September 18, 2025 • 44 mins
Razor-thin debt spreads underpin the global investor push into private markets, which can pay significantly more, according to Blackstone. “We see excess spread in private credit,” Michael Zawadzki, chief investment officer of Blackstone Credit & Insurance, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s David Havens in the latest Credit Edge podcast. “That’s a really attractive thing for our clients around the world,” he adds, marking the premium at 150-200 bps over both traded high-yield and investment-grade debt. The three also discuss the rise of foreign insurers, pension funds and sovereign wealth in private credit, as well as the outlook for data-center finance, leveraged buyouts and default risks.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:18):
Hello, Welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2 (00:24):
And I'm David Haven's, the senior credit analyst of Bloomberg
Intelligence charged with covering non bank financials, which happens to
include alternative asset managers, private credit, and BDC's. This week,
we're very pleased to welcome Michael Zuwadsky, who, as happenstance
would have it, is the chief investment officer of Blackstone's
Credit and Insurance group. Mike, how are you?
Speaker 3 (00:45):
I'm fantastic, Thanks guys for having me.
Speaker 2 (00:47):
It's awesome. Are we going with Z or Mike? Let's
go with z Okay? Z it is. Z's CIO office
at Blackstone includes a team of more than one hundred people,
larger than most credit platforms in their entirety, pouring for
more than five thousand companies in various investment portfolios. If
those figures are off, you're just going to have to
take it up with the Blackstone Secured lending folks, because
(01:09):
that's what they said on their second quarter conference call.
Speaker 3 (01:11):
I trust them completely, all.
Speaker 2 (01:13):
Right, Listeners are going to be deeply interested in your
views and observations as it relates to the markets and
private credit.
Speaker 1 (01:19):
Great, and I'll start by saying credit markets are looking
pretty complacent at the moment. High grade bond spreads haven't
been this tight since the late nineties. Yes, I'm old
enough to remember that demand for yield is very strong,
Supply of new corporate debt is quite thin. Returns in
public markets, though, have been pretty solid, leaving some investors
to question the value of going private. Why sacrifice liquidity
(01:40):
at a time when the economy is slowing and there's
so much headline risk. There's also a fair amount of
anxiety about private asset performance. How are those companies managing
through trade wars and some pretty big US policy shifts.
What's the impact of inflation and high debt service costs?
Are there actually a lot more stressed deals into faults
out there than actually being reported. So that what you'll
(02:03):
take is private credit risk fairly valued at the moment,
and all the concerns about the aesset class warranted.
Speaker 3 (02:09):
Great.
Speaker 4 (02:10):
Well, Look, I just came back from basically a triple
around the world for the last thirty days. I was
on four different continents and I met with some of
our largest clients in all the regions around the globe,
and these are the topics we were discussing. We started
with a conversation around the macro, and I would tell
you folks are feeling a lot more comfortable with the
underlying macro. You mentioned some of the uncertainties that are
(02:31):
out there, and that is true, but when you actually
look at the fundamentals on the ground, company performance continues
to be strong. Eighty percent of companies in the second
quarter beat guidance. Consumer balance sheets are healthy, and we're
on the verge of some monetary and fiscal stimulus and
big capex spending cycles in areas like AI and energy
(02:51):
and power. All of those things provide strong macro backdrop
for investing in credit. The challenge, as you alluded to, James,
is that evaluations the liquid markets have gotten elevated, and
that's why you see spreads in liquid fixed income traditional
fixed income being awfully tight. The result of that is
that's leading to our clients around the world looking to
(03:12):
allocate more to private credit because as we look at
the market, we see excess spread in private credit, whether
it's on the investment grade side or the sub investment
grade side, at about two hundred basis points in excess
of liquid credit, and that's a really attractive thing for
our clients around the world.
Speaker 2 (03:29):
And is that is the market in equilibrium? Do you
think a from sort of a funding perspective, because obviously,
if you're going from public into private, you're picking up
a lot of spread, but you're also giving up liquidity,
so it sort of introduces this whole issue of liquidity risks.
So you want to make sure that your assets and
liabilities are pretty well tied up, and I know from
(03:49):
looking at the BDCs that there is a close match.
Does that exist you think across most or all private
credit market sectors?
Speaker 4 (03:57):
Well, it's hard to generalize across private credit because the
market is massive, it's expansive, with lots of different asset classes.
And then maybe we should come back to that in
a bit. But if I were to just make a
general comment around liquidity risk asset liability management, actually private
credit does a phenomenal job at that. If you actually
look at private credit vehicles that are either unlevered or
(04:18):
at most one times levered, there's good match between assets
and liabilities. There's no cross collateralization of balance sheets, and
so when you actually look at the foundation of the
asset class, it is built on resilience and prudent management,
and that's what we see across the board.
Speaker 1 (04:36):
So that two hundred basis points differential between I'm assuming
it's a high yield the leveraged loan Roady syndicates it
against a private direct loan. You're getting two hundred basis
points on top of that. Is it the same fray
g exactly exactly?
Speaker 4 (04:52):
And I think the reason why that excess spread exists
is what we call this farm to table model, where
we bring our capital our investors right up next to
the borrowers, and in doing that, we can deliver a
customized solution that meets their capital needs without all the
leakage that happens along the way if you go to
market and have multiple pathsive syndication and so bringing that
(05:13):
capital direct to borrower that is a big source.
Speaker 3 (05:16):
Of premium for our clients.
Speaker 4 (05:18):
And obviously you're right, David, there is some excess return
that comes with clients that could afford some element of
ill liquidity in their asset portfolios.
Speaker 1 (05:28):
But from the borough they're paying more. So, I mean,
on the one hand, i'd wonder why they would pay
more if they have access to all this liquidity elsewhere.
And also how sustainable is it for a risky a
borrower to keep paying that high cost.
Speaker 4 (05:41):
Well, let's talk about that for a second. To the end, borrower,
you're basically in the same spot. You're just not paying
a bunch of fees along the way. If you look
at your all in cost of capital, you get to
a much more similar spot. And because we're bringing our
clients capital direct to the borrower, that means that all
of those economics go to our clients. That's really what matters,
(06:01):
and that's the value proposition we're delivering on your common
around you know, borrowers being able to accept cost of capital.
That goes back to where I started with, which is
we're seeing very strong credit performance across the board. If
you look at Blackstone's business, for example, we have two
thousand non investment grade borrowers and we have a default
(06:24):
rate of below fifty basis points across that portfolio. Over
the last twelve months, we continue to see strong earnings growth,
and so we have a lot of confidence, at least
in the companies we tend to partner with, which tends
to be the bigger companies in higher growth, more resilient,
less cyclical sectors and areas where we can really benefit
(06:45):
from the strength of the Blackstone platform. If you look
at the areas that we tend to do a lot
in right in software, for example, we've got a huge
business that invests specifically in software on the private equity side.
In healthcare, we've got a dedicated life sciences business and energy,
and we've got a huge infrastructure investing business. Being able
to access all the insights across Blackstone that drives our
(07:07):
credit selection, that drives the lower loss rates we've been
able to deliver for our clients over an extended period
of time.
Speaker 2 (07:13):
And for the borrowers, what's the value proposition for them
for going with Blackstone as opposed to a bank or
you know, sort of some other borrowing channel.
Speaker 4 (07:23):
Speed, certainty, flexibility, a customized solution. Having one partner on
the other end. If you want to do an acquisition
or fund a growth project, you know exactly who to call.
And then what I'll call value creation services. We've got
a dedicated team within the credit bitness a Blackstone that
will go in and help borrowers drive cross sell across
(07:47):
the Blackstone portfolio help them take out operating costs and
run more streamline, do things like cybersecurity assessments. We've created
over five billion dollars of enterprise value in our credit
book alone through these value added services. And so when
you put all of that together, it's really quite a
compelling solution for borrowers, whether they are investment grade or
(08:08):
sub investment grade.
Speaker 2 (08:09):
Yeah, and you know, it's obviously a competitive market the
banks for whatever reason, and there seem to be various,
you know, sort of topics that are brought up as
to why the banks have sort of seeded, you know,
this beachhead and not more than a beachhead. I guess
it's continent in private credit. But they seem to want
to get back into the market now. Now they've got
(08:31):
leverage shoe, I don't mean financial leverage. They've got the
ability to sort of lean on, you know, some of
the borrowers to get back into the into the marketplace.
Are you seeing them becoming more aggressive these days or
or just not yet.
Speaker 4 (08:44):
I would say we've got to again look at the
market holistically.
Speaker 3 (08:48):
Right.
Speaker 4 (08:49):
A lot of the conversation, and most of what we've
spoken about today is focused on sponsored back direct lending,
that's about a two trillion dollar asset class. The overall
private credit market is thirty trillion dollars an addressable size.
And so when you look at big areas of our market,
from private investment grade to asset back finance, REZI mortgages,
(09:09):
in for credit, these are huge market opportunities with significant
secular growth drivers where capital from both banks and private
lenders are needed. Those are markets where the supply demand
dynamic for US as a lender today is incredibly favorable.
And so there's tremendous amounts of white space for us
to go out and do direct lending. Yes, the banks
(09:31):
will participate as well, but these are huge markets, and
in fact, in many of these markets, you're seeing us
partner with banks to go and deliver solutions to asset
originators and clients. And you saw us do that in
fun finance with Key Bank. You've seen us do that
in infrastructure credit with Santander. You've seen us do that
in credit cards with Barclay's. I think this model of
(09:53):
there is such a large market opportunity out there in
the broadly defined private credit marketplace.
Speaker 3 (10:00):
Can we work jointly with.
Speaker 4 (10:01):
Banks to deliver solutions to our borrowers in the way
that meets their needs.
Speaker 1 (10:05):
Glad you brought up scale. So I was going to
ask because your colleague Rob Hone came on the show
last year and pegged at thirty trillion. Then Public came
on a few weeks lation and said it's actually forty trillion,
and they said half of it was already you know,
in existence, so that we're already a twenty trillion market,
but it's going to grow to forty trillion. So there's
kind of a lot of you know, big numbers being
thrown out, but we already How big is the actual
(10:26):
market right now?
