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Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.

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Speaker 1: This week, we're very pleased to welcome Rob Horn, global

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Speaker 1: head of Infrastructure and act based credit at Blackstone.

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Speaker 2: How are you, Rob, Very well, pleasure to be here, James.

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Speaker 1: Appreciate you joining us today. We're very excited to have

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Speaker 1: you on the show, and we're also delighted to have

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Speaker 1: us our guest, Tolu Alamutu from Bloomberg Intelligence. Hello, Tolu,

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Speaker 1: Hello James.

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Speaker 3: Great to be here again. Thank you.

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Speaker 1: Thank you. So just to set the scene a bit,

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Speaker 1: we're seeing a pickup in volatility this week. War in

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Speaker 1: the Middle East has pushed investors to haven's like gold

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Speaker 1: and oil, and stocks are down, but credit markets are

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Speaker 1: hanging in there. After getting a boost from rape cuts

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Speaker 1: last month. A resilient US economy and likely soft landing

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Speaker 1: are giving the bulls some fiction. Lower rates take some

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Speaker 1: pressure off weak companies that were struggling with high borrowing

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Speaker 1: costs for the last few years. Triple C rated bonds

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Speaker 1: in particular have done very well. That's the riskiest end

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Speaker 1: of credit. There's more demand than net supply of corporate debt,

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Speaker 1: which is a big technical boost. Private debt and asset

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Speaker 1: based finance remain hot. We're going to dig into some

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Speaker 1: of that later today. And the big picture, though, we're

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Speaker 1: bracing for volatility in the run up to the US

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Speaker 1: election in November. While in the debt markets there's still

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Speaker 1: a fair amount of distress, defaults and bankruptcy. Also seeing

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Speaker 1: some stress in private markets amendments, extensions and increasing number

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Speaker 1: of loans being repaid with more debt and arise in

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Speaker 1: defaults there too. So let me ask you both to

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Speaker 1: weigh in here. What's the outlook? Where do we go

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Speaker 1: from here?

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Speaker 2: Let me start with you, Rob pleasure to be here

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Speaker 2: just to provide some contacts. So within our business in

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Speaker 2: Blackstone Credit, we manage liquid credit, corporate credit, and infrastructure

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Speaker 2: and asset based credit. Everything that we do in infrastructure

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Speaker 2: and asset based credit is really investing in the real

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Speaker 2: economy and real assets. And so these are assets that

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Speaker 2: benefit from collateral covenants, high free cash flow, and we're

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Speaker 2: seeing a lot of resiliency in our part of the market.

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Speaker 1: What about you, totally? What do you see?

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Speaker 3: Yeah, I couldn't agree with you more in terms of

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Speaker 3: the outlook for things and risks that we're seeing. So

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Speaker 3: it's not just your political risk. But the election calendar

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Speaker 3: is still busy. Everybody's obviously watching the US and whether

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Speaker 3: or not we like it, what happens in the US

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Speaker 3: has a significant or can have a significant impact on

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Speaker 3: how people trade in the rest of the world. But

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Speaker 3: what we're seeing in the sector that I cover, which

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Speaker 3: is European real estate, which is obviously the best sector ever.

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Speaker 3: You'd expect me to say that, but you know, seriously,

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Speaker 3: in terms of performance this year, European real estate has

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Speaker 3: been a top performer within investment grade in Europe and

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Speaker 3: there's little to suggest that that's going to change going

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Speaker 3: through to the end of the year. Why is that

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Speaker 3: primarily because rates are coming down or no longer going up, basically,

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Speaker 3: and that is having a positive or stabilizing impact on

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Speaker 3: the valuation of properties, not all across the board, but

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Speaker 3: you know, in big segments of that market, and because

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Speaker 3: of that, the real estate bonds are doing much better. Also,

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Speaker 3: the primary market has opened up in a significant way,

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Speaker 3: so you were talking about some of that earlier as well,

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Speaker 3: and so that is helping to alleviate some of the

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Speaker 3: concerns that people had about liquidity funding in the real

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Speaker 3: estate sector, so that's driving the bond up. Having said that,

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Speaker 3: you know, last year was basically a phenomenal year in

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Speaker 3: terms of returns. We had I think twelve thirteen percent

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Speaker 3: returns in investment grade. It's going to be difficult to

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Speaker 3: repeat that this year, but it's I think still going

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Speaker 3: to be a decent year despite the fact that we

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Speaker 3: have this troubling geopolitical risk backdrop as well as a

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Speaker 3: busy election calendar.

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Speaker 1: So to combine those two thoughts, Robbie, you mentioned that,

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Speaker 1: you know, what you're doing is real economy stuff, it's

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Speaker 1: real assets, but the way you're doing it, I would

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Speaker 1: say is probably a bit more esoteric. And as totally mentioned,

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Speaker 1: the FED has just come in with a much bigger

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Speaker 1: rate cut than expected other central banks easing cash. Really

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Speaker 1: isn't that hard to find for most borrows. Why do

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Speaker 1: they need to come to Blackstone, you know, why not

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Speaker 1: just the banks or the public markets.

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Speaker 2: So we're seeing a number of powerful trends in the market.

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Speaker 2: So first, the capital needs across the real economy are

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Speaker 2: just enormous. You look at a couple of these sectors,

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Speaker 2: digital infrastructure expected to spend a trillion dollars on data

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Speaker 2: centers in the next five years. You look at the

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Speaker 2: major reindustrialization of our economy toward renewables and energy transition,

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Speaker 2: where Blackstone has said we will invest one hundred billion

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Speaker 2: dollars other very large sectors like residential real estate. So

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Speaker 2: the capital needs are just very, very large, and what

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Speaker 2: we're seeing is that the banks are really focused on

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Speaker 2: areas that are core to them. These are thirty trillion

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Speaker 2: dollar markets with a lot of white space. Borrowers often

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Speaker 2: need flexible capital, customized solutions, and there's a very large

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Speaker 2: market opportunity that today is occupied by the banks, and

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Speaker 2: we're seeing private capital providers participate in that market.

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Speaker 3: Well, you've mentioned data centers, which have been topical for

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Speaker 3: some time, especially within the real estate sector because of

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Speaker 3: how they performed during the pandemic relative to other types

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Speaker 3: of real estate. They were doing quite well relative to

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Speaker 3: other types. Is there a concern on your part then

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Speaker 3: that may be valuations in that segment of real estate

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Speaker 3: might be overstretched, given that they held up rather better

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Speaker 3: through the pandemic, And then to relate it to that

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Speaker 3: we on this side of the point anyway, have seen

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Speaker 3: some m and A in that sector. What's your view

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Speaker 3: on that. Do you think that that's a trend that

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Speaker 3: might continue or do you think it's just one offs

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Speaker 3: here and there that we might see in data centers?

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Speaker 2: Excellent, So at Blackstone we are thematic investors, so we

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Speaker 2: like to identify themes that we believe that are going

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Speaker 2: to outperform for decades, that have very strong tailwinds, that

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Speaker 2: have very strong growth, and that tends to drive positive

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Speaker 2: credit performance. We definitely see that in the data center market,

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Speaker 2: and from a credit investor's perspective, what's quite protective is

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Speaker 2: that most of these data centers are contracted for anywhere

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Speaker 2: from ten to twenty five years with some of the

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Speaker 2: the largest technology companies in the world, and so they

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Speaker 2: do benefit not only from growth, but a high degree

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Speaker 2: of stability.

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Speaker 3: So you see that sort of continuing. And how about

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Speaker 3: the MNA aspect, is there anything to be said that?

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Speaker 2: Well, I think you're you know, if you look at

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Speaker 2: our activity at Blackstone on the equity side of our business,

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Speaker 2: we took ownership of a business called QTS several years ago.

