Blackstone has pushed back against recent criticism of private credit, reporting that defaults are falling and the market remains strong.
Over the past year, “bubble” concerns have grown within the media for the private credit market due to its rapid growth.
In a recent blog, the largest alternatives manager disagreed with these concerns, stating that “private credit’s growth is driven by real, sustainable trends”. The firm noted that growth has been underpinned by near-zero interest rates, which drove investors to seek yield in private credit. Also, private equity dry powder in North America is about five times larger than private credit dry powder, creating a pipeline of deals that need financing.
Blackstone described this as a “natural evolution” of the market, simply a “flexible financing solution” taking market share, rather than evidence of “excessive risk-taking or speculation”.
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The firm also said it is seeing “healthy market fundamentals” within the market, with leveraged loan defaults down more than 100bps this year.
While the firm expects defaults to rise from current low levels, a normal part of credit investing, it said its underwriting process is designed to minimise impact.
With a $200bn (£148.8bn) private loan portfolio, Blackstone addressed recent high profile bankruptcies, noting these are “not typical” of the North American direct lending portfolio it targets.
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A lower-rate environment may reduce yields, Blackstone said, but the sector continues to earn around a 200bps premium over leveraged loans and high-yield bonds. In a lower-rate environment, that premium can make up an even larger portion of total return.
Lower financing costs can also spark mergers and acquisitions (M&A), create deployment opportunities, improve borrower cash flows, and strengthen balance sheets, which can bolster credit quality, the firm said. Blackstone highlighted that M&A activity has risen 64 per cent year-on-year.
“Headlines about private credit challenges aren’t new. We’ve seen similar narratives during the recent rate-hiking cycle, the regional banking crisis, and ‘Liberation Day’. Sometimes it feels like ‘don’t let facts get in the way of a good story’, but facts matter,” the firm said.
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