Speaker 4 (10:27):
Well, look, I think you've got to talk about the
actual funded market versus the actual addressable market. And most
folks publicly report the actual funded market at two trillion.
So whether the addressable market is twenty or thirty or forty, frankly,
I don't worry too much about that. What I worry
what I focus on is in any of those contexts,
(10:49):
you have an extraordinary long runway ahead. You're in the
very early innings, particularly in areas like private investment, grade
and asset bashed finance.
Speaker 2 (10:58):
Those are the.
Speaker 4 (10:58):
Fastest growing part of the overall private credit ecosystem, and
that's where the largest capital needs are, whether it's in digital,
infront data centers, energy and power and so on and
so forth.
Speaker 2 (11:11):
Yeah, there's also been a lot written recently about insurance
companies and private credit, private assets coming on to insurance companies.
And I've been looking at life insurance companies since nineteen ninety,
sort of dating myself a little bit there, but it's
interesting when insurance companies, you know, sort of get involved
(11:33):
in a sector, they tend to stampede into a sector.
Sometimes they do so, you know, maybe not having done
their homework entirely, But it does seem to me that
this sort of private investment grade credit is a really
interesting area for insurance companies, you know, because you've got
well rated I guess credit, so minimal credit risk, substantial spreads.
(11:57):
What are you doing there? Like what's you've got an
insurance operation or you've got insurance affiliates investments in insurance companies.
It's a huge area.
Speaker 4 (12:07):
Yeah, So let's start with how we are set up
and how we're partnering with our insurance clients, and then
we can talk about the opportunity set so at Blackstone.
We have a little bit of a different model than
some of the other players in the market, where we
are fully asset light balance sheet light. We serve our
clients in the insurance market as an asset manager. We
originate and manage asset portfolios on their behalf, and all
(12:32):
of our clients set shoulder to shoulder and we use
their collective buying power to do very large deals. We
did a five billion dollar deal, for example, with Rogers
up in Canada where we finance against their infrastructure network
back haul, and so our model is very much true
to the way Blackstone approaches partner with our clients across
every part of our ecosystem, not just credit, but private equity,
(12:55):
real estate, infrastructure. Why the private investment create marketplace has
resonated with insurers is they have long duration liabilities and
so they want to match that up with long duration assets.
And because they have law duration liabilities, they don't necessarily
need access to liquidity over the short term, and so
(13:16):
it lends themselves to investing in high quality, resilient, investment
grade assets where you can get excess spread. I mentioned
one hundred and fifty two hundred basis points of excess
spread for taking some illiquidity, and that is why we
have seen our insurance partners actively invest in this market
with a lot of success. I would also add that
(13:37):
it provides a lot of diversification into real assets. It's
a highly scalable opportunity. I mentioned some of the big
deals we've been involved in, but these are large growing markets.
If you look at the hyperscalers, they'll invest nearly four
hundred billion dollars in digital Infra Alan this year. And
so these are big markets, rapidly growing markets, and asset
(13:59):
pools that fit insurance balance sheets very well. I think
the interesting thing to me, David, is the next chapter
of this. And I think the next chapter of this
comes in two forms. One non insurance clients traditional institutions, pensions,
sovereign wealth funds saying hey, we want to get excess
spread and access to high quality, non correlated real assets
(14:22):
in the private investment grade landscape, and so we want
to start allocating here. And then all of our non
US clients. If you look at Asia base insurers, for example,
only five percent of their balance sheets are in private
credit versus a US basinsure might have thirty five or
forty percent and so those are two markets that are
largely unpenetrated but absolutely should grow, like we've seen the
(14:47):
market grow with US based insurers.
Speaker 2 (14:50):
You were, I presume you're over in Asia on your
four continent tour, it was one of them. Yeah, the
Asian insurance market, at least on the life and saving side,
seems to you'll be it's catching up, I think to
where we are in the US right. I mean, it
still tends to be a little bit more of an underwriting,
you know, sort of market as opposed to sort of
an investment spread market. But I assume that that's going
(15:12):
to change, and I assume that that's going to create
a lot of demand.
Speaker 4 (15:15):
It's going to change, and it's going to create demand
just like you say, David, because those clients need the
same thing that our US clients need, which is access
to high quality, low risk assets at scale with excess spread.
And that is what day in day out, our one
hundred person team focused on this market looks to deliver.
(15:36):
And we've got well over one hundred billion dollars of
private investment grade assets today. But when we look forward,
we think that's going to be the fastest growing part
of our credit ecosystem, what.
Speaker 1 (15:48):
Do these assets look like it? Because again I'm confused.
I mean, I can see it from the investor side,
they want the access spread, it makes absolute sense. But
from the boro aside, you know, in the US, a
big company just go to the high grade bone market
and get very good execution and you know very well
bid at monkey at the moment, say what kinds of
borrow is? What kinds of real assets are we talking about?
Speaker 4 (16:07):
Yeah, so if you look at our business, we generally
organize in four or five verticals, I would say most
of what we're doing is financing against hard assets. And
so I gave you an example of Rogers up in
Canada where we basically took an asset off their balance sheet,
their network infrastructure, and we finance against that. It was
(16:28):
a five billion dollar customized financing. That is not something
that you could easily go to the public high grade
market with. We did a similar thing with a company
here in the US called EQT around one of their
pipeline assets. And when I look at our business today,
we have a very long pipeline of deals that looks
similar to that, and so we call those deals corporate
(16:51):
solutions deals where we work with an investment grade borrower
and deliver a scale, customized solution that meets their needs.
But we're also financing digital in for a data center
build out. I mentioned the size of that market. Morgan
Stanley put out a report two weeks ago they thought
seven hundred billion dollars of private credit capital alone would
be needed to build out data center and digital info assets.
(17:14):
And then think about all the corresponding energy and power
assets and infrastructure assets that go alongside that, things like
heart assets. We have a large deal in the aviation
finance space, we have a pending deal in aircraft engines, railcars.
Think about all the heart assets and transportation. What we're delivering, James,
is a customized solution at scale, direct to borrower. Yes,
(17:36):
many of these bars will access the public high grade market.
But when you can deliver scale, customized solution to help
meet a need, whether it's fund and acquisition fund capital needs,
that is super valuable and that is what our clients
look for.
Speaker 2 (17:50):
So it sounds like the leverage there or the wedge
is something a situation where you've got something you know,
sort of turnplane vanilla came up. Some of these is
not I planed in all something that has a you
know sort of there's a specific asset, there's a specific
pool that might be a little bit different than you know,
sort of what everyone else is looking at. Is that
the look?
Speaker 4 (18:10):
I think again, if I think back about what's made
us very successful in direct lending, it's speed, it's certainty,
it's value added services, it's capital at scale and provide
a customized solution for almost.
Speaker 3 (18:23):
Every deal we do. One or more of.
Speaker 4 (18:26):
Those factors is driving the decision to do something direct
with us versus potentially a public market alternative.
Speaker 1 (18:34):
I think, as you say, data centers is something that
everyone's getting very excited about. We've had the big advantage
data center deal Meta black Stains obviously got a long
history of doing that kind of stuff. But you know what,
what do you make of those deals? What the risks
to lenders? How can they protect themselves? And you know,
how active do you want to be in that space?
Speaker 4 (18:51):
I think we're going to be extraordinarily active.
Speaker 2 (18:54):
We already are.
Speaker 4 (18:55):
And part of it is what I mentioned earlier, which
is when we have an investment theme at Blackstone on
the private equity side or the infrastructure equity side, the
amount of benefit that gives us on the credit side.
Speaker 3 (19:09):
Is really extraordinary.
Speaker 4 (19:11):
Right, Blackstone owns QTS, which is the largest developer of
data centers here in the US. We have a large
ownership stake in air Trunk, which is the largest developer
of data centers in the Asia Pacific market. That gives
us extraordinary insights into what's going into that market. And
so when we look at a credit deal, it's really
valuable to know firsthand what's going on in these markets.
And so that's where I would start. The second thing
(19:33):
I would say is as a lender lending against fifteen
twenty year triplenet contracts from the highest quality credit counter
parties in the world, which is what money of these
data centers look like, is a really great place for.
Speaker 3 (19:49):
Us to play.
Speaker 4 (19:50):
You mentioned a couple of deals. You are basically taking
credit risk against one of the big hyperscalers, but you're
doing it via this asset and getting paid, like I said,
excess spread typically one hundred and fifty to two hundred
basis points. What gives us a ton of comfort is
not just the insights on the equity side, but the
contractual protections you get as a lender into these deals
(20:12):
where you're basically just facing off against that counterparty, whether
it's Amazon or Meta or Microsoft, but doing it via
an asset.
Speaker 2 (20:21):
That's really attractive.
Speaker 1 (20:22):
And is it a twenty year deal?
Speaker 3 (20:24):
They can be.
Speaker 4 (20:25):
Ten, they can be fifteen, they can be twenty. But
what we're seeing is very attractive laun duration triple net
contracts that are fantastic for us to finance.
Speaker 1 (20:34):
What kind of tickets are you take?
Speaker 4 (20:36):
Look, we can do very large ticket size. It's not
I mentioned we did five billion dollars alone in that
Rogers deal. So if you think about the size of
these deals and you think about the size of some
of these data center complexes, they can be quite large.
And we're going to continue to be a leading player
in this market.
Speaker 1 (20:53):
Because these are going up to tens of billions of
dollars each time you come out with a deal. And
we've talked before this school about livving its tendencies. Do
few bigger deals with a few puntnas. But what about
the risk?
Speaker 4 (21:06):
Again, we'll underwrite the deal to its bespoke risk. That's
why we have an incredibly robust investment committee process. When
we do a large deal like that, we're spreading it
across many different clients, and so each individual one of
our clients. That's what I mentioned around our business model,
where we're aggregating almost brick by brick client relationships in
(21:28):
the insurance space. So every single client will have an
allocation to a deal that meets their investment guidelines, So
we're diversifying risk in their portfolio. But the aggregate buying
power of our platform, because of the breath of our
client base, that's what allows us to go into the
market and do these really large, interesting deals with excess spread.