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Speaker 2: It had a significant bank of powered land, gave it

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Speaker 2: many advantages in the market. We've recently made an acquisition

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Speaker 2: of a company called air Trunk, so both in the

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Speaker 2: US and Asia, we're among the largest developers in the world.

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Speaker 2: And I think any time you have an attractive market,

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Speaker 2: I think you're going to see folks want to enter

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Speaker 2: enter the market. I think what we're able to do

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Speaker 2: in our business is we have significant scale, significant depth

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Speaker 2: in our business and relationships with all of the major customers.

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Speaker 2: So that puts us in a very good position whether

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Speaker 2: we're developing data centers, financing them, or buying businesses, giving

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Speaker 2: us tremendous insight into these markets.

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Speaker 1: A lot of interesting that air Trunk Deally just mentioned.

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Speaker 1: You know, it's the biggest investment you've made so far

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Speaker 1: in the Asia Pacific region. As I understand it, an

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Speaker 1: Australian data center operator valued at twenty four billion Australian

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Speaker 1: or about sixteen billion US dollars, so really one of

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Speaker 1: the biggest in digital infrastructure globally. This year we were

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Speaker 1: looking at it and wondering how that company sales as

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Speaker 1: I see it, one billion Aussie dollars supporting a debtload

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Speaker 1: of fourteen billion. I mean, how does that work? You

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Speaker 1: have to capitalize a lot of that interest. How does

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Speaker 1: that you know, how do you put that together?

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Speaker 2: So when you look at when you look at these platforms,

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Speaker 2: they are extremely capital intensive because they're growing very significantly,

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Speaker 2: So it's hard to look at the metrics in that fashion.

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Speaker 2: I think what gives us tremendous insight is what we

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Speaker 2: see is that the forecasts for data center needs that

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Speaker 2: are broadly in the market are are possibly underestimated based

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Speaker 2: on the direct conversations that we have with customers in

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Speaker 2: the market. Also, we are very long term investors. We

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Speaker 2: hold these in long term, very well capitalized vehicles, and

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Speaker 2: that allows us to really invest, you know, over the

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Speaker 2: next coming decades and fund these businesses and fund them

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Speaker 2: for growth as we as we did with QTS and

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Speaker 2: the US markets.

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Speaker 1: So as you mentioned that pretty massive the assets and

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Speaker 1: there's no real exit you know for example that you

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Speaker 1: know with a sovereign wealth fund by a twelve billion

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Speaker 1: dollar data center in Richmond after it's being built, for example,

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Speaker 1: is securitization potentially an alternative way of taking money off

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Speaker 1: the table? I mean, is that an exit view?

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Speaker 2: So in our in our platforms we're focused at this

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Speaker 2: time on the equity side, is really growing these values.

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Speaker 2: What I would say is there's a mariat of debt

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Speaker 2: financing markets available for these companies. Going back to your

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Speaker 2: earlier comments, initially these assets were financed in the commercial

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Speaker 2: mortgage back markets and viewed as real estate assets. Then

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Speaker 2: they were viewed as esoteric asset based finance assets. And

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Speaker 2: they're now being financed in the infrastructure markets and a

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Speaker 2: very wide variety of markets across the world. So there

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Speaker 2: is a lot of demand to invest in these kinds

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Speaker 2: of assets, and the securitization markets are alive and well

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Speaker 2: for these businesses as well.

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Speaker 3: You've talked about the positive long term view that you've

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Speaker 3: taken on these assets. What would you say, then, are

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Speaker 3: the risks maybe in the short term, because we definitely

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Speaker 3: would like to think of the long term. But I

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Speaker 3: guess sometimes it's difficult to stomach some of the volatility

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Speaker 3: that you can see in the in the nearer term period.

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Speaker 3: So are there risks stay to the demand for these

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Speaker 3: assets or is the risk maybe more on the financing side.

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Speaker 3: You already said that the markets are open now, but

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Speaker 3: could your political risks stymy that for instance?

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Speaker 2: Absolutely? You know what's interesting is you look at you know,

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Speaker 2: when you mentioned volatility. I think about the public markets,

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Speaker 2: and sometimes the public markets penalizes companies that have a

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Speaker 2: lot of investment opportunity because they wonder, well, how are

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Speaker 2: they going to fund that investment opportunity? Are they going

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Speaker 2: to raise equity that dilutes me? Are they going to

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Speaker 2: raise debt that may be more expensive? In a private

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Speaker 2: company format, we can really take control of that and

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Speaker 2: finance it with private dollars and see through the long term.

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Speaker 2: We have large capital markets teams that can raise the debt.

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Speaker 2: But moreover, we have significant credit capital within Blackstone Credit

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Speaker 2: and insurance to fund these assets as well and provide

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Speaker 2: a great stability of capital over the longer term.

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Speaker 1: To zoom out for a second, you mentioned asset based

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Speaker 1: finance and hearing a lot about it at the moment,

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Speaker 1: about the opportunity. People are quite excited about it. But

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Speaker 1: for our listeners who are not, you know, deep in

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Speaker 1: the weeds of this stuff. You know, how does it

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Speaker 1: differ to, for example, asset backed securities. Is it is

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Speaker 1: it basically the same thing, but just goes to the

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Speaker 1: private markets.

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Speaker 2: I think that, you know, there's no one definition of

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Speaker 2: asset based finance. What we are doing in private asset

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Speaker 2: based finance is we're going directly right up to the borrower.

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Speaker 2: We're we're transacting bilaterally with the borrower. We say, it's

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Speaker 2: you know, like farm to table. And in the asset

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Speaker 2: based credit business, we're financing a wide variety of industries

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Speaker 2: that impact everybody's daily lives. So think about for the consumer,

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Speaker 2: we're financing credit cards, home improvement loans, single family rentals.

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Speaker 2: In the commercial business, we might be financing, you know,

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Speaker 2: equipment that's in your doctors, in your doctor's office, or aircraft.

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Speaker 2: And then things like data centers and energy infrastructure that

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Speaker 2: we've talked about, we typically do that, you know, So

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Speaker 2: why do we call it asset based finance. We're typically

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Speaker 2: in a senior position and we have security in the

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Speaker 2: assets of the business. The ABS markets are similar the

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Speaker 2: asset backed securitization markets, but that tends to be in

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Speaker 2: public format, and securitization refers to very highly diversified pools

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Speaker 2: of assets that are typically financed in the public markets.

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Speaker 1: A lot of that sounds like consumer stuff that you know,

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Speaker 1: walking down the hightreet, I see Bank America, a city bank.

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Speaker 1: You know, why aren't they doing that? In said you're

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Speaker 1: not a retail bank, so why why not those guys

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Speaker 1: owning that business.

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Speaker 2: So the banks are are active in areas that are

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Speaker 2: core to their franchise, but there are a lot of

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Speaker 2: non bank originators out there that operate in different areas

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Speaker 2: of the market. So, for example, we tend to be

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Speaker 2: most active in areas where you know we're financing the homeowner,

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Speaker 2: that the homeowner has high utility, but maybe non core

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Speaker 2: for a bank. So for example, we're very active in

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Speaker 2: home improvement lending, home efficiency lending like financing people's hvac

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Speaker 2: or residential solar. These are more esoteric areas where the

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Speaker 2: banks have been less active. And then we are active

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Speaker 2: in partnering with the banks. So we've publicly announced several

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Speaker 2: months ago a transaction we did with Barclays where we

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Speaker 2: purchased a portfolio of credit card receivables from them in

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Speaker 2: partnership in a way that would enable them to continue

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Speaker 2: to grow their business.

