California rent control proposal shows how limited partners are handcuffed

Donations to the campaign against a California rent control proposition by some of Blackstone Group LP's real estate portfolio companies highlighted limited partner policies on manager-related political donations — and investors' limited role in decisions to make these donations.

The proposition, rejected by voters in last week's midterm elections, would have allowed California cities and counties to enact rent control, including restricting rent increases when a landlord rents to a new tenant.

According to California Secretary of State Alex Padilla's website, Blackstone Property Partners LP, an open-end fund; BREIT MF Holdings LLC, a non-traded real estate investment trust; three Blackstone Real Estate Partners funds — Funds VI through VIII and their holdings — were the second-largest contributor to the "No on Proposition 10" campaign. Combined, the group donated $5 million, filings show. Another Blackstone portfolio company, Invitation Homes Inc., which owns single-family homes for rent, is the 10th largest contributor with a $1.3 million donation.

Limited partners are rarely informed about political donations, which are seen by general partners as business decisions made by portfolio companies. But there are limits in the form of investors' policies to prevent managers from using political donations to sway investment decisions.

"Most LPs don't know that the political contributions from portfolio companies is happening and, given the construct of the limited partnership agreement, have no control over it," said David Fann, New York-based president and CEO of private equity consultant TorreyCove Capital Partners LLC.

Even so, managers are respecting limitations imposed by many investors in the form of policies to prevent managers from using political donations to sway investment decisions.

"We are aware that many investment firms are active in various political matters nationally and outside our state," said Charles Wollmann, spokesman for the New Mexico State Investment Council, Santa Fe, which oversees $24.7 billion in endowments and is an investor in Blackstone real estate funds. "While we generally won't view that as a positive factor, we also understand it's a fairly common business strategy for many managers. These concerns only become material in our decision-making process when such strategies directly impact politics in our state, or negatively affect our investments."

New Mexico State Investment Council created a policy in 2009 requiring managers to agree not to make political or charitable contributions ... or any other monetary or other benefits conferred, to or on any members of the SIC (State Investment Council) or any of its committees.

In 2009, New York state Comptroller Thomas P. DiNapoli banned business with donors to comptroller candidates, ahead of Securities and Exchange Commission regulations. Mr. DiNapoli is sole trustee of the $209.2 billion New York State Common Retirement Fund, Albany. The pension fund is an investor in Blackstone Property Partners, whose portfolio companies donated to the anti-rent control campaign in California. Retirement fund officials declined comment on the Blackstone donations situation, said Matt Sweeney, a spokesman for Mr. DiNapoli.

Specifically, Mr. DiNapoli's 2009 ban, by way of an executive order, prevents the New York State Common Retirement Fund from doing business with investment advisers that have donated to the comptroller or have made political contributions to candidates running for comptroller.

The 2009 order was similar to an SEC proposal that was adopted in 2010. That rule prohibits investment advisers from making contributions to public officials with the intent of generating business. Investment advisers cannot receive compensation from a government entity, including a public pension fund, for two years after the firm or its partners, members or certain employees make a contribution to a government official who can influence the selection of investment advisors.

When it comes to political donations, institutional investors are in a tricky position, industry experts say. Limited partners are indirectly funding portfolio company donations by being limited partners in their managers' vehicles.

Each portfolio company is owned by its shareholders, which in this case are the Blackstone real estate funds, making the funds' limited partners indirect owners of the portfolio companies, Mr. Fann said.

"The revenue, expenses, income, cash flows and the balance sheet are owned by the shareholders. So, if the portfolio company makes political contributions, these contributions are being paid by the shareholders," he said.

However, limited partners generally have little role in the portfolio company businesses, including the decision to make a political donation, Mr. Fann said. In this respect, limited partners are no different from shareholders in public companies who are seldom informed of the companies' political contributions, he said.