee Shop Has Just Posted the Following:

The recent news that GIC bought Blackstone Group’s 50% equity in the Broadgate Office Complex in London for 1.7 million pounds was a surprised to me. For those who do not know, Blackstone Group is a very large manager of private real estate equity fund. Their job is to get investors, buy projects, trun them round, sell or hold them, and give a nice return to their investors on the funds deposited with them. In other words, they are big wheeler and dealers in real estate all over the world.

This is not the first time that GIC has gone in on a Blackstone project. The last time, they did so was in 2006 in which they lost all their investment and more, to the tune of USD$675 million in the short span of 4 years. Blackstone somehow conned GIC into providing mezzanine financing in the purchase of the Stuyvesant Town/Peter Cooper apartment complex village in New York city. Blackstone’s plan was to essentially kick out as many of the current tenants in the 11,250 apartment complex that they could, re-rent the apartments out to new tenants at the current market. The increase in rental revenues will result in a higher valuation of the whole project and they can sell it for a large capital gain later down the road.

Well, Blackstone did not do its due diligence, and neither did GIC. It turns out that most of the apartments (73%) were under New York rent control (Rent Stabilization Ordnance), and therefore, you could not arbitrarily increase rent on the tenants. The previous owner of this project, Metlife, had already tried to raise the rent, but encountered legal issues with the rent control. Blackstone and its partners paid a ridiculous $5.4 billion for this project based on not what the current revenues are but what the future revenues will be after rents were raised. Needless to say, the tenants filed a class action lawsuit against the Blackstone and its investment group and won. This was the death knell for the whole group of investors. Their failure to raise the rent resulted in them defaulting on mortgage payments to the 1st mortgage holder as well as to the other parties financing the $5.4 billion purchase. The first mortgage lender (Wachovia Bank/Wells Fargo), only provided part of the financing. The rest came from 2 mezzanine lenders, who are subordinate to all other debtors. GIC, who had put in USD$575 million, was one of the 2 mezzanine debtors. The shocker here is that the 2 mezzanine debtors were not equal in status. GIC was a tier 2 mezzanine lender, even subordinated to the other mezzanine debtor. Obviously, foreclosure action due to default payments were carried out and the property was valued at USD$2.8 billion by the court. All lenders were paid a fraction of what they had loaned to the project. But at least the other Tier 1 mezzanine lender got back USD$45 million, while GIC received no money, being the most junior lender. In addition to the USD$575 million loss, GIC had negotiated an equity stake as part of the mezzanine financing (quite a common thing to do in the world of mezzanine financing), and as part owners of the project actually owed the first mortgage holder an additional USD$100 million!!! The end result is a total loss of USD$675 million for the 4 year period of 2006-2010.

Many questions can be asked here. Why did Blackstone think it can do something that Metlife couldn’t? How did GIC allow itself to be persuaded to go in the project as tier 2 mezzanie lenders, in effect junk bond holders? Why did GIC not sue Blackstone for misrepresentation? Why is GIC still doing business with Blackstone. By the way, Blackstone was sued by a bunch of investors recently over misrepresentation in an IPO they issued, and was ordered by a US court to pay USD$85 million.

Going back to this Broadgate deal in London. Blackstone paid just over 1 million pounds 3 years ago and now is flipping their share to GIC for 1.7 million pounds for a profit of 700 million pounds. Not bad for 3 years. I wonder why they did not offer this sweet deal to GIC 3 years ago? On a side note, the Norwegian Sovereign Wealth fund was also looking to buy the Blackstone share but did not do so. Perhaps the Norwegians know overpriced properties when they see it?

GIC likes to think that its core values of PRIME is important, but everyone can see that it is for PR purposes and they have no interest in adhering to them. GIC’s PRIME core values are as follows:

Prudence – “We exercise prudence and sound judgement and take a considered approach to managing risks……” . Obviously not the case in the Stuyvesant Town Project.

Respect – “We do not tolerate behaviour that works against the interest of our clients or of GIC.”
Well, since the citizens of Singapore are ultimately the clients of GIC, we did not see any dismissals or terminations from senior ranks in GIC over this incident, so I am concluding that such poor behaviour and performance was tolerated.

Integrity – “Everything we do is founded on integrity. We expect the highest standards of honesty from everyone in GIC, both in our work and in our personal lives. This includes abiding by the laws of the countries we invest in, and observing our code of ethics in letter and in spirit.
We must never jeopardize the trust others have in us and in our reputation for professionalism.”
If GIC does have the highest standard of honesty, they would have come out and told Singaporeans what happened. And why would they still continue to do business with a company that swindled them?
Merit – “We select business partners based on their capability. We believe in long-term relationships built upon high levels of performance and quality of service.”

This part is a joke, they are still selecting swindlers for business partners.

Merit - We recruit and develop our people solely on merit. We draw our talent from around the world

Judging by the asssorted PAP lackeys, relatives and what not on the BOD, I doubt if they were all there due to meritocracy.

Excellence – “We are relentless in our pursuit of excellence. In all that we do, we strive to be the best that we can be. This demands that we plan and anticipate well,”

Yes, their pursuit of excellence is so great that they lost USD$675 million on just this one deal.


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