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Speaker 3: Yeah, I'm actually going to ask about the Barkie's transaction. Obviously,

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Speaker 3: from Barkie's perspective, I guess you can see the rationale

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Speaker 3: and that they cut risk weighted assets and that should

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Speaker 3: have a positive act on their capital ratios and so on.

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Speaker 3: One question that I would have though, is are you

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Speaker 3: concerned about some parts of the US consumer base. Some

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Speaker 3: of my colleagues in the US recently published a note

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Speaker 3: talking about the two speed economy where lower income households

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Speaker 3: may be coming under pressure even though rates are coming

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Speaker 3: down and so on. So are you concerned that that

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Speaker 3: will affect those sorts of transactions and the quality of

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Speaker 3: the credit card portfolios or what do you do to

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Speaker 3: safeguard against any kind of deterioration significant deterioration as a

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Speaker 3: result of consumers coming under pressure.

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Speaker 2: Absolutely, and it's not really not only the consumer. I thinks,

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Speaker 2: as you've seen the economy slow a little bit, you

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Speaker 2: just see broadly a more greater bifurcation in the credit markets.

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Speaker 2: We think that in news to our advantage at Blackstone,

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Speaker 2: we have a very rigorous investment process. Our conviction around

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Speaker 2: our key themes really guides us. And within the consumer space,

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Speaker 2: our key theme is financing the high quality consumer. It

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Speaker 2: tends to be a consumer that owns their home. The

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Speaker 2: high quality consumer has been in a pretty good environment.

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Speaker 2: Their wages have increased, seventy percent of their mortgages are fixed,

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Speaker 2: and their home values are increasing, so the high quality

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Speaker 2: consumer is in pretty good shape. We are seeing a

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Speaker 2: bifurcation in that market with increased charge offs for lower

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Speaker 2: quality consumers. We've really focused on the prime customer. In

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Speaker 2: the case of the Barclay's portfolio. They continue to service

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Speaker 2: that customer. They have a wonderful franchise in that area,

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Speaker 2: and we bought a book of credit cards that's quite

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Speaker 2: seasoned nine and a half year season. So when you

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Speaker 2: can observe nine and a half years of data of

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Speaker 2: consumer behavior gives you a lot of conviction on that underwriting.

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Speaker 2: But we are certainly seeing a bifurcation and credit and

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Speaker 2: that that's something that we anticipated and it impacted our

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Speaker 2: investment activity several years ago in terms of where we

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Speaker 2: would focus.

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Speaker 3: Can we maybe talk a little bit more about the

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Speaker 3: opportunities for firms like yourselves to partner with banks. Is

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Speaker 3: that where you see a lot of the growth coming from,

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Speaker 3: or like with the credit card transaction with Barclays, or

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Speaker 3: is it more something that you mentioned earlier, partnering more

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Speaker 3: with the non bank financial institutions that are doing similar business.

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Speaker 2: It's really all of the above. So I think the

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Speaker 2: you know, the primary driver of the opportunity set is

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Speaker 2: just the huge capital need and the fact that this

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Speaker 2: is a highly fragmented, target rich environment that touches is

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Speaker 2: so many areas of the real economy. We're active doing

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Speaker 2: deals directly with corporations and non bank lenders. We are

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Speaker 2: also very active partnering with banks. Blackstone has a forty

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Speaker 2: year history of partnering with banks. We view that many

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Speaker 2: of the banks have tremendous relationships, They have tremendous advisory franchises,

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Speaker 2: tremendous capital markets franchises, and the banks are you know,

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Speaker 2: eighty five ninety percent of the asset based credit market

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Speaker 2: today just because they have been the ones financing the

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Speaker 2: real economy. As they look to be very thoughtful about

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Speaker 2: where they deploy their capital and really focus on areas

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Speaker 2: that are core to them, that creates opportunities for us

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Speaker 2: to partner with them in different areas that may be

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Speaker 2: less core to their franchise. So earlier this year, for example,

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Speaker 2: we partnered in the acquisition of a railcar portfolio from

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Speaker 2: a large bank as they looked at where they would

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Speaker 2: focus or a big portfolio of renewable energy investments. So

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Speaker 2: we are seeing that opportunity to partner Barclays is a

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Speaker 2: good example. We also answered another announced another transaction with

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Speaker 2: Key Bank in the fun finance space as well that

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Speaker 2: was similar.

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Speaker 3: Just again sort of focusing on this opportunity to partner

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Speaker 3: with banks. I mean, you've been greater putting figures around

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Speaker 3: some of the opportunities that there are in asset based

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Speaker 3: financing and so on. How large would you say that

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Speaker 3: opportunity is? And if I may also ask, what kind

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Speaker 3: of returns are we talking about when you're buying these

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Speaker 3: portfolios of credit cards or whatever other type of lending.

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Speaker 2: Absolutely so, looking at the credit markets more broadly today

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Speaker 2: or private credit today is about a two trillion dollar market.

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Speaker 2: It has grown about ten fold over the last decade.

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Speaker 2: At two trillion, it really and it's been primarily focused

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Speaker 2: on financing private equity transactions. That's what private credit has

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Speaker 2: been mostly so far. That is really just a sliver

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Speaker 2: of the overall opportunity set. The opportunity set to finance

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Speaker 2: the real economy, whether that's credit cards, whether that's equipment,

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Speaker 2: whether that's data centers, aircraft, that is roughly a thirty

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Speaker 2: trillion dollar opportunity. So we're really expanding the opportunity set

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Speaker 2: from quite a narrow part of the market to really

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Speaker 2: a mainstream part of the market.

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Speaker 3: Right, So you're saying from two up to thirty so fast.

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Speaker 3: As a credit analyst, I apology, I'm always going to

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Speaker 3: be a little bit cautious when something has grown quite

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Speaker 3: so fast in such a short term or a short

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Speaker 3: short time. So I should say, so, are you concerned

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Speaker 3: about how fast private credit has grown so far and

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Speaker 3: what that could mean in terms of quality of the assets,

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Speaker 3: in terms of returns, in terms of getting paid back

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Speaker 3: when you expect. So that's I guess the first question,

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Speaker 3: and second to the opportunity set and getting to well

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Speaker 3: not necessarily getting to thirty trillion, or getting to a

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Speaker 3: proportion of that thirty trillion. Do you think that private

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Speaker 3: credit can become the dominant source of funding to that

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Speaker 3: thirty trillion number or do you think that it will

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Speaker 3: account for a minority part of that.

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Speaker 2: So what we're seeing in the market, and this has

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Speaker 2: been a change in the last five to ten years,

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Speaker 2: is that again private credit historically was really focused on

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Speaker 2: mid to high return parts of the market. We are

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Speaker 2: now seeing an opportunity where to invest in the private

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Speaker 2: investment grade markets and the institute that entrust us with

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Speaker 2: their capital are generally taking a small portion of what

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Speaker 2: they have historically put in liquid investment grade credit. They're

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Speaker 2: generally observing that the quality of those liquid benchmarks have deteriorated.

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Speaker 2: There's more triple B minus, there's more spread compression, and

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Speaker 2: they allocate it to us to invest in infrastructure and

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Speaker 2: asset based credit, where not only can we get hard

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Speaker 2: asset collateral which differs from what they get in the

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Speaker 2: public market, but we also get a premium return the

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Speaker 2: markets where the banks have been active. What I would

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Speaker 2: say is that we can very well not only coexists,

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Speaker 2: but partner with banks in that thirty trillion dollar market.

