Blackstone Says Private Credit Market May Surge 20-Fold

Want to hear from you. How big do you think it'll all get? Well, First off, Shonali, thanks for having me. Great to be here. We say 25 trillion, so I've heard fifteen, I've heard 25. I've heard up to 50. What's really interesting is that the market size today is only 1.7 trillion. And so when you think about that massive white space of growth ahead, I hear people say early innings. I think we're still in batting practice when you think about the opportunity set ahead and it's really 3 generational mega trends that are driving that. One, higher base rates, you can get equity like returns with credit risk to the secular shift from banks to private credit providers. And three, and this is really important, the proliferation of strategies that we can offer clients to access the private credit opportunity, everything from investment grade through sub investment grade, corporate credit, real asset credit, structured credit, we're really covering the waterfront in terms of the opportunity set. It's pretty interesting. 1.7 trillion to 25 trillion is a pretty massive jump. How fast do you get there across the market and what is the biggest driver of growth within that? Look, I think the biggest piece that's going to unlock that is this private investment, great opportunity set, which is really huge and really attractive for clients because it offers excess spread with very low credit risk and it offers diversifying exposure and is like asset backed finance and infrastructure credit, which are really compelling in today's market. Now it's interesting you see so much of the market jumping into asset that they space finance, asset backed finance, whatever you want to call it. But if you see what's happening with Basel 3 end game, for example, there's a lot of expectation that that acceleration will just get faster. Explain that movement. Well, there's a couple things happening there. Number one is just the sheer market size. Again, asset backed finance we we size at 5 to $10 trillion. So you have a huge market #2 it's much earlier in its transition from the banks to private lenders. 90% of that market is still done by banks. And three, and this is really important, you're financing the real economy. You're not waiting for M and A transactions to happening. You're financing consumers, you're financing data centers, you're financing energy transition, huge growth capital expenditures. That's what's driving the growth. How much are those types of transactions now becoming more attractive for firms like Blackstone relative to that M and a private equity backed financing? Well, they're really attractive relative to the risk. And so if you look at what we've done in that market, we've originated billions of dollars of single A rated paper at 200 basis points of excess spread above what you would buy a comparably rated corporate investment bond. And what's really interesting is if you think about these areas like energy transition and data centers, they are massive opportunities with trillions of dollars of capital that's required to fund them. And we've got incredible expertise not just in credit in blast zone, but broadly across our entire franchise and real estate, private equity and infrastructure. You know, when people look across the credit landscape right now, they say, OK, well, you know a lot of people like floating rate private credit here, but at the same time you look in the public markets and spreads are just incredible levels and you do both from where you're sitting. So what do you prefer at this point in time? Well, look, I think you're absolutely right that that public market spreads, whether it's high yield or investment grade, they've got an awfully tight because of strong technical flows into those markets seeking absolute yield. But we have a choice. We have a choice to go to markets where we see excess spread, illiquidity, premium and that's why we're highly recommending our clients to enter these areas of private credit. Where's the risk as the market is pricing as though there is no risk, frankly, that there's a very little risk of default, But it can't be true that in this environment that you will see nothing go wrong just for the pure fact that people are going to be refinancing into higher rates. Well, I think we need to level set on a couple things #1 when we look at the broader market, we see really strong economic resilience, and that's showing up in credit performance #2 if you look at where a lot of these activities are, some are investment grade, which I highlighted. So quite resilient, but even on sub investment grade, the vast majority of what we're doing is senior secured first lien, 40% loan to value lending that inherently is not a risky activity. And so you have this broad picture of health. And So what we focus on is where are the tails, where might you see dispersion. And I would say we're seeing that more often in subscale borrowers who have a harder time dealing with this environment and some out of favor sectors. And if you look in the public market, that tends to be the cyclicals and secularly declining names. A little bit of a nerdy question here because something that a lot of people have been talking about in the market is you see a lot of publicly traded BDC's and these are a good reflection of the private market, right? You've had Moody's downgrade a couple of them, but more importantly, you have some trading below the net asset value. The question I'm getting from a lot of people is should they be marked at lower valuations? Is this a reflection that they are still marked too high? I think it's a reflection of buyers of those securities differentiating based on quality. And you're right, Moody's has done that. They've downgraded some, they've upgraded us. When you look at default rates in that market, you see some dispersion and invest Products like ours are trading at big premiums to NAB because of the quality of the portfolios and the low loss rates we've achieved.