Transcription
Welcome to Blackstone's webinar on private credit and what the headlines are missing. Blackstone President and COO John Gray and Global CIO of Blackstone Credit and Insurance Mike Zawadzki are here to explain the state of private credit in today's economic environment.
All right, John, let's dive in. Let's start big picture like you do so often for us. Let's talk about the macroeconomy. Let's talk about what's going on in global markets. We have public data, we have government data, but you've got a lot of Blackstone private data. You speak with business leaders, political leaders. How are you feeling about the global state of affairs?
Well, obviously we're in an uncertain moment and our thoughts are with all the service members in the Middle East right now, our friends in that part of the world. Um but I would say stepping back, we probably feel a little bit better, maybe materially better than the headlines. And I'd say that for a few reasons. First, just putting this moment in perspective, if you went back over the last 6 years, this is the fifth time where we've had a pretty significant crisis in the first 4 months of the year. We had COVID, obviously. We had the Russia-Ukraine war. We had uh Silicon Valley Bank. We had Liberation Day last year. Now this conflict. In each of those cases, as investors, it was easy to get very concerned. And potentially do something dramatic. And in retrospect, you were best off being patient and being long-term in nature, which is what we try to do. And I feel like this is another moment. Somehow this will get resolved. And then what will come to the fore is what's happening in the underlying economy. And there I would say to your questions, the data we see from our 275 companies and 13,000 pieces of real estate is pretty encouraging. Revenue growth at our companies continues to be strong. There's a little bit of weakness in middle and lower end consumers. Um when we look at the overall picture, that feels good. And when we look at inflation, we're seeing, yes, there'll be a spike in oil prices. Yes, you know, the tariffs are still working their way through the system, but rental housing costs are coming down much more than the government data says. We've seen shelter costs come down from growth rates of call it 4.7 to low 3s over the last 2 years. And I think the Fed will have the opportunity to lower rates later this year. And so, when you have a healthy economy, falling inflation, and over time rates coming down, that's a helpful backdrop for companies, for consumers, and obviously for investors.
The other thing that I think is so important, and we call it the main thing, is what's happening with technology. Which is this enormous investment boom, $700 billion by five companies being invested, even more on top of that when you think about data centers and chips and energy, which is providing an enormous catalyst for the economy in the near term and over the next few years. And what should lead to this long-term sort of productivity boom that we think that's going to come out of this. As the AI gets diffused into the economy, as it gets deployed in our personal lives, across companies, I think it's going to have a powerful effect. If you go back to the 1990s, we saw this. But now we're going to see it on much bigger scale. And I think that will accelerate economic growth. I think it will accelerate earnings growth and again be good for investors. The big asterisk, actually, is not the near-term volatility in the world, it's the disruption that's going to come from this technology. And we'll talk about that, I'm sure, in our discussion, but it's really the way businesses are going to be changed and how do you invest against that? Where do the risks lie? That to me as an investor is a big thing we're thinking about. But when I look at collectively the overall backdrop, it feels certainly a lot better than what I read every day.
>> Materially better. That stands out to me. Okay, so private credit. That's the subject of this webinar. But before we kind of dig into the tougher questions, let's just level set here. What is private credit? Why has it gotten so big? And why is everybody so focused on it right now?
Well, I I guess I'd start with it's pretty basic. It's basically non-bank lending. And and the reason it's grown so much is a little bit, you know, going to technology, what did Amazon do in the retail business? They essentially brought goods directly from the manufacturer, let's say, directly to you as a consumer. And the concept of physical stores got disintermediated and they created a better customer experience in many cases. And there's a similar dynamic at play here in private credit. Because what we're doing is taking either institutional capital or individual investor capital and we're bringing it right up to the borrowers. And in that process, we're lowering a bunch of costs, origination, securitization, financing costs, and allowing the investor to get a higher return. Now in exchange for that, the investor does give up some liquidity and that's what the trade-off is. [snorts] That's basically the trade-off at Blackstone, which is you trade away some level of liquidity for higher returns. But that's what's been happening in both non-investment grade credit, which was what BCRED is about, but also in the investment grade world. From the borrower's standpoint, it's often a better experience because they get certainty. Because the entity, let's call it BCRED, is delivering them a fixed price cuz they're storing, they're going to hold the loan, as opposed to a financial institution who may be selling it downstream and say, "Hey look, the pricing I'm going to charge you may change depending on where I sell the ultimate product." And then from a financial system standpoint, it's beneficial because it's a lower leverage way generally of lending. Which is if you think about what we do for institutions, which is often unleveraged or in the case of BCRED, less than one times leverage, a fraction of financial institutions, it's bringing down the amount of leverage in the system. So that's beneficial.