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Speaker 2: It touches so much of the economy that I expect

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Speaker 2: the banks to continue to be extremely active, and I

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Speaker 2: do expect private credit to continue to grow into that

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Speaker 2: market from what today is a relatively small base in

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Speaker 2: the context of the size of that m I think

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Speaker 2: as it relates to the quality of the opportunities, I

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Speaker 2: think you know in any market you're going to have bifurcation.

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Speaker 2: I think that's why you know why you want a partner,

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Speaker 2: or why we feel we're well positioned as a large

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Speaker 2: scale player. You know, we manage four hundred billion dollars

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Speaker 2: in the credit markets. We have tremendous advantages in the

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Speaker 2: market in that we manage, for example, the largest energy

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Speaker 2: transition credit fund. We're among the largest lenders in the

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Speaker 2: data center space. We have a ton of data because

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Speaker 2: you know, we have forty five hundred portfolio companies within

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Speaker 2: Blackstone Credit. We have five thousand portfolio companies within our

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Speaker 2: secondary's business. So we have a ton of data that

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Speaker 2: guides our investment activity and a very rigorous investment process.

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Speaker 2: And in particular in this part of the business, we're

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Speaker 2: investing in hard asset portfolio companies that have been very

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Speaker 2: resis alli into over long periods of time.

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Speaker 1: But from the investor's standpoint, I mean they are still

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Speaker 1: seeing fairly high yields in the liquid markets. You know,

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Speaker 1: IG has gone below five percent, but it's still much

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Speaker 1: higher than it has been historically. If you're going to

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Speaker 1: stick your neck out into asset based finance and other

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Speaker 1: what we might call more esoteric products, and that's liquid

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Speaker 1: and you know, longer lockups, presumably, what extra gains can

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Speaker 1: an investor expect?

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Speaker 2: Absolutely, And I think we would view that these investors

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Speaker 2: are not sticking their neck out, per se. I think

399
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Speaker 2: they're actually diversifying and de risking their portfolios in doing this,

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Speaker 2: because today they have most of their capital in liquid

401
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Speaker 2: securities that's corporate and unsecured, and so that has, you know,

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Speaker 2: a degree of concentration in that activity. When they move

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Speaker 2: it to the asset based markets, keep that this is

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Speaker 2: an area that the banks have been investing in prudently

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Speaker 2: for decades. They invest in these areas because they've generally

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Speaker 2: had low losses. We've looked at the data in these

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Speaker 2: asset classes going back to before the Great Financial Crisis.

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Speaker 2: They've had very low losses over time, and it really

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Speaker 2: comes back to the fact that we're investing senior in

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Speaker 2: the capital structure with hard asset collateral. Our investors are

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Speaker 2: giving up some liquidity to do that. I think what

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Speaker 2: we look at is, you know, are the liquid markets

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Speaker 2: really as liquid as we all want them to be

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Speaker 2: when you need them. I think we find that in

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Speaker 2: times of crisis they tend to be less liquid, and

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Speaker 2: when we look at what we're doing in asset based credit,

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Speaker 2: they tend to be highly free, cash flow generative and

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Speaker 2: effectively self liquidate. So we get about on average twenty

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Speaker 2: five percent of our investment back every year just from

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Speaker 2: the natural roll down of these portfolios, from the free

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Speaker 2: cash flow of these portfolios, and so you know, they

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00:26:03,720 --> 00:26:06,679
Speaker 2: do actually provide some liquidity in that cash flow compared

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Speaker 2: to a corporate loan that has five years of coupons

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Speaker 2: and then a bullet payment. So it's really quite attractive

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Speaker 2: in that regard.

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Speaker 1: Some of your competitors are going to come on the

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Speaker 1: show that they are talking about, you know, mid teens

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Speaker 1: returns equity like returns in credit for this kind of thing.

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Speaker 1: That's what's getting them excited. Is is it double digits? Well,

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Speaker 1: is it, you know, higher than ten? Can you give

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Speaker 1: us a put a number on it?

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Speaker 2: Yeah? Absolutely, So across our business, we are active investing

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Speaker 2: across the capital structure. In Blackstone credit and insurance, we

434
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Speaker 2: are really a large scale performing credit manager. We manage

435
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Speaker 2: two hundred billion dollars for insurance companies as an example.

436
00:26:45,600 --> 00:26:50,280
Speaker 2: A big base of our capital is managed at investment

437
00:26:50,280 --> 00:26:54,800
Speaker 2: grade plus returns, but they're you know, sub double digit returns,

438
00:26:54,840 --> 00:26:59,800
Speaker 2: really an investment grade replacement product. We are also active

439
00:26:59,840 --> 00:27:03,800
Speaker 2: in high yield and opportunistic markets where we target double

440
00:27:03,800 --> 00:27:07,679
Speaker 2: digit returns. With a you know, different risk profile and

441
00:27:07,760 --> 00:27:10,760
Speaker 2: a different different kind of counter party and different activity.

442
00:27:11,520 --> 00:27:17,200
Speaker 3: You mentioned earlier that with some investments you're getting twenty

443
00:27:17,240 --> 00:27:20,720
Speaker 3: five percent of those back each year. What does that

444
00:27:20,880 --> 00:27:26,040
Speaker 3: mean in terms of recycling capital? And how does that

445
00:27:26,160 --> 00:27:29,600
Speaker 3: affect your ability to be selective when it comes to

446
00:27:29,640 --> 00:27:32,880
Speaker 3: choosing opportunities. One reason that I ask is on one

447
00:27:32,920 --> 00:27:37,119
Speaker 3: of our previous podcasts, we had one person tell us

448
00:27:37,160 --> 00:27:40,720
Speaker 3: that they were choosing just one or two of every

449
00:27:40,960 --> 00:27:44,560
Speaker 3: hundred opportunities that they're shown. But if you're having that

450
00:27:44,640 --> 00:27:48,640
Speaker 3: amount of cash coming back in, does that affect your

451
00:27:48,680 --> 00:27:52,399
Speaker 3: ability to be selective in any way? How selective are

452
00:27:52,440 --> 00:27:55,080
Speaker 3: you with the opportunities that are presented?

453
00:27:55,960 --> 00:28:01,000
Speaker 2: So similarly, you know, we have an extremely whyid funnel

454
00:28:01,520 --> 00:28:05,320
Speaker 2: in our organization. We you know, as I mentioned, we're

455
00:28:05,359 --> 00:28:09,000
Speaker 2: active with banks and advisors. We have over four hundred

456
00:28:09,720 --> 00:28:14,080
Speaker 2: banking and advisory relationships. We have a lot of direct counterparties,

457
00:28:14,560 --> 00:28:18,720
Speaker 2: so we transact with over one hundred direct counterparties. Over

458
00:28:18,800 --> 00:28:20,919
Speaker 2: seventy percent of the deals that we do are with

459
00:28:21,080 --> 00:28:26,119
Speaker 2: repeat relationships. We also have several relationships which are actually

460
00:28:26,160 --> 00:28:30,119
Speaker 2: contractual in nature, where we set up an agreement where

461
00:28:30,920 --> 00:28:35,000
Speaker 2: our partner effectively delivers us all of the loans that

462
00:28:36,480 --> 00:28:39,200
Speaker 2: they issue over say a twelve to twenty four month period.

463
00:28:39,240 --> 00:28:43,840
Speaker 2: So a lot of our investing activity is programmatic in nature.

464
00:28:44,480 --> 00:28:47,680
Speaker 2: We do tend to transact similarly on probably less than

465
00:28:47,720 --> 00:28:50,840
Speaker 2: five percent of the of the deals that we see,

466
00:28:52,000 --> 00:28:55,280
Speaker 2: and so we are quite selective. We have the benefit

467
00:28:55,320 --> 00:28:59,800
Speaker 2: from this very large funnel and again investing into markets

468
00:28:59,800 --> 00:29:03,480
Speaker 2: across the real economy, so it affords us the ability

469
00:29:03,520 --> 00:29:06,560
Speaker 2: to be selective and really focus on our high conviction themes.