Speaker 2 (21:50):
It seems to integrate nicely with the power part of
Blackstone's you know, sort of overall ecosystem as well.
Speaker 3 (21:58):
Yeah, exactly right.
Speaker 4 (21:59):
Look, these are themes that we have very very high
conviction is we look at large thematic growth trends, AI
the power that's required to fund that. Those are two
at the very top of the list, and when we
see these thematics across our platform, we instruct our team
to go out and originate in these markets.
Speaker 1 (22:20):
You mentioned software though, also, and that seems to being
area that some people are concerned about, giving how levit
is and how easy it is to replace it with
AI at the moment, So how are you changing your
approach to lending to that business.
Speaker 4 (22:30):
Well, look, we've been focused. It's a great question. We've
been focused on AI for some period of time, and
we've got a large team right now led by Rodney Zemmel,
who used to run the digital practice at McKenzie, who
helps us, deal by deal assess what is the risk
of AI disruption and for us as a lender, that's
a key part of our underwriting. And so we're in
(22:52):
the investment committee room. We actually for every software deal,
we have a scorecard that the team needs to fill
out to ascertain how likely is this company to be
disrupted by, how embedded are they in the workflow is,
how hard it is it to switch, how does their
technology stack up versus alternatives, And so when we're underwriting
a deal in the software space, it's not just the
(23:12):
financial underwright, it's the product underwright. And in fact, Blacktone
has a team of over five hundred technologists who all
what they do is procure software for our portfolio companies.
And so when we want to make an investment in
a software business, it's really nice to be able to
call our team and say, hey, are you buying this
for our portfolio companies? Is they're a better product out there,
(23:33):
and I think that gives us a holistic view of
the underwrite.
Speaker 3 (23:36):
I would tell you when we look at.
Speaker 4 (23:38):
Our software portfolio today, we feel quite good about the
performance and overall we see continued strong growth and free
cash flow generation.
Speaker 2 (23:47):
What are the weak spots out there right now? Like
you have Blackzone, I think probably has close to unparalleled
I guess, insight into multiple industries and probably information that
might be a little bit more immediate than what the
markets tend to see and be able to digest. So
are there any soft spots that you see developing? You know,
obviously we had terrif Liberation Day not too long ago.
(24:11):
That felt horrible, then it felt better, and now you're
sort of wondering, you know, maybe the economy is beginning
to soften up a little.
Speaker 4 (24:18):
I'd say the things we're watching is borrow or size.
We tend to focus on larger scale borrowers. I think
when we look at the market, subscale, lower middle market
type borrow wars have definitely had a harder time navigating
some of the uncertainty and volatility.
Speaker 3 (24:35):
In the macro.
Speaker 4 (24:36):
So that's one thing we look at. Sector is a
huge area for us to focus on software continues to
perform well in our portfolio, business services, insurance services, all
of those markets continue to be incredibly strong. But deep cyclicals,
high cap X investments, areas that had huge runups post COVID,
(24:56):
like freight logistics or building products. Those are markets where
we see a little bit of weakness, and accordingly, we're
pretty careful about deploying capital into those areas.
Speaker 1 (25:08):
So you've see more payment in kind defers, interests, quiet restructuring.
Is that sort of thing going on in your portfolio?
Speaker 4 (25:15):
Away from you, I would say that's an area that
has gotten a lot published on it, but holistically I
don't view that as a massive issue. If we look
at our portfolio, for example, less than one percent of
our income comes from paiding kind assets that are marked
below eighty five cents in the dollar, and so you
don't have this large issue there. More often what we
(25:39):
see in the market is new deals having a bit
of paid in kind capacity as part of the setup.
But again that's baked into the underwright and we looked
at the credit metrics, and we look at the loan
to value incorporating that as part of the structure.
Speaker 1 (25:52):
So we're not seeing more stress away from you in
other parts of the market, because that is talked about
a love as you say, and people do talk about
new entrance to the space. Been here a long time,
so you pretty you know, not as vunderable that they're
a small and new entrance that people cool tourists and
think that they might be preblence with.
Speaker 4 (26:08):
I think this theme of dispersion is the one we'll
talk a lot about. You know, I obviously have the
fortune of looking at our portfolio, which is performing extraordinarily well.
But when you step back and look at what's happening
in the macro, yes, overall, I feel pretty good about
what's there. But I think you will see some dispersion
where managers who don't have the origination capabilities or the
(26:30):
asset management capabilities are exposed to some of the sectors
or companies that may be more vulnerable in environment like that,
I think it is natural to see some uptick in
dispersion in manager performance.
Speaker 3 (26:42):
But I would tell you that's a good thing.
Speaker 4 (26:43):
And I think for us, as someone who has been
in this market for over twenty years as a proven
investment process, has lots of asset management and other capabilities
We don't shy away from that because we think our
underwriting and our capabilities on the investment side will continue
to differentiate.
Speaker 2 (27:00):
Yeah, at least looking at the BDCs. We just did
a report called the BDC Beat available to you on
the terminal, just came out today, but it sort of
looks at information that we've been writing about for a while.
We look at pick rates. We look at non accrual
rates across a portfolio of about thirty of the larger BDC's,
(27:21):
the ones that've issued public bonds, and there definitely is dispersion.
You know, the aggregate numbers haven't really changed all that much.
If you look at non accrural rates, I think they've
been between one and two percent since the pandemic. If
you look at the PICK rate, which I try to
focus on investment income pick specifically, but if you look
(27:42):
at the pickrate, it's held steady around six percent. It's
actually down a little bit this year. That surprises a
lot of people. It may even disappoint people, you knowlines, Yeah,
I would tell you that it may disappoint some people
who've sort of been rooting about now's the time that
these guys are going to get it. But it just
doesn't seem to.
Speaker 4 (28:00):
Well, I guess just doesn't see fundamentally, fundamentally, you step
back and what are we doing? What are most people
in the direct lending market doing? There writing first lean
senior secured loans at forty percent loan to value and
putting them in vehicles that are either un levered or
at most one times levered. That is not fundamentally a
risky activity. Might you see an idiosyncratic event here or
(28:24):
there where a company underperforms, of course, but the grand
scheme of what's going on in the asset class is
pretty straightforward senior secured, lower risk lending. Well, you see dispersion, sure,
but when I step back and look at what's happening
in the asset class, we continue to feel like it's
a great thing for our client portfolios, whether they be institutional,
(28:45):
insurance or individuals.
Speaker 1 (28:47):
Do you know worry a tool though, that some of
this risk is being mispriced? I mean, you know, if
every time the market grows this quickly to this scale,
something happens, and you know, I've never seen a market
that has this amount of access demand US supply no
create some kind of issues. Do you think that that's
(29:09):
me just exaggerating because I'm generalist.
Speaker 2 (29:12):
Or before you answer. One of the things I've sort
of thought about this is that this whole private credit market,
it's not a new market, it's a new form of
the market because what we're talking about private credit used
to be done by the banks. So people talk about
how much private credit is growing like crazy. It is,
(29:32):
but not overall like sort of corporate credit overall isn't
growing like crazy. It's just been transferred from the banking
sector into these other sectors.
Speaker 4 (29:42):
And again, I think this goes back to what we're
talking about about some of the misconceptions of the market. Again,
you have, you know, senior secured lending at low loan
to values that is existent for a very long period
of time. Who is doing it, the form of which
it's done.
Speaker 3 (29:56):
I think that has.
Speaker 4 (29:57):
Evolved, and I think we'll continue to evolve. Again, the
most interesting thing to me is all of the areas
outside of direct lending, because again, you've got a two
trillion dollar direct lending market, but you've got a thirty
trillion dollar opportunity set. And as we think about these
new AZTEC classes and we think about international expansion, to me,
like that is what folks aren't talking enough about here.
(30:18):
But when I went on my tour around the world,
that's where our clients were most focused.
Speaker 1 (30:24):
So talk about international expansion. There was this big you know,
April whenever it was the tires Day, pushed against American exceptionalism,
and then this idea that you needed to diversify geographically.
Is that parts of the international side or is it
a different story.
Speaker 4 (30:37):
Look, I think most of our clients will still have
their portfolios largely concentrated in the US, but I do
think there is a desire for some of our clients
abroad to strengthen their local origination, and I think that
is what is driving some of the activity, whether it's
in Europe or an Apac. And you've seen us add
to our team significantly. We just added someone in Japan
(31:01):
on the credit side, We've added someone in India. We'll
be up to one hundred and fifty people across Europe
within credit alone. So this is a market where we
see lots of opportunities for our clients. But I would
say a lot of clients in that region who haven't
had access to local origination are now trying to partner
with managers to capitalize on the opportunity set that we
know is coming.
Speaker 2 (31:22):
It seems to be a little bit of a lower
leveraged world outside the US. Would you agree with that?
Speaker 4 (31:28):
I would say generally speaking yes, But again, when we
look at most of what we're doing is unlevered. Everything
in the private investment create space, it is un levered,
and so I think that is the norm for the
vast amount of what we're doing in the markets.
Speaker 1 (31:41):
Yeah, we wrote about black crooks attempts to build up
in Asia private credit specifically and just not able to
get the deals. And you know, we need the fundraising
stumps partly because there was an acquisition going on this
separate But that do seem to be challenges when you're
raising money and you don't have enough to invest in.
So how what's your view of Asia in that context?
Speaker 4 (32:04):
Well, again, I think you've got to be prudent as
you think about your growth plans. And we've had a
team on the ground there for many years. We leverage
the capabilities and insights of our private equity and our
real estate franchises that are very strong in those markets,
and then we continue to build and I would tell
you it is logical to expect you're an Asia to
(32:29):
lag the growth that we see in the US, But
that's a timing thing. You know, all of the themes
that are driving a lot of the growth, for example
on the asset bat market in the US, whether it's digital, infra,
or energy and power, those same themes exist globally, and
the same needs for private capital, especially on the credit side,
to support those secular capital needs, those exist globally, and
(32:52):
so you're really just talking about a timing from when
you start to see it really take off.
Speaker 1 (32:57):
And in there's a big defense story. Is that an
opportunity for private.
Speaker 3 (33:02):
I think it's part of it.