Why is this happening now? Uh you know, I think there are a few reasons. There were a few high-profile bankruptcies that in the fall of last year, interestingly, that were not private credit originated. But the sector has grown a lot. There are market participants who don't love this new dynamic, um who would love to see private credit go away. But I think because of what I've said, which is the fact that you can deliver the the product, essentially the capital, directly to borrowers and offer certainty, that dynamic will allow this to continue to grow. Could it slow in some sectors for a period of time as we've seen now because there's uncertainty? Yes. But in the fullness of time, if you deliver a higher return to investors, that's where the capital will flow. And that's why I continue to believe this sector will grow both for non-investment grade as we're talking about today, but also investment grade credit.
Okay. So now we have to get a little tougher now that we've sort of laid the landscape for where we are. There's been discussion about defaults, potential worry about massive defaults. If these are non-bank loans, certainly they there are still terms. The loans need to be paid back at a set timetable with interest. Is there a worry that we are going to see a lot of these companies unable to repay these loans and thus default?
I think short answer is lots, no. But will there be an increase in defaults off of very low levels? Yes. And we've been saying that for some time. These are non-investment grade loans. If you look in the leveraged loan and high yield markets, the liquid markets, the average default rate is 3%. That's part of what's priced into these products is that there will be some level of default. What I tend to look at is look at the overall picture. Because a lot of what you get in the press is one individual credit. Within BCRED, we have 700 different loans in there. So, if you look at the aggregate portfolio, EBITDA or cash flow in the portfolio is up about 10% over the last year. Generally pretty good. Um debt service coverage ratios have gone from 1.6 to 2.1 times. That's a reflection of cash flow growth, but also the Fed lowering rates. Those are generally not aligned with a sharp uptick in defaults. Now, there will be some increase. And then the question becomes, when you have challenged credits, how do you treat those? Well, if you look in BCRED, the bottom 5% of the portfolio of these senior loans is marked at 76 cents. That is designed to reflect the issues those companies are are facing. So, yes, there will be, as there often is with credit and particularly non-investment grade credit, there will be losses. That's why you mark the book. But the overall picture, which is coincident with a pretty healthy economy, looks pretty good to us.
So, is that bottom 5% concentrated in software? That seems to be a lot of the worry. You're talking about AI as a force for good, but there's a worry that it's going to disintermediate a lot of these software companies basic business model.
Well, I think there's some software businesses. There's one company Medallia that we've talked about and there could be more although interestingly that did not have to do with AI impact. I think again it's helpful to look at the big picture. If you think about software companies I think there will be disruption. But again I talked earlier about Amazon. If you think about retailers going back 25 years ago back then people would have said all the retailers would be knocked out. And today I think Walmart stock's up ninefold, Costco's up 27 times, TJ Maxx up 45 times. Now there are plenty of Toys R Us, Kmart, Sears. So I think there will be a dispersion of outcomes. And I think what's important is within software is this a system of record? Is it a company that is very hard to dislodge? And also does the management team adapt to the new world? And I think in many cases those companies will continue to do well. Interestingly last year our software companies were our best performing companies from a cash flow standpoint. I think the other really important thing is I think people forget to distinguish between equity and debt. So we've seen on the stock market software companies trade off. And in the enterprise software area we've seen their multiples go from 18 times to 12 times. Yet when you think about the loans we made we only lent 37% loan to value. Very senior in the capital stack. Our average loan is six and a half times debt to EBITDA. So well below where those companies are trading publicly. And so if the question is have we seen erosion in the equity value of software companies? Yes. But the debt being senior is more protected. Again, will there be situations where companies get in trouble? Certainly. That's non-investment grade credit. Could there be incremental because of disruption? Yes. But when you look at the overall portfolio and where you sit senior in the capital stack and the fact that in the software businesses the average sponsor put up $3 billion junior to us, that gives us an enormous amount of comfort.
Okay. Okay. You talked a little bit about valuation and there is criticism there but it's not as transparent in private credit as in some other investment vehicles. Why shouldn't that be a worry for me if I'm invested in private credit?