470
00:29:06,960 --> 00:29:09,640
Speaker 2: And we're investing in the several markets that are north

471
00:29:09,680 --> 00:29:12,880
Speaker 2: of a trillion dollar markets. When you look at data centers,

472
00:29:13,000 --> 00:29:17,440
Speaker 2: energy infrastructure, residential real estate lending, these are all very

473
00:29:17,520 --> 00:29:20,480
Speaker 2: very large markets and they present large opportunities.

474
00:29:20,960 --> 00:29:23,920
Speaker 3: Of course, I mean you mentioned energy transition right at

475
00:29:23,920 --> 00:29:27,960
Speaker 3: the start, as well as digital infrastructure and residential real estate.

476
00:29:28,000 --> 00:29:30,360
Speaker 3: We'll come to residential real estate I think in a

477
00:29:30,400 --> 00:29:32,960
Speaker 3: little bit, but just on energy transition, clearly, it's something

478
00:29:33,000 --> 00:29:36,160
Speaker 3: that's very close to the heart of most people here

479
00:29:36,160 --> 00:29:39,920
Speaker 3: at Bloomberg. You would have seen our founder at Climate

480
00:29:39,920 --> 00:29:44,880
Speaker 3: Week and so on. Are you concerned about some of

481
00:29:44,960 --> 00:29:50,480
Speaker 3: the apparent backlash. I guess that you have from moving

482
00:29:50,640 --> 00:29:57,000
Speaker 3: from less clean to more clean sources of energy. And

483
00:29:57,560 --> 00:30:02,080
Speaker 3: within that context, you concerned that the results of the

484
00:30:02,200 --> 00:30:08,280
Speaker 3: US election might have an impact on the energy transition process.

485
00:30:09,040 --> 00:30:12,760
Speaker 2: So we have you know, we've invested in our history

486
00:30:12,960 --> 00:30:18,560
Speaker 2: under in all sorts of administrations. We've operated our prior

487
00:30:18,680 --> 00:30:23,480
Speaker 2: funds under both Republican and Democratic administrations. And what we've

488
00:30:23,520 --> 00:30:28,000
Speaker 2: seen over time is that renewable energy and energy transition

489
00:30:28,160 --> 00:30:31,680
Speaker 2: assets have quickly come down the cost curve, and they've

490
00:30:31,680 --> 00:30:35,680
Speaker 2: become in some cases the most economic sources of energy

491
00:30:35,680 --> 00:30:39,080
Speaker 2: in the market. That is really the primary driver of

492
00:30:39,120 --> 00:30:43,680
Speaker 2: the increased market share of renewable energy. That said, we

493
00:30:43,760 --> 00:30:48,080
Speaker 2: continue to need fossil fuels. We continue to think natural

494
00:30:48,160 --> 00:30:51,120
Speaker 2: gas is going to be critically important to the stability

495
00:30:51,120 --> 00:30:54,760
Speaker 2: of our grids and making sure that our lights come

496
00:30:54,800 --> 00:30:59,120
Speaker 2: on and uh, and we continue to see significant investment

497
00:30:59,160 --> 00:31:03,600
Speaker 2: opportunity both across renewables and other areas of the energy

498
00:31:03,640 --> 00:31:04,840
Speaker 2: transition value chain.

499
00:31:05,800 --> 00:31:07,760
Speaker 3: Can you remind us of the figure that you said,

500
00:31:07,760 --> 00:31:14,800
Speaker 3: then said earlier of how big the energy transition opportunity is,

501
00:31:14,880 --> 00:31:18,440
Speaker 3: and then not quite linked to that, but linked to

502
00:31:18,440 --> 00:31:22,400
Speaker 3: something else that you said on the cost of renewables

503
00:31:23,040 --> 00:31:27,800
Speaker 3: is there then a concern from the perspective of the

504
00:31:27,840 --> 00:31:33,520
Speaker 3: companies producing wind turbines and so on, that perhaps they

505
00:31:34,000 --> 00:31:38,320
Speaker 3: may no longer be profitable if they're not able to

506
00:31:38,640 --> 00:31:42,400
Speaker 3: sell what they're producing at a level that covers the

507
00:31:42,440 --> 00:31:43,840
Speaker 3: cost that they've already incurred.

508
00:31:44,760 --> 00:31:49,640
Speaker 2: Absolutely. What I highlighted earlier is that at Blackstone we

509
00:31:49,680 --> 00:31:53,320
Speaker 2: have set an objective that of investing over one hundred

510
00:31:53,400 --> 00:31:57,080
Speaker 2: billion dollars in the energy transition. We're well on our way.

511
00:31:57,120 --> 00:31:59,959
Speaker 2: I believe we're north of twenty billion at this stage.

512
00:32:00,720 --> 00:32:06,040
Speaker 2: We operate very large investment platforms in this area. We

513
00:32:06,080 --> 00:32:09,640
Speaker 2: operate the largest energy transition private credit fund in the world.

514
00:32:09,640 --> 00:32:13,479
Speaker 2: In fact, at about seven billion dollars. We estimate that

515
00:32:13,520 --> 00:32:18,160
Speaker 2: we have financed perhaps fifteen percent of all renewable projects

516
00:32:18,200 --> 00:32:21,840
Speaker 2: that have been financed in the country this year. So

517
00:32:21,880 --> 00:32:26,320
Speaker 2: we're quite active in these markets. I think what we're

518
00:32:26,400 --> 00:32:31,360
Speaker 2: seeing is that again, the economics really support these industries.

519
00:32:31,920 --> 00:32:35,040
Speaker 2: There are tax credits that have been available to the

520
00:32:35,080 --> 00:32:39,200
Speaker 2: renewable energy industry for over twenty years that have financed

521
00:32:39,240 --> 00:32:43,480
Speaker 2: many projects that are important to our system. They've been

522
00:32:43,520 --> 00:32:49,760
Speaker 2: extended under both Republican and Democratic administrations as well, and

523
00:32:49,800 --> 00:32:51,960
Speaker 2: we do see those as being an important part of

524
00:32:51,960 --> 00:32:54,960
Speaker 2: the system, and if you were to see those change,

525
00:32:55,080 --> 00:32:57,520
Speaker 2: I think you could see some impact on just the

526
00:32:57,600 --> 00:33:01,120
Speaker 2: pace of activity in the market. But those credits have

527
00:33:01,200 --> 00:33:02,800
Speaker 2: been in place for about twenty years.

528
00:33:03,600 --> 00:33:08,440
Speaker 1: Yeah, the opportunity reflect beginning in asset based finances, real estate,

529
00:33:08,680 --> 00:33:10,720
Speaker 1: residential real estate all I know because I live in

530
00:33:10,760 --> 00:33:14,040
Speaker 1: New York, because there's enough fitness, too expensive. What is

531
00:33:14,040 --> 00:33:16,960
Speaker 1: the opportunity for you? And also interested in totally's thoughts

532
00:33:17,040 --> 00:33:19,200
Speaker 1: on you know, the lay of the land that I mean,

533
00:33:19,240 --> 00:33:20,680
Speaker 1: what are we talking about when we talk about the

534
00:33:20,680 --> 00:33:21,719
Speaker 1: real estate opportunity.

