In the time since private credit became Blackstone’s largest business, the sector has gone from star to a thorn in the industry’s side.
A wave of nearly $20 billion in redemptions from corporate-lending funds for wealthy individuals has left the industry on the defensive. And on Blackstone’s first-quarter earnings call, its leaders blamed “external assertions” from the press, social media, and other commentators for slowing investor demand and driving concerns of systemic risk and potential investor losses.
Steve Schwarzman, the firm’s founder and CEO, said that the firm is “navigating an intensely negative campaign against the private credit sector,” and that we should “separate the fact from the fiction.”
While retail investors have been withdrawing money, Blackstone says institutional clients are still pouring in, suggesting the sentiment is driven by perception rather than performance.
“What’s been more challenging is that some of the social media and press reporting is so different than the facts that we see,” Gray said.
Private credit accounted for more than half of the $68.5 billion in inflows across the firm, and the troubled direct-lending sector accounted for a quarter of the firm’s total inflows.
“This success in fundraising is in sharp contrast to what one reads regularly in the press about weak institutional demand for private market strategies,” Gray said, citing the firm’s oversubscribed, $10 billion opportunistic credit fund, “one of the largest institutional credit fundraises in our history.”
The “striking” difference between institutional and insurance clients and retail investor sentiment is “as sharp of a contrast as I’ve ever seen,” Gray said.
Schwarzman also sought to tamp down fears that private credit could pose a systemic threat, citing comments from Treasury Secretary Scott Bessent, Federal Reserve and Securities and Exchange Commission leaders, and finance executives, who he said do not view the asset class as a systemic risk.
“The key question is whether private credit is a good product for investors and can it continue to deliver a premium to liquid credit over time?” Schwarzman said.
As you might expect, Schwarzman’s answer is yes. He cited 9.4% net returns on non-investment grade private credit since inception nearly 20 years ago, “roughly double the return of the leveraged loan market.”
Returns, however, were lower over the last twelve months in private credit, at 5.7% net of fees, and actually flat, net of fees, in the first quarter.
The past 20 years have had many macroeconomic bumps, and the Iran War and rising defaults could present their own challenges, but Schwarzman said that low fund leverage, meaningful capital reserves, and current income generation will help drive “a premium return to liquid markets over time.”
As for redemptions, Gray said that a “smaller number of large investors who are double the size” of the average Blackstone Private Credit Fund investor were driving them.
“It’s sort of the bigger boulders as opposed to the pebbles where you get more movement in terms of redemptions,” Gray said.
The problem, Blackstone president Jon Gray said, isn’t their relationship with “obviously sophisticated” financial advisors who sell these products and have a high view of the firm. Nor is it a lack of transparency about liquidity constraints.
“If you look at BCRED on the cover page, there are six bold highlighted lines talking about the liquidity limitations in the product,” Gray said.
He pointed to BREIT, which is finally seeing net positive inflows after its own redemption challenges. The “number of competitors” has diminished for BREIT after the shakeout, and Gray says there’s a likelihood of the same for BCRED.
“I do think we could see a changing of the guard or a winnowing a little bit through this process,” Gray said.
Read the full article here