Speaker 4 (33:03):
And I think the narrative around Europe definitely is a
bit more constructive than it was in the recent past,
with more supportive government around infrastructure spend, defense, defense spend.
We tend to see a little bit of excess spread
in Europe relative to the US, and we've seen a
recovery and deal activity and so all of that is
(33:24):
definitely supporting client interest in that market.
Speaker 1 (33:28):
So I take your point about the proposition from the
investment standpoint, but still we are looking at you know,
aggregated numbers from Pitchbook for example, saying that traditional private
credit fundraising is at the lowest since twenty nineteen, which
begs the question, you know why our institution investors becoming
less interested according to the data in private debt, and
(33:50):
you know, shouldn't it silly growing in terms of the
factional fundraising.
Speaker 4 (33:54):
So what we're seeing is a consolidation of where people
are deploying their capital. So the other massive theme I
see is the large managers like Blackstone who are able
to originate in scale across all of these markets, who
are able to partner with large sophisticated clients around the
world to deliver customized solutions. We're seeing a consolidation of
(34:17):
the capital there. And so a big theme that I
see around the world is these multi asset credit partnerships
where we partner with a sophisticated institution and we figure out, Okay,
here's all the things we're seeing across Blackstone, from direct
lending to asset bat finands, to infrastructure credit to private
ig all over the world. How can we work with
(34:38):
you holistically to partner across all of those things that
we're seeing to deliver a resilient, diversified, customized portfolio that
delivers the best of all of the things we do
across Blackstone in credit, and so we're seeing that from
our largest institutional clients, We're seeing that from our insurance partners,
(35:00):
and increasingly individuals are saying, Okay, how do I access
more of the credit opportunity beyond just direct lending?
Speaker 1 (35:08):
And does that mean that only those sorts of players
will ultimately exist in this market?
Speaker 3 (35:13):
Is that that scale matters?
Speaker 4 (35:14):
You brought it up earlier, James, I think, more than
anything in credits, scale is a massive differentiator. Allows you
to do those large deals which we spoke about. It
allows you to access the biggest and best borrowers. It
allows you to offer unique solutions to clients, and it
allows us to invest in some of those resources that
I mentioned on the value creation side, on the asset
management side, that allow us to deliver performance on behalf
(35:37):
of our clients.
Speaker 1 (35:38):
Do you need to get bigger?
Speaker 4 (35:40):
Well, I think you will see us continue to scale
because scale is a huge advantage. And there's white space
I mentioned. I mentioned Europe and APAC as an area
of white space. I mentioned private investment grade where I
think we've only scratched the surface, and so I think
you will absolutely see us get.
Speaker 3 (35:56):
Bigger in those markets.
Speaker 4 (35:57):
And I think the other thing we haven't spent a
lot of time on and this conversation is deal activity
is picking up in a very material way. And I
don't know that this has really been picked up on,
but this summer was the third highest summer for M
and A activity since two thousand and eight. August was
the single biggest month we had in investment committee in
(36:18):
the last three years.
Speaker 3 (36:19):
And August is supposed to be a slow month. We'll
close thirty deals.
Speaker 4 (36:23):
Basically in the next two weeks, and so we are
seeing a significant uptick in deal activity across all of
our markets because the underlying macro feels a little bit better,
because you're seeing rates and cost of capital coming down,
because you're seeing increased confidence in strong corporate earnings. And
so I think this deal machine that has been a
(36:43):
little bit slow to get out of the blocks over
the last couple of years, I think you're at a
real inflection point. I think that's another reason why we're
seeing strong client interest in credit and another reason why
scale and flexibility of capital and a broad capability set
are the big differentiators.
Speaker 1 (37:00):
Evaluations are still very high.
Speaker 4 (37:02):
For the right assets, and again I think the right assets,
you are seeing buyers, whether that's strategic or financial buyers
step up, and I expect to continue.
Speaker 1 (37:11):
To see that and LBOs as well.
Speaker 3 (37:14):
You're starting to see it. You're starting to see it.
Speaker 4 (37:15):
It was a market that for a while was just
characterized by refinancings, and I think you're going to see
deal activity pickup. And like I said, we have. We've
had a very active August and I expect the fourth
quarter to be quite busy as well.
Speaker 1 (37:29):
Is that more of a direct lending opportunity or is
it a leveraged loan, high yield traditional finance or is
it a mixture of all.
Speaker 4 (37:35):
I think it's all the above. If you look just
in the last week to ten days, We've announced a
deal with Parkplace, which is a data center services provider.
We've announced a deal with just Right. We've announced a
deal this morning with am Trust. We did a big
data center deal with Aligned. We probably announced half a
dozen deals just in the last week. And that is
(37:55):
a good indication of the deal activity and pipeline we
have at our at our fingertips today.
Speaker 1 (38:01):
So it continues through the fourth quarter into next year.
Speaker 4 (38:04):
You think this I think, look, obviously we're we're in
a world with lots of volatility and macro question marks
out there. But I think if we stay in the
current backdrop we're in right now, I think that's going
to be a really good thing for deal activity.
Speaker 2 (38:17):
And the issue of suitability has come up also, how
how do you address that?
Speaker 4 (38:22):
Well, again, I think each client in their advisors will
have to make the determination of how much illiquidity they
can have in their portfolio. But when you think about
something like retirement savings, by definition, that is a longer
dated decision, and as a result, there should be some
amount of illiquidity that individuals can tolerate within their portfolios.
Speaker 2 (38:44):
Maybe not for me.
Speaker 4 (38:46):
I'll let you your own decision, David.
Speaker 1 (38:48):
As this monkey becomes called democratization, that's what people have
been talking about for well, and more regulation, presumedly more transparency.
Does that not a road that one hundred fifty to
two hundred basis points premium on private ve's is public?
Speaker 4 (39:04):
Well, again, I would separate those two things, James. I
think what we deliver on a deal by deal basis
for our client, for our borrowers, by built bringing our
capital all the way to them and delivering a customized
solution alongside value creation services, alongside all the other things
that Blastom delivers its borrowers. I think that's one thing
on the deal side. I think that will continue. On
(39:26):
your common around transparency, we embrace transparency fully.
Speaker 3 (39:31):
David knows this.
Speaker 4 (39:32):
If you look at any of our BDCs, you can
pull up a ten Q and see every position we
have and we can see you know where we're marking
them and when they mature, and what the interest rate
is on them.
Speaker 3 (39:42):
And I would.
Speaker 4 (39:43):
Tell you that is great for clients to be able
to have that transparency, and so we welcome.
Speaker 1 (39:49):
That, and you'll still trading them as well.
Speaker 3 (39:52):
Well. We haven't been as.
Speaker 4 (39:55):
Engaged on trading private credit. I think most of our
clients think about private credit as just that they want
to earn that liquidity premium. In most of our borrowers,
they partner with Blackstone because they want Blackstone to own
the loan, not whoever we might trade it to. And
so I think we'll continue to look at this asset
class as one where we're originating to term on behalf
(40:17):
of our clients.
Speaker 2 (40:20):
Yeah, and just by the way you do, you did
bring up the issue of transparency and just so listeners
understand the all of this information does reside in the
in the public markets and SEC documentation. It's also available
on the Bloomberg terminals, on our BBC page and on
some of our other loan pages, so you know that
information has been transferred to the terminal.
Speaker 3 (40:41):
I've been on those pages. I must say, and.
Speaker 1 (40:43):
You do a great job and to stay until do
you need to acquient other thumbs? Are you going to
grow organically? What's the longusen vision and sons of youal platform.
Speaker 4 (40:53):
Look, we've done really a remarkable job growing our business,
and we've done it virtually all organic. Our bias is
to build from within. We've got a proving capability of
doing that. We've got extraordinary, extraordinary people all over our organization.
We've got seven hundred and fifty people in credit. When
there's new opportunities, we want to tap our existing team
(41:14):
to go capitalize on it. And we were talking about
Asia Pacific and what we've done there, and that's another
that's a great example of an area where I think
you'll see us grow organically.
Speaker 2 (41:24):
Do you see more insurance partnerships coming down the coming
down the line? It is interesting. I think you know
the different approaches that alternative asset managers have taken to insurance.
You know, obviously Apollo is all in the theme, Kkar
is all in with with Global Atlantic, and you guys
have taken a different attack on that where I think
you own ten to twenty percent of AIG, Is that right? Corbridge? Corbridge?
Speaker 4 (41:50):
Yeah, we had a minority staking Corbridge. But you know
the model that we have again very different from what
those others are doing where they've kind of taken whole
ownership of an insurance balance sheet. For us, it's really
an asset management relationship, yep.
Speaker 2 (42:03):
And do you see more of these partnerships coming down
the line.
Speaker 4 (42:06):
It wouldn't surprise me, right. I think when you look
at insurers, private credit is a really nice fit for
what they're trying to do in terms of excess spread,
low risk, taking some inliquity to do that. The challenge
is origination, and so if you're a standalone insurer and
you don't have either an asset management partner or a
(42:28):
balance sheet partner to help you originate, I think it's
logical to expect to see more of that. I think
the models that people employ will continue to look a
little bit differently, and the ability for folks to execute
to originate in scale, I think that also will look
very different. It's nice for us to have, you know,
one hundred and twenty five billion dollar head start in
(42:50):
private investment grade when we go and we talk to
some potential clients on the insurance side.
Speaker 1 (42:56):
Great stuff. Michael Zowski, CIA of Blackston's Credit and Insures Group,
many thanks for joining us on the Credit Edge.
Speaker 3 (43:02):
Thanks for having me guys, and.
Speaker 1 (43:03):
Of course very grateful to David Havens from Bloomberg Intelligence.
Thank you very much.
Speaker 2 (43:07):
Great being with your for.