535
00:33:22,160 --> 00:33:26,600
Speaker 2: Yeah, I think there's there's two areas that we would

536
00:33:26,600 --> 00:33:30,800
Speaker 2: focus on. So one is there is significant amounts of

537
00:33:30,880 --> 00:33:34,760
Speaker 2: home value in the US market today. There's forty three

538
00:33:34,880 --> 00:33:38,800
Speaker 2: trillion dollars of home value. There's only thirteen trillion of

539
00:33:38,880 --> 00:33:43,240
Speaker 2: mortgage debts, so there's basically thirty trillion of unencumbered home

540
00:33:43,280 --> 00:33:46,640
Speaker 2: equity value that presents us and people are staying in

541
00:33:46,680 --> 00:33:49,880
Speaker 2: their homes longer because of what they've experienced with mortgage rates.

542
00:33:50,480 --> 00:33:54,880
Speaker 2: That has presented an opportunity for you know, financing the consumer,

543
00:33:54,960 --> 00:33:59,680
Speaker 2: whether that's you know, home equity lines of credits or

544
00:33:59,720 --> 00:34:03,360
Speaker 2: home improvement loans. So that's one area of opportunity. I think,

545
00:34:03,400 --> 00:34:08,280
Speaker 2: as you noted, there is certainly a housing affordability issue

546
00:34:08,719 --> 00:34:12,880
Speaker 2: that we see in the country. You've seen two times

547
00:34:12,920 --> 00:34:16,320
Speaker 2: population grow since the nineteen sixties, and we're building fewer

548
00:34:16,320 --> 00:34:21,239
Speaker 2: homes and it's considerably cheaper for Americans to rent than

549
00:34:21,239 --> 00:34:23,600
Speaker 2: it is to buy a home. And so one big

550
00:34:23,600 --> 00:34:27,400
Speaker 2: opportunity is in single family rentals, where we're a significant

551
00:34:27,480 --> 00:34:29,400
Speaker 2: lender to the marketplace in that area.

552
00:34:30,560 --> 00:34:34,640
Speaker 3: And I know, James, you wanted a perspective Europe as

553
00:34:34,640 --> 00:34:38,200
Speaker 3: well on real estate, and on I guess residential real

554
00:34:38,360 --> 00:34:44,759
Speaker 3: estate in particular. I think it really depends on the

555
00:34:44,800 --> 00:34:49,040
Speaker 3: market that you are looking at. In some markets across

556
00:34:49,080 --> 00:34:55,640
Speaker 3: Europe you still have an undersupply problem and that tends

557
00:34:55,719 --> 00:35:02,160
Speaker 3: to support the valuations of residential estate. But I can

558
00:35:02,200 --> 00:35:04,680
Speaker 3: think of at least one market where there is still

559
00:35:05,680 --> 00:35:10,680
Speaker 3: an oversupply problem. That's in Finland, and so valuations there

560
00:35:10,719 --> 00:35:14,799
Speaker 3: have just not yet stabilized. And we actually had one

561
00:35:16,120 --> 00:35:20,319
Speaker 3: bondish or where they give a profit warning earlier this

562
00:35:20,440 --> 00:35:28,520
Speaker 3: year because of that effect of oversupply on the valuations

563
00:35:28,560 --> 00:35:32,040
Speaker 3: of its portfolio. Having said all of that, I think

564
00:35:33,080 --> 00:35:39,879
Speaker 3: residential real estate has done better than some other sub

565
00:35:39,920 --> 00:35:43,919
Speaker 3: sectors within real estate just in general, or has been

566
00:35:44,000 --> 00:35:47,320
Speaker 3: a little bit more resilient. And we've seen some quite

567
00:35:47,440 --> 00:35:55,040
Speaker 3: significant sized transactions done by the largest residential landlord in Europe,

568
00:35:55,040 --> 00:36:00,000
Speaker 3: which is Venovia in German, primarily in Germany, partnering sometimes

569
00:36:00,000 --> 00:36:05,200
Speaker 3: times with private credit, but also with others. So there's

570
00:36:05,239 --> 00:36:10,400
Speaker 3: clearly a demand there and people are seeing the value

571
00:36:10,440 --> 00:36:14,360
Speaker 3: there as well. So residential real estate overall has held

572
00:36:14,440 --> 00:36:19,239
Speaker 3: up better than I guess some sub sectors of real

573
00:36:19,320 --> 00:36:21,080
Speaker 3: estate in Europe, thank you.

574
00:36:21,120 --> 00:36:22,880
Speaker 1: So what's the trade then, I mean, how do you

575
00:36:22,920 --> 00:36:24,360
Speaker 1: how do you source the assets or are you just

576
00:36:24,360 --> 00:36:26,919
Speaker 1: buying the mortgages? What's what's the process?

577
00:36:27,200 --> 00:36:31,720
Speaker 2: Yeah, so I think there's there's two ways to approach

578
00:36:31,800 --> 00:36:35,960
Speaker 2: this in this market. You can clearly go buy from banks,

579
00:36:37,400 --> 00:36:39,759
Speaker 2: you know, think of that as buying retail if you will.

580
00:36:39,800 --> 00:36:43,399
Speaker 2: There's a few intermediaries in there, and your spreads will

581
00:36:43,440 --> 00:36:47,960
Speaker 2: be compressed. In the case of what we're doing, really

582
00:36:48,000 --> 00:36:51,800
Speaker 2: several years ago we set up a number of platforms

583
00:36:51,840 --> 00:36:55,080
Speaker 2: to be able to source these directly. So we have

584
00:36:55,160 --> 00:37:01,400
Speaker 2: partnerships and or investments in originators that you originate en

585
00:37:01,480 --> 00:37:06,160
Speaker 2: mass across the country. We have separate portfolio companies that

586
00:37:06,280 --> 00:37:10,560
Speaker 2: onboard the loans, verify them, monitor them over time, and

587
00:37:10,680 --> 00:37:13,759
Speaker 2: between these systems we have you know, over one hundred

588
00:37:13,800 --> 00:37:18,120
Speaker 2: and fifty employees actually just focused on this activity within

589
00:37:18,200 --> 00:37:22,440
Speaker 2: those portfolio companies, and that enables us to have, you know,

590
00:37:22,480 --> 00:37:25,799
Speaker 2: a meaningful excess return relative to if we, you know,

591
00:37:25,920 --> 00:37:27,560
Speaker 2: just went and bought it from somebody else.

592
00:37:28,200 --> 00:37:30,759
Speaker 3: We've talked a little bit or a lot about the

593
00:37:30,880 --> 00:37:34,959
Speaker 3: US opportunity set when it comes to residential real estate.

594
00:37:35,000 --> 00:37:40,799
Speaker 3: How would you view Europe versus the US in that context? Then?

595
00:37:40,880 --> 00:37:44,400
Speaker 3: Do you think that there are opportunities in European residential

596
00:37:44,440 --> 00:37:44,960
Speaker 3: real estate?

597
00:37:45,760 --> 00:37:48,240
Speaker 2: I think we're seeing that the you know, the banks

598
00:37:48,400 --> 00:37:53,960
Speaker 2: really you have less non bank lenders in the European markets,

599
00:37:53,960 --> 00:37:57,399
Speaker 2: and so we see that the banks are an intermediary there.

600
00:37:57,440 --> 00:37:59,640
Speaker 2: But we do partner with the banks in those areas

601
00:37:59,680 --> 00:38:00,120
Speaker 2: as well well.