Well, I think what's really important cuz there's all this talk about transparency that private credit's opaque. The reality is if you look at BCRED every quarter we put every loan out there publicly. You can look at it, how much we invested, where we carry that loan. That's more transparent. There's no financial institution that does that. So it's pretty clear where this is. Second thing I'd say is we have an incredibly rigorous valuation process that also utilizes outside firms to check on what we're doing, our process, our valuations, all of that. And the third thing I'd say is we went through this with BREIT which many of our clients who are investors in BCRED continue to be investors in BREIT or were investors in the past. And I remember vividly three, four years ago your valuations Blackstone, they're not right. You know, why should we trust you this? We said well, same thing, rigorous process, third parties, we real time updating. And we subsequently after the real estate market went down sharply, we sold $35 billion of assets at a premium to our marks. And we were able to provide liquidity to our investors who wanted it. We were able to continue to protect capital, deliver strong returns, all of those things. And the investors got a real proof point on our valuation process. Now when all of this is happening no one writes and says, "Hey, we were wrong by the way on the BREIT situation." And I feel the same way again. Our team, you're going to hear from Mike here in a little bit, is incredibly rigorous around valuations. It's so important. We have to be because we're in this business for the long term. It's not about one vehicle. It's about building trust, delivering for our customers over time. And if there are bad facts, if a company's performing poorly, we must mark it down. That's part of our responsibility.
>> Let's go a little bit further back and talk about the global financial crisis. There have been headlines and questions. Is this like what we saw preceding the global financial crisis? From where you sit do you see those parallels?
No. I mean which when you think about the financial crisis the investment banks were 25 to 40 times levered. Uh when we're talking about BCRED which is the largest non-traded BDC we have 50 billion of equity and 30 billion dollars of debt. So less than one time. So that seems pretty different to me. Also the liabilities of the banks came due every day. They were deposits, repo, commercial paper. These vehicles have none of that. They have much longer duration liabilities. So none of that mismatch between assets and liabilities. And the third thing was credit. Remember the largest asset class in the world, US housing, was in real trouble. Subprime had north of 20% defaults in 2007. And when you compare that to what's going on today, low single digit default rates which we've acknowledged you could see a bit higher still nothing like what we've seen there. And so I actually think it's almost reckless when people go out and compare this. It doesn't mean that investors returns in certain asset class can't be lower. But back then you were talking about a highly leveraged financial system that had great mismatch in terms of asset liability and huge underlying credit problems. And those conditions do not exist today.
>> Materially different I would say.
>> Materially different. Yes. But there is still some fear or maybe it's misunderstanding that has driven investors to seek redemptions at a higher level than typical for this product. Why doesn't that rattle you?
Well, I think the redemptions if if people are on TV or in the press every day saying this is very, very risky obviously that's going to generate a response. And so to us the key remains not how many fans are in the stands but what the scoreboard is. And so for us the key continues to be are we delivering a premium return to what you can get in liquid non-investment grade credit? You can't be immune from the world or where the Fed sets rates but can you focus on delivering that? And so I think the reason I'm calmer is because I recognize that long term this is part of what happens. These products were designed in a certain way. They are designed to provide a certain amount of liquidity but also to have certain limitations and they're designed to deliver a premium return. And just the idea that redemptions have gone up and people are responding to very negative um you know, information that's out there. What this will show in the test of time is these products can deliver. And I think what's really interesting is which is different than the BREIT experience is that loans get paid off. So whereas you had to sell properties, in this case, you know, last year we had 15% of the loans pay off. [snorts] Obviously there'll still be some investors who are investing. And so to me the way I think about this is we continue to put our heads down, we deliver for customers. If we do all of that, it'll work out in the end. Yes, there's a lot of noise but these these products are well designed, well thought out and the team does a great job managing them.
Before we let you go, I would like to sort of dig in on what happened last quarter with the redemption request.
Well, what we did was because there was so much concern out there. And again harking back to our BREIT experience, we had all this noise. Back then we put some capital in because we wanted to show alignment with our investors. And what we did here even though we went over the 5% caps and there was plenty of liquidity in the vehicle, we said, "Look let's pay it out and let's do it using some capital from the firm's balance sheet to show alignment and significant capital from the individuals, senior leadership of the firm, senior leadership in our credit group just to show alignment. We believe in this product. We're going to put our money where our mouth is." That's basically what it was about to provide clarity in an uncertain moment. Now as you look forward we're just going to have to see what the facts at that time are. And I would go back to this idea that the products were designed in a certain way. They're designed to protect the existing investors and they're designed so that they aren't forced to sell assets and harm returns. Again on BREIT, if you go back to that the product over nine and a half years we had a period where we were above the redemption caps. People got their capital back substantially in four months instead of one month. And over this 9 and 1/2 year period, we've delivered a 65% premium to the public read market. So, if you accept the fact that these products are designed in a certain way, they're not designed to be daily mutual funds. They're designed to deliver a premium return, but you give up a little bit of liquidity, then you understand that what's happening, how you manage this, it can all be done in a thoughtful way. And so, for us, focus on the long-term, focus on delivering for our clients, that's what it's all about. We think about this wealth business in the context of a long-term relationship with financial advisors, with their clients. We want to deliver for them. That's the most important thing, and that will guide us in every decision we make with BCRED. Performance is always what matters at the end of the day. That's what you always say. That's how we feel. Jon Gray, thank you so much. That was really, really thoughtful. And now I want to bring in Blackstone's resident private credit expert, Mike Zuwatsi. He's going to take us a little deeper and further separate some fact from fiction. So, Z, it's all yours. Take it away.
