The crunch at Starwood Capital’s $10bn property fund

In today’s newsletter:

• Property funds feel the redemptions

• Who will get Paramount?

• Berkshire’s secret insurance stock

Real estate barons face a reckoning

Starwood Capital and Blackstone Group became property giants on Wall Street by being contrarian, often moving against the general sentiment of the market.

Starwood’s founder Barry Sternlicht cut his teeth in the early 1990s buying property owned on the balance sheets of failed banks being unwound by the Resolution Trust Corporation. The decision to buy near the nadir of a property bust catapulted Sternlicht as a real estate investor.

Blackstone’s Jonathan Gray was similarly an aggressive real estate buyer after the 2008 financial crisis, transforming the $1tn-in-assets group into a global property giant.

But in recent years, some of their portfolios have acted much more like the market, a fact that has created a reckoning for their respective companies. On Wednesday, DD’s Antoine Gara and the FT’s Dan McCrum reported on a crunch occurring inside Starwood’s $10bn “retail” property fund, called Sreit.

Both Blackstone and Starwood were early and successful in building unlisted property funds for wealthy individuals who wanted exposure to private real estate bets.

Their funds became sensations between 2019 and 2022, drawing tens of billions in assets that invested heavily in property including US apartment buildings and industrial warehouses as yield-starved investors hunted for returns in a world of ultra-low interest rates.

But after interest rates soared in the following years, investors grew fearful of property bets and wanted their money back. They pulled money from both funds at a time when real estate valuations have been under pressure.

The situation has raised big questions on whether the two funds can sell assets for gains and return cash after investing mostly at a time when property was priced richly.

The redemptions have caused both groups to become sellers of property in markets where they historically may have been buyers.

To meet what has been 18 months of heavy redemptions, Starwood’s Sreit fund has avoided fire-selling property by drawing heavily from its available liquidity, tapping about $1.3bn from a $1.55bn credit line, according to securities filings this week.

It has left the $10bn-in-assets property trust low on liquidity sources such as cash and short-term credit as it continues to face heavy redemptions, raising the risk the fund could run out of both in the second half of this year unless it borrows more or sells more property assets. The borrowings are also costly, coming at an interest rate above 7.5 per cent.

Adding to the challenge for Starwood is its high leverage of 57 per cent of gross assets. To raise $500mn in cash to meet a similar amount of quarterly redemptions, it might need to sell more than $1bn in property at a time when dealmaking has slowed.

The takeover battle that could reshape Hollywood

Paramount Pictures has seen it all: bankruptcy, the Depression, talking pictures, the rise of television. It’s made some of the most iconic films of all time, including The Godfather, Chinatown and Titanic.

But now, the last major studio left in Los Angeles’s Hollywood district is facing its toughest test yet: the streaming era.

The Redstone family has controlled the nearly century-old company since 1994, and has attracted a wave of attention from Wall Street and Hollywood alike in recent months as it considers a sale.

Two groups are squaring off for the legendary media company. On one side is Apollo and Sony, with a $26bn bid. David Ellison’s entertainment company Skydance with backing from private equity groups RedBird Capital and KKR is on the other.

For the industry at large, there seems to be an upheaval brewing.

The battle for Paramount has raised questions about what Hollywood will ultimately look like in the coming years. Many bankers and executives say the “big five” studios — Paramount, Warner, Disney, Universal and Sony — could soon shrink to three.

“Are we in the middle of a scaling back in Hollywood?” asks one LA-based dealmaker. “Absolutely.”

The turbulent time has been reflected in the studios’ share prices: Paramount and another century-old studio, Warner Bros, have both more than halved over the past five years.

It has also divided Hollywood and shareholders into distinct camps. The former appears to be rooting for Skydance, with industry legends such as Titanic director and producer James Cameron telling the FT: “I love the Ellison idea.”

The industry’s already been through more than a decade of megamergers. There was Comcast and Universal in 2011, Disney and Fox in 2019 and then Warner and Discovery in 2022. Paramount suddenly found itself dwarfed compared to Hollywood’s new giants.

Both bids have their fair share of hurdles. Outside investors and regulators each need to be convinced.

And Washington has been particularly tough on media deals in recent years (Paramount itself was victim to a blocked deal with its proposed $2.2bn sale of book publisher Simon & Schuster to rival Penguin Random House.)

We’re taking bets on which group will win out.

How Berkshire built a secret stock position for months

Berkshire Hathaway has unveiled its mystery stock.

The conglomerate on Wednesday revealed in regulatory filings it has built a $6.7bn stake in New York-listed insurer Chubb. (The filing reflected its stake in Chubb as of March 31, and represents about 6.4 per cent of the company’s outstanding share capital.)

Chubb has benefited hugely in recent years from rising commercial insurance prices, and is part of a small club of megacap insurers that include Germany’s Allianz and China Life.

So how did Berkshire build its secret stake?

US investment managers that oversee more than $100mn in stocks and certain other securities have to report their holdings quarterly to the US Securities and Exchange Commission.

But there are some exceptions. A company can ask the regulator for a “confidential treatment request” — an exemption designed to keep a manager’s stake in certain stocks private for a period of time.

“A firm might just not want people to know what they’re doing quite yet,” said Michael Hertzel, a finance professor at Arizona State University. “You do want to be as transparent as possible, but on the other hand, you might not want competitors to know what you’re doing.”

To get approval, investors have to prove revealing the position would likely cause “substantial harm to the manager’s competitive position”, according to the regulator.

Berkshire’s done this before. In 2011, the company quietly built up a 5.5 per cent stake in IBM by shielding itself through the same confidentiality request.

The group hasn’t always gotten approval. In 2004, the regulator denied confidentiality requests the conglomerate had made that year and the one prior, saying its reasons for keeping certain holdings confidential were “overly broad”.

Let us know what you think — should companies be able to keep certain holdings secret? Reach out to us at due.diligence@ft.com.

Job moves

• Andrea Williams is joining Robinhood as vice-president and head of corporate communications. She joins from Goldman Sachs.

• EasyJet’s chief executive Johan Lundgren is to leave the low-cost airline after seven years in the top job and will be replaced by chief financial officer Kenton Jarvis.

• Debevoise & Plimpton has promoted eight new partners globally, in New York, Washington, London and Hong Kong.

• Centricus, a global investment firm, and Consello, a global advisory and investing platform, are teaming up through a “strategic alliance”.

• Charles Schwab’s chief financial officer Peter Crawford is retiring. Mike Verdeschi, former Citi treasurer, will replace him.

• Thames Water’s largest shareholder Canadian pension fund Omers has withdrawn its representative Michael McNicholas from the board.

Smart reads

Alps mystery The global struggle between Washington and Beijing over military secrets has landed in an unlikely place: at an inn in the foothills of the Swiss Alps, The Wall Street Journal reports.

Banking in Russia European banks are finding out the hard way that making a clean break from the country is tough. Central banks are building up the pressure, Bloomberg reports.

Billionaire class Italian historian Guido Alfani dives deep into the history of the ultra-wealthy in his new book, and how their role in society has changed over the years, the New Yorker writes.

News round-up

BT’s CEO says she ‘loves to squeeze’ short sellers while unveiling £3bn of cost cuts (FT)

Vanguard’s new chief plans to lure ‘millions and millions more’ clients (FT)

Chevron to sell UK North Sea assets as it exits ageing oil basin (FT)

How AI is disrupting parking (Axios)

Renaissance Technologies piled into GameStop, AMC ahead of rally (Bloomberg)

Former ‘Love Island’ stars charged with promoting trading scheme on Instagram (FT)