602
00:38:01,320 --> 00:38:06,480
Speaker 3: And we've talked about digital infrastructure. We've talked about residential

603
00:38:06,520 --> 00:38:10,720
Speaker 3: real estate, but one area that we haven't really touched

604
00:38:10,760 --> 00:38:14,880
Speaker 3: on is offices. I was wondering whether you had a

605
00:38:15,000 --> 00:38:17,440
Speaker 3: view on the outlook for offices. I can tell you

606
00:38:17,480 --> 00:38:23,480
Speaker 3: from my perspective, they've probably pulled away from the brink

607
00:38:23,560 --> 00:38:27,560
Speaker 3: in some parts of Europe and done better than people

608
00:38:27,800 --> 00:38:31,920
Speaker 3: feared because of the work from home phenomenon and because

609
00:38:31,960 --> 00:38:34,040
Speaker 3: of still high vacancies. But I know that in the

610
00:38:34,160 --> 00:38:36,960
Speaker 3: US things are a little bit different for some of

611
00:38:37,000 --> 00:38:41,319
Speaker 3: the companies. So what's your view on the office sector then?

612
00:38:42,080 --> 00:38:44,480
Speaker 3: Do you see opportunities there or would you rather focus

613
00:38:44,520 --> 00:38:45,600
Speaker 3: on residentials?

614
00:38:46,800 --> 00:38:51,560
Speaker 2: Going back to you know, Blackstone's focus on high conviction areas,

615
00:38:52,000 --> 00:38:54,759
Speaker 2: I think several years ago we really focused our real

616
00:38:54,880 --> 00:39:00,600
Speaker 2: estate activity on logistics, on single family rentals, on areas

617
00:39:00,640 --> 00:39:03,920
Speaker 2: of the life sciences market, data centers, areas that were

618
00:39:03,960 --> 00:39:06,839
Speaker 2: more specialized, and that's really where we have focused our

619
00:39:06,880 --> 00:39:10,319
Speaker 2: deployment and you see that reflected in our portfolio as well.

620
00:39:11,440 --> 00:39:14,200
Speaker 1: Can I ask you about fundraising, Rob, you know, this

621
00:39:14,280 --> 00:39:16,880
Speaker 1: seems like something that people should be looking at. I mean,

622
00:39:16,920 --> 00:39:20,320
Speaker 1: I've been talking for years about infrastructure generally is potentially

623
00:39:20,360 --> 00:39:24,560
Speaker 1: a really good long term investment for you know, pension

624
00:39:24,560 --> 00:39:27,000
Speaker 1: funds and insurance and all this stuff because of the

625
00:39:27,480 --> 00:39:31,720
Speaker 1: you know, the duration well than anything. But it doesn't

626
00:39:31,760 --> 00:39:34,839
Speaker 1: seem that that's happening. Yeah, I mean, is that a

627
00:39:34,880 --> 00:39:37,359
Speaker 1: push of yours to get that money in. I mean,

628
00:39:37,360 --> 00:39:39,000
Speaker 1: how do you how do you see that happening.

629
00:39:39,920 --> 00:39:42,360
Speaker 2: So when we look at when we look at asset

630
00:39:42,440 --> 00:39:46,319
Speaker 2: based credit, uh, you know, we started to see a

631
00:39:46,320 --> 00:39:50,320
Speaker 2: trend about ten years ago where insurance companies were actually

632
00:39:50,360 --> 00:39:53,960
Speaker 2: early in asset based credit, partnering with firms like ours

633
00:39:53,960 --> 00:39:57,960
Speaker 2: to access the market, and insurance companies realized that if

634
00:39:57,960 --> 00:40:01,239
Speaker 2: they could just earn a little more return and at

635
00:40:01,280 --> 00:40:03,960
Speaker 2: low loss rates, well, then they could be more competitive

636
00:40:03,960 --> 00:40:08,080
Speaker 2: in selling life insurance policies and selling annuities. And so

637
00:40:08,560 --> 00:40:11,360
Speaker 2: this was a market where insurance companies were actually early

638
00:40:12,040 --> 00:40:16,719
Speaker 2: in positioning their investments toward asset based credit. Still not

639
00:40:16,760 --> 00:40:19,239
Speaker 2: a huge part of their books. Is still only three

640
00:40:19,320 --> 00:40:23,120
Speaker 2: percent of insurance life insurance company balance sheets are in

641
00:40:23,800 --> 00:40:27,560
Speaker 2: private asset based credit, with probably the largest players maybe

642
00:40:27,640 --> 00:40:30,680
Speaker 2: being fifteen percent of their balance sheets and the smaller

643
00:40:30,680 --> 00:40:35,360
Speaker 2: players being less than three percent. I think that benefit

644
00:40:35,520 --> 00:40:39,480
Speaker 2: is now very well known in that market. There has

645
00:40:39,560 --> 00:40:41,719
Speaker 2: been a lot of deployment, a lot of fundraising, and

646
00:40:41,800 --> 00:40:45,640
Speaker 2: we continue to see that accelerating. Moreover, what we are

647
00:40:45,719 --> 00:40:50,239
Speaker 2: seeing is that their neighbors are noticing whether you're a

648
00:40:50,239 --> 00:40:53,000
Speaker 2: pension fund or a sovereign wealth fund. You may have

649
00:40:53,080 --> 00:40:57,200
Speaker 2: different stakeholders, but the concept of looking at your liquid

650
00:40:57,280 --> 00:41:00,239
Speaker 2: fixed income and saying, maybe I can do some thing

651
00:41:00,280 --> 00:41:05,000
Speaker 2: different with this that increases my return and does not

652
00:41:05,160 --> 00:41:09,319
Speaker 2: increase my losses and continues to protect from a risk perspective.

653
00:41:09,400 --> 00:41:12,719
Speaker 2: And so we're starting to see pension funds begin to

654
00:41:12,800 --> 00:41:16,239
Speaker 2: allocate into this private asset based credit market, and again

655
00:41:16,320 --> 00:41:18,640
Speaker 2: we expect that to grow very significantly.

656
00:41:18,960 --> 00:41:21,600
Speaker 1: So are they any three percent now the pension funds?

657
00:41:22,080 --> 00:41:24,839
Speaker 2: I think the pension funds would be lower than that

658
00:41:24,920 --> 00:41:27,760
Speaker 2: in private investment rate. I think we're seeing there really

659
00:41:27,840 --> 00:41:31,320
Speaker 2: just starting to make their first allocations to this market.

660
00:41:31,680 --> 00:41:35,160
Speaker 1: What about the longer term trajectory, do you think that,

661
00:41:35,320 --> 00:41:36,880
Speaker 1: you know, it would make sense for them to have

662
00:41:37,160 --> 00:41:40,320
Speaker 1: like ten percent or twenty percent in the exposure.

663
00:41:40,640 --> 00:41:43,960
Speaker 2: I think absolutely. And if you look at the trajectory,

664
00:41:44,800 --> 00:41:46,400
Speaker 2: you know, if you look at what's happened in the

665
00:41:47,280 --> 00:41:51,320
Speaker 2: private equity markets, where private equity is really a core

666
00:41:51,480 --> 00:41:58,320
Speaker 2: allocation to most equity, you know, to most equity portfolios. Again,

667
00:41:58,360 --> 00:42:02,080
Speaker 2: you've seen direct lending progress down that path, but asset

668
00:42:02,080 --> 00:42:06,040
Speaker 2: based credit is really at the beginning of that journey.

669
00:42:06,520 --> 00:42:09,600
Speaker 2: And so you know, if you have an asset class

670
00:42:09,680 --> 00:42:13,280
Speaker 2: that's diversifying from the rest of what you own, very

671
00:42:13,320 --> 00:42:16,440
Speaker 2: safe offers a premium return. You're going to want to

672
00:42:16,480 --> 00:42:19,000
Speaker 2: allocate more to that. You're going to want to be

673
00:42:19,120 --> 00:42:23,120
Speaker 2: mindful that it has different liquidity characteristics than the liquid market,

674
00:42:23,200 --> 00:42:25,440
Speaker 2: so it's not going to be all of your portfolio,

675
00:42:25,840 --> 00:42:28,080
Speaker 2: but it doesn't need to be all of your portfolio

676
00:42:28,160 --> 00:42:30,640
Speaker 2: to add value from where it is today, Whether it's

677
00:42:30,719 --> 00:42:33,400
Speaker 2: zero percent of your portfolio or three percent, they're certainly

678
00:42:33,480 --> 00:42:36,520
Speaker 2: room to increase that toward ten to twenty percent, depending

679
00:42:36,520 --> 00:42:38,319
Speaker 2: on what your liability profile is.