Speaker 1 (43:08):
Even more credit market analysis and insight. Read all David
Havees's great work on the terminal. Bloomberg Intelligence is part
of our research department with five hundred analysts and strategists
working across all markets. Coverage includes over two thousand equities
and credits and outlooks on more than ninety industries and
one hundred market industries, currencies and commodities. Please do subscribe
to the Credit Edge wherever you get your podcasts. We're
(43:29):
on Apple, Spotify and all other good podcast providers, including
the Bloomberg Terminal at b pod, Goo gear us A
review tell your friends, or email me directly at jcromb
eight at bloomberg dot net. I'm James Crombi. It's been
a pleasure having you join us again next week on
the Credit Edge
Hello, Welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2 (00:24):
And I'm David Haven's, the senior credit analyst of Bloomberg
Intelligence charged with covering non bank financials, which happens to
include alternative asset managers, private credit, and BDC's. This week,
we're very pleased to welcome Michael Zuwadsky, who, as happenstance
would have it, is the chief investment officer of Blackstone's
Credit and Insurance group. Mike, how are you?
Speaker 3 (00:45):
I'm fantastic, Thanks guys for having me.
Speaker 2 (00:47):
It's awesome. Are we going with Z or Mike? Let's
go with z Okay? Z it is. Z's CIO office
at Blackstone includes a team of more than one hundred people,
larger than most credit platforms in their entirety, pouring for
more than five thousand companies in various investment portfolios. If
those figures are off, you're just going to have to
take it up with the Blackstone Secured lending folks, because
(01:09):
that's what they said on their second quarter conference call.
Speaker 3 (01:11):
I trust them completely, all.
Speaker 2 (01:13):
Right, Listeners are going to be deeply interested in your
views and observations as it relates to the markets and
private credit.
Speaker 1 (01:19):
Great, and I'll start by saying credit markets are looking
pretty complacent at the moment. High grade bond spreads haven't
been this tight since the late nineties. Yes, I'm old
enough to remember that demand for yield is very strong,
Supply of new corporate debt is quite thin. Returns in
public markets, though, have been pretty solid, leaving some investors
to question the value of going private. Why sacrifice liquidity
(01:40):
at a time when the economy is slowing and there's
so much headline risk. There's also a fair amount of
anxiety about private asset performance. How are those companies managing
through trade wars and some pretty big US policy shifts.
What's the impact of inflation and high debt service costs?
Are there actually a lot more stressed deals into faults
out there than actually being reported. So that what you'll
(02:03):
take is private credit risk fairly valued at the moment,
and all the concerns about the aesset class warranted.
Speaker 3 (02:09):
Great.
Speaker 4 (02:10):
Well, Look, I just came back from basically a triple
around the world for the last thirty days. I was
on four different continents and I met with some of
our largest clients in all the regions around the globe,
and these are the topics we were discussing. We started
with a conversation around the macro, and I would tell
you folks are feeling a lot more comfortable with the
underlying macro. You mentioned some of the uncertainties that are
(02:31):
out there, and that is true, but when you actually
look at the fundamentals on the ground, company performance continues
to be strong. Eighty percent of companies in the second
quarter beat guidance. Consumer balance sheets are healthy, and we're
on the verge of some monetary and fiscal stimulus and
big capex spending cycles in areas like AI and energy
(02:51):
and power. All of those things provide strong macro backdrop
for investing in credit. The challenge, as you alluded to, James,
is that evaluations the liquid markets have gotten elevated, and
that's why you see spreads in liquid fixed income traditional
fixed income being awfully tight. The result of that is
that's leading to our clients around the world looking to
(03:12):
allocate more to private credit because as we look at
the market, we see excess spread in private credit, whether
it's on the investment grade side or the sub investment
grade side, at about two hundred basis points in excess
of liquid credit, and that's a really attractive thing for
our clients around the world.
Speaker 2 (03:29):
And is that is the market in equilibrium? Do you
think a from sort of a funding perspective, because obviously,
if you're going from public into private, you're picking up
a lot of spread, but you're also giving up liquidity,
so it sort of introduces this whole issue of liquidity risks.
So you want to make sure that your assets and
liabilities are pretty well tied up, and I know from
(03:49):
looking at the BDCs that there is a close match.
Does that exist you think across most or all private
credit market sectors?
Speaker 4 (03:57):
Well, it's hard to generalize across private credit because the
market is massive, it's expansive, with lots of different asset classes.
And then maybe we should come back to that in
a bit. But if I were to just make a
general comment around liquidity risk asset liability management, actually private
credit does a phenomenal job at that. If you actually
look at private credit vehicles that are either unlevered or
(04:18):
at most one times levered, there's good match between assets
and liabilities. There's no cross collateralization of balance sheets, and
so when you actually look at the foundation of the
asset class, it is built on resilience and prudent management,
and that's what we see across the board.
Speaker 1 (04:36):
So that two hundred basis points differential between I'm assuming
it's a high yield the leveraged loan Roady syndicates it
against a private direct loan. You're getting two hundred basis
points on top of that. Is it the same fray
g exactly exactly?
Speaker 4 (04:52):
And I think the reason why that excess spread exists
is what we call this farm to table model, where
we bring our capital our investors right up next to
the borrowers, and in doing that, we can deliver a
customized solution that meets their capital needs without all the
leakage that happens along the way if you go to
market and have multiple pathsive syndication and so bringing that
(05:13):
capital direct to borrower that is a big source.
Speaker 3 (05:16):
Of premium for our clients.
Speaker 4 (05:18):
And obviously you're right, David, there is some excess return
that comes with clients that could afford some element of
ill liquidity in their asset portfolios.
Speaker 1 (05:28):
But from the borough they're paying more. So, I mean,
on the one hand, i'd wonder why they would pay
more if they have access to all this liquidity elsewhere.
And also how sustainable is it for a risky a
borrower to keep paying that high cost.
Speaker 4 (05:41):
Well, let's talk about that for a second. To the end, borrower,
you're basically in the same spot. You're just not paying
a bunch of fees along the way. If you look
at your all in cost of capital, you get to
a much more similar spot. And because we're bringing our
clients capital direct to the borrower, that means that all
of those economics go to our clients. That's really what matters,
(06:01):
and that's the value proposition we're delivering on your common
around you know, borrowers being able to accept cost of capital.
That goes back to where I started with, which is
we're seeing very strong credit performance across the board. If
you look at Blackstone's business, for example, we have two
thousand non investment grade borrowers and we have a default
(06:24):
rate of below fifty basis points across that portfolio. Over
the last twelve months, we continue to see strong earnings growth,
and so we have a lot of confidence, at least
in the companies we tend to partner with, which tends
to be the bigger companies in higher growth, more resilient,
less cyclical sectors and areas where we can really benefit
(06:45):
from the strength of the Blackstone platform. If you look
at the areas that we tend to do a lot
in right in software, for example, we've got a huge
business that invests specifically in software on the private equity side.
In healthcare, we've got a dedicated life sciences business and energy,
and we've got a huge infrastructure investing business. Being able
to access all the insights across Blackstone that drives our
(07:07):
credit selection, that drives the lower loss rates we've been
able to deliver for our clients over an extended period
of time.
Speaker 2 (07:13):
And for the borrowers, what's the value proposition for them
for going with Blackstone as opposed to a bank or
you know, sort of some other borrowing channel.
Speaker 4 (07:23):
Speed, certainty, flexibility, a customized solution. Having one partner on
the other end. If you want to do an acquisition
or fund a growth project, you know exactly who to call.
And then what I'll call value creation services. We've got
a dedicated team within the credit bitness a Blackstone that
will go in and help borrowers drive cross sell across
(07:47):
the Blackstone portfolio help them take out operating costs and
run more streamline, do things like cybersecurity assessments. We've created
over five billion dollars of enterprise value in our credit
book alone through these value added services. And so when
you put all of that together, it's really quite a
compelling solution for borrowers, whether they are investment grade or
(08:08):
sub investment grade.
Speaker 2 (08:09):
Yeah, and you know, it's obviously a competitive market the
banks for whatever reason, and there seem to be various,
you know, sort of topics that are brought up as
to why the banks have sort of seeded, you know,
this beachhead and not more than a beachhead. I guess
it's continent in private credit. But they seem to want
to get back into the market now. Now they've got
(08:31):
leverage shoe, I don't mean financial leverage. They've got the
ability to sort of lean on, you know, some of
the borrowers to get back into the into the marketplace.
Are you seeing them becoming more aggressive these days or
or just not yet.
Speaker 4 (08:44):
I would say we've got to again look at the
market holistically.
Speaker 3 (08:48):
Right.
Speaker 4 (08:49):
A lot of the conversation, and most of what we've
spoken about today is focused on sponsored back direct lending,
that's about a two trillion dollar asset class. The overall
private credit market is thirty trillion dollars an addressable size.
And so when you look at big areas of our market,
from private investment grade to asset back finance, REZI mortgages,
(09:09):
in for credit, these are huge market opportunities with significant
secular growth drivers where capital from both banks and private
lenders are needed. Those are markets where the supply demand
dynamic for US as a lender today is incredibly favorable.
And so there's tremendous amounts of white space for us
to go out and do direct lending. Yes, the banks
(09:31):
will participate as well, but these are huge markets, and
in fact, in many of these markets, you're seeing us
partner with banks to go and deliver solutions to asset
originators and clients. And you saw us do that in
fun finance with Key Bank. You've seen us do that
in infrastructure credit with Santander. You've seen us do that
in credit cards with Barclay's. I think this model of
(09:53):
there is such a large market opportunity out there in
the broadly defined private credit marketplace.
Speaker 3 (10:00):
Can we work jointly with.
Speaker 4 (10:01):
Banks to deliver solutions to our borrowers in the way
that meets their needs.
Speaker 1 (10:05):
Glad you brought up scale. So I was going to
ask because your colleague Rob Hone came on the show
last year and pegged at thirty trillion. Then Public came
on a few weeks lation and said it's actually forty trillion,
and they said half of it was already you know,
in existence, so that we're already a twenty trillion market,
but it's going to grow to forty trillion. So there's
kind of a lot of you know, big numbers being
thrown out, but we already How big is the actual
(10:26):
market right now?
Speaker 4 (10:27):
Well, look, I think you've got to talk about the
actual funded market versus the actual addressable market. And most
folks publicly report the actual funded market at two trillion.
So whether the addressable market is twenty or thirty or forty, frankly,
I don't worry too much about that. What I worry
what I focus on is in any of those contexts,
(10:49):
you have an extraordinary long runway ahead. You're in the
very early innings, particularly in areas like private investment, grade
and asset bashed finance.