Thank you, Jon and Courtney. Um you know, with so much focus on the headline risk that you guys just hit very, very well, I thought maybe I'd just step back and center my comments today on two pretty fundamental questions I think all investors should be asking. Number one, why should you even own private credit in your portfolio? And I'll talk about what we're seeing from our institutional client to support that view. And number two, if you do decide to invest in private credit, how do you make sure you're partnering with the right manager? During periods of higher uncertainty like today, who you invest with really matters. So, maybe I'll start with that first question. Why should you care about this asset class at all? If you think about the standard 60/40 model portfolio, the 40% allocated to fixed income or credit, it's really designed to deliver four important attributes. Income, consistency, diversification, and downside protection. Private credit has actually outperformed liquid credit on each of these metrics. It's why we sometimes call it the better 40. It delivers on what the fixed income portion of your portfolio is supposed to do. Now, of course, you need to give up some liquidity to capture those benefits, but I think Jon's comments covered that while we expect defaults to normalize from historically low levels, overall portfolio fundamentals, they're holding up well. The system has low leverage. The downside impact on returns is manageable. And so, if you look at it in that context, income, the most fundamental component of that better 40, remains incredibly valuable. So, this Amazon model, this direct farm-to-table model of private credit that we do that cuts out leakage, captures origination premium, it's consistently generated about 200 basis points of excess income above public credit over time. And as you can see on this slide, when you compound that spread premium, it really adds up. Over the last decade, what that means is investors earned 1 and 1/2 times the income investing in private credit versus liquid credit. And while income levels over time will be in part driven by base rate movements, we view that excess return as a durable feature of private credit that has existed for decades, and we expect it to continue moving forward. And it's important to remember that volatility like we're seeing today actually creates opportunity, and you need to stay invested to enjoy this power of compounding income and allow timely deployment, disciplined underwriting, active management to win out. Income also happens to be the most consistent driver of return in credit investing. And the income premium is actually why private credit has outperformed liquid credit for nine of the past 10 years, including last year in 2025. Higher income, consistent performance, those are the things that have helped BCRED outperform liquid loans by 360 basis points since its inception about 5 years ago.
Diversification. So, another interesting feature of private credit is the expansion of the opportunity set beyond just sponsor-backed direct lending. I think we're still in the very early innings of this asset class, and we view the total addressable market for private credit around $30 trillion over time versus just $2 trillion today. Now, most of that growth will come from what we call financing the broader real economy. Think about the rising capital needs in hard asset areas like digital infrastructure to fund AI growth, which we spoke about earlier, energy and power. All of these are high-conviction themes for us here at Blackstone. when you capture that excess spread across that broader opportunity set, that offers nice diversification for from corporate risk, helps improve portfolio resilience, and really mitigates risk that um come with being isolated to a single asset class. So, we've hit on income, we've hit on consistency, we've hit on diversification. The fourth, and I would say maybe most important part of that better 40 is capital preservation. And I would say this piece is always top of mind for us. It's easy to forget amidst these headlines that credit is designed to be a defensive allocation. Senior secured positioning with low leverage, remember our average investment is made up of 40% debt and 60% equity at the company level. When you combine that with current income, that's historically been a great source of downside protection. And so, when you look over cycles, whenever there's market volatility, the thing to look at is how does performance compare in private credit relative to the broader markets during those tough periods of time? And the answer is, when the S&P has had down years, private credit has had some of its best outperformance. Look here at this chart at 2008, 2018, 2022. In those down equity markets, private credit has acted as a shock absorber for diversified portfolios. And in two of the three periods, you actually saw private credit generate positive returns. And even during the GFC, when the S&P and leveraged loan markets saw significant drawdowns, private credit was actually the most defensive, down only mid-single digits. And I think this is really important data to be aware of, especially since today we're in another period of heightened volatility with the S&P dropping 5% in the first quarter of 2026. So, actually another way to think about the defensive nature of the asset class is to look at a downside case. And a downside case that we sometimes talk about is if you look at the bottom 10% of our portfolio, just assume all of that defaults, and let's say we only recover 50 cents on the dollar on those defaulted loans, that's way weaker than what we've seen um historically. If that happens, the impact is about 300 basis points of return per year over a 2-year period. And so, today, if you're yielding 9 to 10% in a private credit vehicle, you subtract 300 basis points from that, you're at around 6 to 7%. All else equal, that is what happens um if you see that level of default. So, it's really the combination of durable outperformance relative to liquid credit, which we've hit on a couple of times, combined with downside protection during turbulent markets that have been the hallmarks of the private credit asset class over a long period of time.