Speaker 2 (10:58):
Those are the.
Speaker 4 (10:58):
Fastest growing part of the overall private credit ecosystem, and
that's where the largest capital needs are, whether it's in digital,
infront data centers, energy and power and so on and
so forth.
Speaker 2 (11:11):
Yeah, there's also been a lot written recently about insurance
companies and private credit, private assets coming on to insurance companies.
And I've been looking at life insurance companies since nineteen ninety,
sort of dating myself a little bit there, but it's
interesting when insurance companies, you know, sort of get involved
(11:33):
in a sector, they tend to stampede into a sector.
Sometimes they do so, you know, maybe not having done
their homework entirely, But it does seem to me that
this sort of private investment grade credit is a really
interesting area for insurance companies, you know, because you've got
well rated I guess credit, so minimal credit risk, substantial spreads.
(11:57):
What are you doing there? Like what's you've got an
insurance operation or you've got insurance affiliates investments in insurance companies.
It's a huge area.
Speaker 4 (12:07):
Yeah, So let's start with how we are set up
and how we're partnering with our insurance clients, and then
we can talk about the opportunity set so at Blackstone.
We have a little bit of a different model than
some of the other players in the market, where we
are fully asset light balance sheet light. We serve our
clients in the insurance market as an asset manager. We
originate and manage asset portfolios on their behalf, and all
(12:32):
of our clients set shoulder to shoulder and we use
their collective buying power to do very large deals. We
did a five billion dollar deal, for example, with Rogers
up in Canada where we finance against their infrastructure network
back haul, and so our model is very much true
to the way Blackstone approaches partner with our clients across
every part of our ecosystem, not just credit, but private equity,
(12:55):
real estate, infrastructure. Why the private investment create marketplace has
resonated with insurers is they have long duration liabilities and
so they want to match that up with long duration assets.
And because they have law duration liabilities, they don't necessarily
need access to liquidity over the short term, and so
(13:16):
it lends themselves to investing in high quality, resilient, investment
grade assets where you can get excess spread. I mentioned
one hundred and fifty two hundred basis points of excess
spread for taking some illiquidity, and that is why we
have seen our insurance partners actively invest in this market
with a lot of success. I would also add that
(13:37):
it provides a lot of diversification into real assets. It's
a highly scalable opportunity. I mentioned some of the big
deals we've been involved in, but these are large growing markets.
If you look at the hyperscalers, they'll invest nearly four
hundred billion dollars in digital Infra Alan this year. And
so these are big markets, rapidly growing markets, and asset
(13:59):
pools that fit insurance balance sheets very well. I think
the interesting thing to me, David, is the next chapter
of this. And I think the next chapter of this
comes in two forms. One non insurance clients traditional institutions, pensions,
sovereign wealth funds saying hey, we want to get excess
spread and access to high quality, non correlated real assets
(14:22):
in the private investment grade landscape, and so we want
to start allocating here. And then all of our non
US clients. If you look at Asia base insurers, for example,
only five percent of their balance sheets are in private
credit versus a US basinsure might have thirty five or
forty percent and so those are two markets that are
largely unpenetrated but absolutely should grow, like we've seen the
(14:47):
market grow with US based insurers.
Speaker 2 (14:50):
You were, I presume you're over in Asia on your
four continent tour, it was one of them. Yeah, the
Asian insurance market, at least on the life and saving side,
seems to you'll be it's catching up, I think to
where we are in the US right. I mean, it
still tends to be a little bit more of an underwriting,
you know, sort of market as opposed to sort of
an investment spread market. But I assume that that's going
(15:12):
to change, and I assume that that's going to create
a lot of demand.
Speaker 4 (15:15):
It's going to change, and it's going to create demand
just like you say, David, because those clients need the
same thing that our US clients need, which is access
to high quality, low risk assets at scale with excess spread.
And that is what day in day out, our one
hundred person team focused on this market looks to deliver.
(15:36):
And we've got well over one hundred billion dollars of
private investment grade assets today. But when we look forward,
we think that's going to be the fastest growing part
of our credit ecosystem, what.
Speaker 1 (15:48):
Do these assets look like it? Because again I'm confused.
I mean, I can see it from the investor side,
they want the access spread, it makes absolute sense. But
from the boro aside, you know, in the US, a
big company just go to the high grade bone market
and get very good execution and you know very well
bid at monkey at the moment, say what kinds of
borrow is? What kinds of real assets are we talking about?
Speaker 4 (16:07):
Yeah, so if you look at our business, we generally
organize in four or five verticals, I would say most
of what we're doing is financing against hard assets. And
so I gave you an example of Rogers up in
Canada where we basically took an asset off their balance sheet,
their network infrastructure, and we finance against that. It was
(16:28):
a five billion dollar customized financing. That is not something
that you could easily go to the public high grade
market with. We did a similar thing with a company
here in the US called EQT around one of their
pipeline assets. And when I look at our business today,
we have a very long pipeline of deals that looks
similar to that, and so we call those deals corporate
(16:51):
solutions deals where we work with an investment grade borrower
and deliver a scale, customized solution that meets their needs.
But we're also financing digital in for a data center
build out. I mentioned the size of that market. Morgan
Stanley put out a report two weeks ago they thought
seven hundred billion dollars of private credit capital alone would
be needed to build out data center and digital info assets.
(17:14):
And then think about all the corresponding energy and power
assets and infrastructure assets that go alongside that, things like
heart assets. We have a large deal in the aviation
finance space, we have a pending deal in aircraft engines, railcars.
Think about all the heart assets and transportation. What we're delivering, James,
is a customized solution at scale, direct to borrower. Yes,
(17:36):
many of these bars will access the public high grade market.
But when you can deliver scale, customized solution to help
meet a need, whether it's fund and acquisition fund capital needs,
that is super valuable and that is what our clients
look for.
Speaker 2 (17:50):
So it sounds like the leverage there or the wedge
is something a situation where you've got something you know,
sort of turnplane vanilla came up. Some of these is
not I planed in all something that has a you
know sort of there's a specific asset, there's a specific
pool that might be a little bit different than you know,
sort of what everyone else is looking at. Is that
the look?
Speaker 4 (18:10):
I think again, if I think back about what's made
us very successful in direct lending, it's speed, it's certainty,
it's value added services, it's capital at scale and provide
a customized solution for almost.
Speaker 3 (18:23):
Every deal we do. One or more of.
Speaker 4 (18:26):
Those factors is driving the decision to do something direct
with us versus potentially a public market alternative.
Speaker 1 (18:34):
I think, as you say, data centers is something that
everyone's getting very excited about. We've had the big advantage
data center deal Meta black Stains obviously got a long
history of doing that kind of stuff. But you know what,
what do you make of those deals? What the risks
to lenders? How can they protect themselves? And you know,
how active do you want to be in that space?
Speaker 4 (18:51):
I think we're going to be extraordinarily active.
Speaker 2 (18:54):
We already are.
Speaker 4 (18:55):
And part of it is what I mentioned earlier, which
is when we have an investment theme at Blackstone on
the private equity side or the infrastructure equity side, the
amount of benefit that gives us on the credit side.
Speaker 3 (19:09):
Is really extraordinary.
Speaker 4 (19:11):
Right, Blackstone owns QTS, which is the largest developer of
data centers here in the US. We have a large
ownership stake in air Trunk, which is the largest developer
of data centers in the Asia Pacific market. That gives
us extraordinary insights into what's going into that market. And
so when we look at a credit deal, it's really
valuable to know firsthand what's going on in these markets.
And so that's where I would start. The second thing
(19:33):
I would say is as a lender lending against fifteen
twenty year triplenet contracts from the highest quality credit counter
parties in the world, which is what money of these
data centers look like, is a really great place for.
Speaker 3 (19:49):
Us to play.
Speaker 4 (19:50):
You mentioned a couple of deals. You are basically taking
credit risk against one of the big hyperscalers, but you're
doing it via this asset and getting paid, like I said,
excess spread typically one hundred and fifty to two hundred
basis points. What gives us a ton of comfort is
not just the insights on the equity side, but the
contractual protections you get as a lender into these deals
(20:12):
where you're basically just facing off against that counterparty, whether
it's Amazon or Meta or Microsoft, but doing it via
an asset.
Speaker 2 (20:21):
That's really attractive.
Speaker 1 (20:22):
And is it a twenty year deal?
Speaker 3 (20:24):
They can be.
Speaker 4 (20:25):
Ten, they can be fifteen, they can be twenty. But
what we're seeing is very attractive laun duration triple net
contracts that are fantastic for us to finance.
Speaker 1 (20:34):
What kind of tickets are you take?
Speaker 4 (20:36):
Look, we can do very large ticket size. It's not
I mentioned we did five billion dollars alone in that
Rogers deal. So if you think about the size of
these deals and you think about the size of some
of these data center complexes, they can be quite large.
And we're going to continue to be a leading player
in this market.
Speaker 1 (20:53):
Because these are going up to tens of billions of
dollars each time you come out with a deal. And
we've talked before this school about livving its tendencies. Do
few bigger deals with a few puntnas. But what about
the risk?
Speaker 4 (21:06):
Again, we'll underwrite the deal to its bespoke risk. That's
why we have an incredibly robust investment committee process. When
we do a large deal like that, we're spreading it
across many different clients, and so each individual one of
our clients. That's what I mentioned around our business model,
where we're aggregating almost brick by brick client relationships in
(21:28):
the insurance space. So every single client will have an
allocation to a deal that meets their investment guidelines, So
we're diversifying risk in their portfolio. But the aggregate buying
power of our platform, because of the breath of our
client base, that's what allows us to go into the
market and do these really large, interesting deals with excess spread.
Speaker 2 (21:50):
It seems to integrate nicely with the power part of
Blackstone's you know, sort of overall ecosystem as well.
Speaker 3 (21:58):
Yeah, exactly right.
Speaker 4 (21:59):
Look, these are themes that we have very very high
conviction is we look at large thematic growth trends, AI
the power that's required to fund that. Those are two
at the very top of the list, and when we
see these thematics across our platform, we instruct our team
to go out and originate in these markets.