And I thought it might be interesting to share how institutions are reacting to the noise we're seeing in today's market. I think what people might not fully appreciate is that private credit still overwhelmingly institutional owned. About 80% of the investment investor base in the market today in private credit, it's institutional backed. And so, if you step back and actually look at the overall leveraged finance universe, non-traded BDCs, the part of the market that's getting all this attention, these semi-liquid products, it's about a $300 billion asset class. It's less than 10% of the overall four or five trillion dollar leveraged finance ecosystem when you include bank loans, when you include high yield. And that matters because institutional investors who have invested in private credit for a long period of time, they see the resilient fundamentals, the growing opportunity set, that durable excess spread relative to liquid credit, and they actually continue to increase their allocations. Now, they're acknowledging the concerns that we spoke about earlier on this call, but we spend the time to address those questions, just like we're doing here. And the result is we've seen record institutional inflows into our credit business. Q4 was our strongest quarter ever of institutional credit fundraising at Blackstone. And that momentum has actually continued into the new year. In fact, in just the past couple of weeks, we've received many calls about how we can partner to take advantage of the volatility and opportunities that are emerging in the market today. And some of you may have seen the news story about us reaching the $10 billion hard cap on our latest opportunistic credit fund, which is our best ever raise in that space. And so, I think that shows you how institutions are acting in this environment.
But, let's say you're set on private credit. I think equally important, maybe more important, is how do you make sure that you're evaluating managers against each other because not all managers in this space are created equal and I think with dispersion increasing, where you invest, who you invest with, it matters a lot more when we look forward than we it did maybe looking backward in that very benign default environment that we spoke about. How you underwrite, where you sit in the capital structure, how you actively manage assets, those things ultimately drive outcomes, especially during a period of heightened uncertainty. And at Blackstone, we've stayed focused on all of these areas. We've built over time a 125-person office of the CIO that I oversee. It explicitly is focused on portfolio management, risk mitigation, that's supported by the data across over $500 billion of credit assets and over 5,000 issuers that we oversee here at Blackstone. We have over a 40-person portfolio and asset management team dedicated to supporting our companies in good times and bad. We've delivered over $5 billion of value through our dedicated value creation program. If one of our companies does default, that can just be the beginning of our work to turn that business around and drive a better outcome for our investors and we've fully developed our operating capabilities. We've got private equity DNA at Blackstone to do this. Now, we also have a large dedicated capital formation team that focuses exclusively on maintaining a strong balance sheet, low cost, diversified, resilient, with plenty of liquidity to weather any downside scenarios and that's why our BDCs are recognized as among the highest rated in the market based on leading third-party credit rating agencies. So, that playbook that I just went through, that reflects 20 years of direct lending experience and 40 years of private equity expertise at Blackstone. And and lastly, not to be understated, our long-term transparent our long-term track record of bringing transparency, doing the right thing for our clients. John gave the recent example of how we managed through a tough period for BREIT, how we invested into BCRED last quarter to show alignment, conviction in the fund. Delivering for our investors is always our number one priority and that's how we built the business, that's how we built the BCRED portfolio. Focus on the fundamentals, be resilient through volatility, of course, manage bumps along the way and ultimately achieve outperformance through cycles, which, as I mentioned, our leadership team has a lot of experience doing. Thanks for listening and back to you, Courtney.
Thank you so much, Z and John, for being here and for your insights. As discussed, there are a lot of myths circulating. We hope this session helped you walk away with the facts. And as always, we're here to answer your questions as a trusted partner. We invite you to explore more on the myths versus facts we discussed today, along with video content from our senior leaders on the private credit environment. Please visit blackstone.com/insights. Thanks again for joining us today. We look forward to continue dialogue in the future.