Speaker 1 (22:20):
You mentioned software though, also, and that seems to being
area that some people are concerned about, giving how levit
is and how easy it is to replace it with
AI at the moment, So how are you changing your
approach to lending to that business.
Speaker 4 (22:30):
Well, look, we've been focused. It's a great question. We've
been focused on AI for some period of time, and
we've got a large team right now led by Rodney Zemmel,
who used to run the digital practice at McKenzie, who
helps us, deal by deal assess what is the risk
of AI disruption and for us as a lender, that's
a key part of our underwriting. And so we're in
(22:52):
the investment committee room. We actually for every software deal,
we have a scorecard that the team needs to fill
out to ascertain how likely is this company to be
disrupted by, how embedded are they in the workflow is,
how hard it is it to switch, how does their
technology stack up versus alternatives, And so when we're underwriting
a deal in the software space, it's not just the
(23:12):
financial underwright, it's the product underwright. And in fact, Blacktone
has a team of over five hundred technologists who all
what they do is procure software for our portfolio companies.
And so when we want to make an investment in
a software business, it's really nice to be able to
call our team and say, hey, are you buying this
for our portfolio companies? Is they're a better product out there,
(23:33):
and I think that gives us a holistic view of
the underwrite.
Speaker 3 (23:36):
I would tell you when we look at.
Speaker 4 (23:38):
Our software portfolio today, we feel quite good about the
performance and overall we see continued strong growth and free
cash flow generation.
Speaker 2 (23:47):
What are the weak spots out there right now? Like
you have Blackzone, I think probably has close to unparalleled
I guess, insight into multiple industries and probably information that
might be a little bit more immediate than what the
markets tend to see and be able to digest. So
are there any soft spots that you see developing? You know,
obviously we had terrif Liberation Day not too long ago.
(24:11):
That felt horrible, then it felt better, and now you're
sort of wondering, you know, maybe the economy is beginning
to soften up a little.
Speaker 4 (24:18):
I'd say the things we're watching is borrow or size.
We tend to focus on larger scale borrowers. I think
when we look at the market, subscale, lower middle market
type borrow wars have definitely had a harder time navigating
some of the uncertainty and volatility.
Speaker 3 (24:35):
In the macro.
Speaker 4 (24:36):
So that's one thing we look at. Sector is a
huge area for us to focus on software continues to
perform well in our portfolio, business services, insurance services, all
of those markets continue to be incredibly strong. But deep cyclicals,
high cap X investments, areas that had huge runups post COVID,
(24:56):
like freight logistics or building products. Those are markets where
we see a little bit of weakness, and accordingly, we're
pretty careful about deploying capital into those areas.
Speaker 1 (25:08):
So you've see more payment in kind defers, interests, quiet restructuring.
Is that sort of thing going on in your portfolio?
Speaker 4 (25:15):
Away from you, I would say that's an area that
has gotten a lot published on it, but holistically I
don't view that as a massive issue. If we look
at our portfolio, for example, less than one percent of
our income comes from paiding kind assets that are marked
below eighty five cents in the dollar, and so you
don't have this large issue there. More often what we
(25:39):
see in the market is new deals having a bit
of paid in kind capacity as part of the setup.
But again that's baked into the underwright and we looked
at the credit metrics, and we look at the loan
to value incorporating that as part of the structure.
Speaker 1 (25:52):
So we're not seeing more stress away from you in
other parts of the market, because that is talked about
a love as you say, and people do talk about
new entrance to the space. Been here a long time,
so you pretty you know, not as vunderable that they're
a small and new entrance that people cool tourists and
think that they might be preblence with.
Speaker 4 (26:08):
I think this theme of dispersion is the one we'll
talk a lot about. You know, I obviously have the
fortune of looking at our portfolio, which is performing extraordinarily well.
But when you step back and look at what's happening
in the macro, yes, overall, I feel pretty good about
what's there. But I think you will see some dispersion
where managers who don't have the origination capabilities or the
(26:30):
asset management capabilities are exposed to some of the sectors
or companies that may be more vulnerable in environment like that,
I think it is natural to see some uptick in
dispersion in manager performance.
Speaker 3 (26:42):
But I would tell you that's a good thing.
Speaker 4 (26:43):
And I think for us, as someone who has been
in this market for over twenty years as a proven
investment process, has lots of asset management and other capabilities
We don't shy away from that because we think our
underwriting and our capabilities on the investment side will continue
to differentiate.
Speaker 2 (27:00):
Yeah, at least looking at the BDCs. We just did
a report called the BDC Beat available to you on
the terminal, just came out today, but it sort of
looks at information that we've been writing about for a while.
We look at pick rates. We look at non accrual
rates across a portfolio of about thirty of the larger BDC's,
(27:21):
the ones that've issued public bonds, and there definitely is dispersion.
You know, the aggregate numbers haven't really changed all that much.
If you look at non accrural rates, I think they've
been between one and two percent since the pandemic. If
you look at the PICK rate, which I try to
focus on investment income pick specifically, but if you look
(27:42):
at the pickrate, it's held steady around six percent. It's
actually down a little bit this year. That surprises a
lot of people. It may even disappoint people, you knowlines, Yeah,
I would tell you that it may disappoint some people
who've sort of been rooting about now's the time that
these guys are going to get it. But it just
doesn't seem to.
Speaker 4 (28:00):
Well, I guess just doesn't see fundamentally, fundamentally, you step
back and what are we doing? What are most people
in the direct lending market doing? There writing first lean
senior secured loans at forty percent loan to value and
putting them in vehicles that are either un levered or
at most one times levered. That is not fundamentally a
risky activity. Might you see an idiosyncratic event here or
(28:24):
there where a company underperforms, of course, but the grand
scheme of what's going on in the asset class is
pretty straightforward senior secured, lower risk lending. Well, you see dispersion, sure,
but when I step back and look at what's happening
in the asset class, we continue to feel like it's
a great thing for our client portfolios, whether they be institutional,
(28:45):
insurance or individuals.
Speaker 1 (28:47):
Do you know worry a tool though, that some of
this risk is being mispriced? I mean, you know, if
every time the market grows this quickly to this scale,
something happens, and you know, I've never seen a market
that has this amount of access demand US supply no
create some kind of issues. Do you think that that's
(29:09):
me just exaggerating because I'm generalist.
Speaker 2 (29:12):
Or before you answer. One of the things I've sort
of thought about this is that this whole private credit market,
it's not a new market, it's a new form of
the market because what we're talking about private credit used
to be done by the banks. So people talk about
how much private credit is growing like crazy. It is,
(29:32):
but not overall like sort of corporate credit overall isn't
growing like crazy. It's just been transferred from the banking
sector into these other sectors.
Speaker 4 (29:42):
And again, I think this goes back to what we're
talking about about some of the misconceptions of the market. Again,
you have, you know, senior secured lending at low loan
to values that is existent for a very long period
of time. Who is doing it, the form of which
it's done.
Speaker 3 (29:56):
I think that has.
Speaker 4 (29:57):
Evolved, and I think we'll continue to evolve. Again, the
most interesting thing to me is all of the areas
outside of direct lending, because again, you've got a two
trillion dollar direct lending market, but you've got a thirty
trillion dollar opportunity set. And as we think about these
new AZTEC classes and we think about international expansion, to me,
like that is what folks aren't talking enough about here.
(30:18):
But when I went on my tour around the world,
that's where our clients were most focused.
Speaker 1 (30:24):
So talk about international expansion. There was this big you know,
April whenever it was the tires Day, pushed against American exceptionalism,
and then this idea that you needed to diversify geographically.
Is that parts of the international side or is it
a different story.
Speaker 4 (30:37):
Look, I think most of our clients will still have
their portfolios largely concentrated in the US, but I do
think there is a desire for some of our clients
abroad to strengthen their local origination, and I think that
is what is driving some of the activity, whether it's
in Europe or an Apac. And you've seen us add
to our team significantly. We just added someone in Japan
(31:01):
on the credit side, We've added someone in India. We'll
be up to one hundred and fifty people across Europe
within credit alone. So this is a market where we
see lots of opportunities for our clients. But I would
say a lot of clients in that region who haven't
had access to local origination are now trying to partner
with managers to capitalize on the opportunity set that we
know is coming.
Speaker 2 (31:22):
It seems to be a little bit of a lower
leveraged world outside the US. Would you agree with that?
Speaker 4 (31:28):
I would say generally speaking yes, But again, when we
look at most of what we're doing is unlevered. Everything
in the private investment create space, it is un levered,
and so I think that is the norm for the
vast amount of what we're doing in the markets.
Speaker 1 (31:41):
Yeah, we wrote about black crooks attempts to build up
in Asia private credit specifically and just not able to
get the deals. And you know, we need the fundraising
stumps partly because there was an acquisition going on this
separate But that do seem to be challenges when you're
raising money and you don't have enough to invest in.
So how what's your view of Asia in that context?
Speaker 4 (32:04):
Well, again, I think you've got to be prudent as
you think about your growth plans. And we've had a
team on the ground there for many years. We leverage
the capabilities and insights of our private equity and our
real estate franchises that are very strong in those markets,
and then we continue to build and I would tell
you it is logical to expect you're an Asia to
(32:29):
lag the growth that we see in the US, But
that's a timing thing. You know, all of the themes
that are driving a lot of the growth, for example
on the asset bat market in the US, whether it's digital, infra,
or energy and power, those same themes exist globally, and
the same needs for private capital, especially on the credit side,
to support those secular capital needs, those exist globally, and
(32:52):
so you're really just talking about a timing from when
you start to see it really take off.
Speaker 1 (32:57):
And in there's a big defense story. Is that an
opportunity for private.
Speaker 3 (33:02):
I think it's part of it.
Speaker 4 (33:03):
And I think the narrative around Europe definitely is a
bit more constructive than it was in the recent past,
with more supportive government around infrastructure spend, defense, defense spend.
We tend to see a little bit of excess spread
in Europe relative to the US, and we've seen a
recovery and deal activity and so all of that is
(33:24):
definitely supporting client interest in that market.
Speaker 1 (33:28):
So I take your point about the proposition from the
investment standpoint, but still we are looking at you know,
aggregated numbers from Pitchbook for example, saying that traditional private
credit fundraising is at the lowest since twenty nineteen, which
begs the question, you know why our institution investors becoming
less interested according to the data in private debt, and
(33:50):
you know, shouldn't it silly growing in terms of the
factional fundraising.
Speaker 4 (33:54):
So what we're seeing is a consolidation of where people
are deploying their capital. So the other massive theme I
see is the large managers like Blackstone who are able
to originate in scale across all of these markets, who
are able to partner with large sophisticated clients around the
world to deliver customized solutions. We're seeing a consolidation of
(34:17):
the capital there. And so a big theme that I
see around the world is these multi asset credit partnerships
where we partner with a sophisticated institution and we figure out, Okay,
here's all the things we're seeing across Blackstone, from direct
lending to asset bat finands, to infrastructure credit to private
ig all over the world. How can we work with
(34:38):
you holistically to partner across all of those things that
we're seeing to deliver a resilient, diversified, customized portfolio that
delivers the best of all of the things we do
across Blackstone in credit, and so we're seeing that from
our largest institutional clients, We're seeing that from our insurance partners,
(35:00):
and increasingly individuals are saying, Okay, how do I access
more of the credit opportunity beyond just direct lending?
Speaker 1 (35:08):
And does that mean that only those sorts of players
will ultimately exist in this market?
Speaker 3 (35:13):
Is that that scale matters?
Speaker 4 (35:14):
You brought it up earlier, James, I think, more than
anything in credits, scale is a massive differentiator. Allows you
to do those large deals which we spoke about. It
allows you to access the biggest and best borrowers. It
allows you to offer unique solutions to clients, and it
allows us to invest in some of those resources that
I mentioned on the value creation side, on the asset
management side, that allow us to deliver performance on behalf
(35:37):
of our clients.
Speaker 1 (35:38):
Do you need to get bigger?
Speaker 4 (35:40):
Well, I think you will see us continue to scale
because scale is a huge advantage. And there's white space
I mentioned. I mentioned Europe and APAC as an area
of white space. I mentioned private investment grade where I
think we've only scratched the surface, and so I think
you will absolutely see us get.
Speaker 3 (35:56):
Bigger in those markets.
Speaker 4 (35:57):
And I think the other thing we haven't spent a
lot of time on and this conversation is deal activity
is picking up in a very material way. And I
don't know that this has really been picked up on,
but this summer was the third highest summer for M
and A activity since two thousand and eight. August was
the single biggest month we had in investment committee in
(36:18):
the last three years.
Speaker 3 (36:19):
And August is supposed to be a slow month. We'll
close thirty deals.
Speaker 4 (36:23):
Basically in the next two weeks, and so we are
seeing a significant uptick in deal activity across all of
our markets because the underlying macro feels a little bit better,
because you're seeing rates and cost of capital coming down,
because you're seeing increased confidence in strong corporate earnings. And
so I think this deal machine that has been a
(36:43):
little bit slow to get out of the blocks over
the last couple of years, I think you're at a
real inflection point. I think that's another reason why we're
seeing strong client interest in credit and another reason why
scale and flexibility of capital and a broad capability set
are the big differentiators.
Speaker 1 (37:00):
Evaluations are still very high.
Speaker 4 (37:02):
For the right assets, and again I think the right assets,
you are seeing buyers, whether that's strategic or financial buyers
step up, and I expect to continue.
Speaker 1 (37:11):
To see that and LBOs as well.
Speaker 3 (37:14):
You're starting to see it. You're starting to see it.
Speaker 4 (37:15):
It was a market that for a while was just
characterized by refinancings, and I think you're going to see
deal activity pickup. And like I said, we have. We've
had a very active August and I expect the fourth
quarter to be quite busy as well.
Speaker 1 (37:29):
Is that more of a direct lending opportunity or is
it a leveraged loan, high yield traditional finance or is
it a mixture of all.
Speaker 4 (37:35):
I think it's all the above. If you look just
in the last week to ten days, We've announced a
deal with Parkplace, which is a data center services provider.
We've announced a deal with just Right. We've announced a
deal this morning with am Trust. We did a big
data center deal with Aligned. We probably announced half a
dozen deals just in the last week. And that is
(37:55):
a good indication of the deal activity and pipeline we
have at our at our fingertips today.
Speaker 1 (38:01):
So it continues through the fourth quarter into next year.
Speaker 4 (38:04):
You think this I think, look, obviously we're we're in
a world with lots of volatility and macro question marks
out there. But I think if we stay in the
current backdrop we're in right now, I think that's going
to be a really good thing for deal activity.
Speaker 2 (38:17):
And the issue of suitability has come up also, how
how do you address that?
Speaker 4 (38:22):
Well, again, I think each client in their advisors will
have to make the determination of how much illiquidity they
can have in their portfolio. But when you think about
something like retirement savings, by definition, that is a longer
dated decision, and as a result, there should be some
amount of illiquidity that individuals can tolerate within their portfolios.
Speaker 2 (38:44):
Maybe not for me.
Speaker 4 (38:46):
I'll let you your own decision, David.
Speaker 1 (38:48):
As this monkey becomes called democratization, that's what people have
been talking about for well, and more regulation, presumedly more transparency.
Does that not a road that one hundred fifty to
two hundred basis points premium on private ve's is public?
Speaker 4 (39:04):
Well, again, I would separate those two things, James. I
think what we deliver on a deal by deal basis
for our client, for our borrowers, by built bringing our
capital all the way to them and delivering a customized
solution alongside value creation services, alongside all the other things
that Blastom delivers its borrowers. I think that's one thing
on the deal side. I think that will continue. On
(39:26):
your common around transparency, we embrace transparency fully.
Speaker 3 (39:31):
David knows this.
Speaker 4 (39:32):
If you look at any of our BDCs, you can
pull up a ten Q and see every position we
have and we can see you know where we're marking
them and when they mature, and what the interest rate
is on them.
Speaker 3 (39:42):
And I would.
Speaker 4 (39:43):
Tell you that is great for clients to be able
to have that transparency, and so we welcome.
Speaker 1 (39:49):
That, and you'll still trading them as well.
Speaker 3 (39:52):
Well. We haven't been as.
Speaker 4 (39:55):
Engaged on trading private credit. I think most of our
clients think about private credit as just that they want
to earn that liquidity premium. In most of our borrowers,
they partner with Blackstone because they want Blackstone to own
the loan, not whoever we might trade it to. And
so I think we'll continue to look at this asset
class as one where we're originating to term on behalf
(40:17):
of our clients.
Speaker 2 (40:20):
Yeah, and just by the way you do, you did
bring up the issue of transparency and just so listeners
understand the all of this information does reside in the
in the public markets and SEC documentation. It's also available
on the Bloomberg terminals, on our BBC page and on
some of our other loan pages, so you know that
information has been transferred to the terminal.
Speaker 3 (40:41):
I've been on those pages. I must say, and.
Speaker 1 (40:43):
You do a great job and to stay until do
you need to acquient other thumbs? Are you going to
grow organically? What's the longusen vision and sons of youal platform.
Speaker 4 (40:53):
Look, we've done really a remarkable job growing our business,
and we've done it virtually all organic. Our bias is
to build from within. We've got a proving capability of
doing that. We've got extraordinary, extraordinary people all over our organization.
We've got seven hundred and fifty people in credit. When
there's new opportunities, we want to tap our existing team
(41:14):
to go capitalize on it. And we were talking about
Asia Pacific and what we've done there, and that's another
that's a great example of an area where I think
you'll see us grow organically.
Speaker 2 (41:24):
Do you see more insurance partnerships coming down the coming
down the line? It is interesting. I think you know
the different approaches that alternative asset managers have taken to insurance.
You know, obviously Apollo is all in the theme, Kkar
is all in with with Global Atlantic, and you guys
have taken a different attack on that where I think
you own ten to twenty percent of AIG, Is that right? Corbridge? Corbridge?
Speaker 4 (41:50):
Yeah, we had a minority staking Corbridge. But you know
the model that we have again very different from what
those others are doing where they've kind of taken whole
ownership of an insurance balance sheet. For us, it's really
an asset management relationship, yep.
Speaker 2 (42:03):
And do you see more of these partnerships coming down
the line.
Speaker 4 (42:06):
It wouldn't surprise me, right. I think when you look
at insurers, private credit is a really nice fit for
what they're trying to do in terms of excess spread,
low risk, taking some inliquity to do that. The challenge
is origination, and so if you're a standalone insurer and
you don't have either an asset management partner or a
(42:28):
balance sheet partner to help you originate, I think it's
logical to expect to see more of that. I think
the models that people employ will continue to look a
little bit differently, and the ability for folks to execute
to originate in scale, I think that also will look
very different. It's nice for us to have, you know,
one hundred and twenty five billion dollar head start in
(42:50):
private investment grade when we go and we talk to
some potential clients on the insurance side.
Speaker 1 (42:56):
Great stuff. Michael Zowski, CIA of Blackston's Credit and Insures Group,
many thanks for joining us on the Credit Edge.
Speaker 3 (43:02):
Thanks for having me guys, and.
Speaker 1 (43:03):
Of course very grateful to David Havens from Bloomberg Intelligence.
Thank you very much.
Speaker 2 (43:07):
Great being with your for.
Speaker 1 (43:08):
Even more credit market analysis and insight. Read all David
Havees's great work on the terminal. Bloomberg Intelligence is part
of our research department with five hundred analysts and strategists
working across all markets. Coverage includes over two thousand equities
and credits and outlooks on more than ninety industries and
one hundred market industries, currencies and commodities. Please do subscribe
to the Credit Edge wherever you get your podcasts. We're
(43:29):
on Apple, Spotify and all other good podcast providers, including
the Bloomberg Terminal at b pod, Goo gear us A
review tell your friends, or email me directly at jcromb
eight at bloomberg dot net. I'm James Crombi. It's been
a pleasure having you join us again next week on
the Credit Edge
Host
James Crombie
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