680
00:42:40,200 --> 00:42:44,279
Speaker 3: You've talked very helpfully about insurance companies, pentrum funds, and

681
00:42:44,320 --> 00:42:50,720
Speaker 3: so on to reallocating funds from liquid to less liquid credit.

682
00:42:50,800 --> 00:42:54,160
Speaker 3: I guess, but one thing that has generated quite a

683
00:42:54,200 --> 00:42:59,280
Speaker 3: lot of headlines is potential retail investment in private credit,

684
00:43:00,680 --> 00:43:04,560
Speaker 3: ETFs or whatever other structures. Is that something that you

685
00:43:04,640 --> 00:43:09,160
Speaker 3: believe is a significant opportunity set or is the focus

686
00:43:09,239 --> 00:43:11,600
Speaker 3: more on the institutional side of things?

687
00:43:12,440 --> 00:43:17,560
Speaker 2: Absolutely so. At Blackstone we manage managed capital for all

688
00:43:17,600 --> 00:43:22,439
Speaker 2: sorts of investors, so institutions, insurance companies as well as

689
00:43:22,840 --> 00:43:28,680
Speaker 2: individuals tends to be higher net worth individuals. But you know,

690
00:43:28,719 --> 00:43:31,600
Speaker 2: when you look at their portfolios, a lot of what

691
00:43:31,680 --> 00:43:36,040
Speaker 2: we're able to do is bring you know, highly sophisticated

692
00:43:37,239 --> 00:43:42,280
Speaker 2: asset management investment management into high net worth and retail

693
00:43:42,320 --> 00:43:45,480
Speaker 2: portfolios and add value for those investors, much like we've

694
00:43:45,520 --> 00:43:47,920
Speaker 2: done for institutions over the last forty years.

695
00:43:48,600 --> 00:43:50,160
Speaker 1: Does that bring on the regulators?

696
00:43:51,200 --> 00:43:55,279
Speaker 2: Well, I think I think we operate in areas that

697
00:43:55,320 --> 00:43:58,560
Speaker 2: are broadly regulated. We invest for insurance companies as well,

698
00:43:59,320 --> 00:44:03,800
Speaker 2: so there already is regulatory focus in that area. Again,

699
00:44:03,880 --> 00:44:06,200
Speaker 2: I think that comes back to, you know, if you

700
00:44:06,239 --> 00:44:10,120
Speaker 2: look at the scale of our platform, the professionalism, our

701
00:44:10,160 --> 00:44:14,520
Speaker 2: investment processes that we manage these and you know, we

702
00:44:14,600 --> 00:44:18,080
Speaker 2: manage these portfolios and have had very very low losses

703
00:44:18,120 --> 00:44:21,240
Speaker 2: over long periods of time, particularly in the credit markets.

704
00:44:21,920 --> 00:44:24,080
Speaker 1: Briefly on the on the going back to the insurance money,

705
00:44:24,640 --> 00:44:31,040
Speaker 1: how much or how important rated feeder notes privately issued

706
00:44:31,080 --> 00:44:33,640
Speaker 1: clos to bringing that insurance money.

707
00:44:34,560 --> 00:44:38,680
Speaker 2: It's it's it's a part of the market. Uh, it's

708
00:44:38,800 --> 00:44:41,719
Speaker 2: not a massive part of the market. If you compare that,

709
00:44:42,640 --> 00:44:44,759
Speaker 2: you know, it's actually quite a niche part of the

710
00:44:44,800 --> 00:44:50,360
Speaker 2: market as compared to financing aircraft, financing equipment financing data centers,

711
00:44:50,360 --> 00:44:54,160
Speaker 2: financing credit cards. So it's a rather a rather small

712
00:44:54,239 --> 00:44:57,719
Speaker 2: part of the market. It is a tool that we

713
00:44:57,840 --> 00:45:02,280
Speaker 2: see used to invest in fund that sometimes insurance companies

714
00:45:02,320 --> 00:45:02,879
Speaker 2: invest in.

715
00:45:03,200 --> 00:45:07,000
Speaker 1: And the bigger growth potential would come from pension funds

716
00:45:07,000 --> 00:45:09,040
Speaker 1: and sovereign wealth. Is that fair to say?

717
00:45:10,560 --> 00:45:13,520
Speaker 2: I think that is currently the part of the market

718
00:45:13,560 --> 00:45:19,120
Speaker 2: where there is virtually no investment from those institutions. And

719
00:45:19,200 --> 00:45:21,800
Speaker 2: it's interesting you look at you know, the asset based

720
00:45:21,800 --> 00:45:26,160
Speaker 2: credit market really goes back thousands of years, but it's

721
00:45:26,760 --> 00:45:29,880
Speaker 2: you know, but it's viewed as a new market, certainly

722
00:45:29,920 --> 00:45:35,120
Speaker 2: a new allocations as we see that capital transition from

723
00:45:35,160 --> 00:45:38,719
Speaker 2: bank balance sheets in some cases toward private capital providers

724
00:45:39,120 --> 00:45:42,680
Speaker 2: and it's introduced into the pension and institutional market. I

725
00:45:42,680 --> 00:45:45,719
Speaker 2: think we see a lot of growth in that area.

726
00:45:45,840 --> 00:45:48,000
Speaker 2: There's just a lot of white space because they're they're

727
00:45:48,080 --> 00:45:48,880
Speaker 2: under allocated.

728
00:45:49,120 --> 00:45:49,359
Speaker 3: Right.

729
00:45:49,520 --> 00:45:51,800
Speaker 1: You make it sound simple, you make it sound very tangible,

730
00:45:51,840 --> 00:45:56,200
Speaker 1: but you know there are acronyms ABF. You know, anytime

731
00:45:56,200 --> 00:46:01,480
Speaker 1: people start to see complexity and refige as totally mentioned,

732
00:46:01,480 --> 00:46:04,600
Speaker 1: a rapid growth, they start to worry about you know,

733
00:46:04,640 --> 00:46:07,560
Speaker 1: are we just setting ourselves up for another crisis. Is

734
00:46:07,600 --> 00:46:09,160
Speaker 1: it two thousand and eight, So we'll over again. What

735
00:46:09,480 --> 00:46:12,960
Speaker 1: gives you assurance that we're not going to run into trouble?

736
00:46:14,120 --> 00:46:17,080
Speaker 2: So, as I touched on, this market is not new.

737
00:46:17,600 --> 00:46:21,680
Speaker 2: We're really financing the nuts and bolts of the US

738
00:46:21,800 --> 00:46:26,040
Speaker 2: economy to finance all of our real industries, all of

739
00:46:26,080 --> 00:46:29,880
Speaker 2: our consumer needs. And these are areas that banks have

740
00:46:30,000 --> 00:46:33,400
Speaker 2: invested in for decades. There is a lot of data

741
00:46:33,440 --> 00:46:36,480
Speaker 2: going back decades supporting that there have been low losses

742
00:46:36,520 --> 00:46:40,040
Speaker 2: in this area. It's not so much that the end

743
00:46:40,080 --> 00:46:43,600
Speaker 2: markets are growing because they have certain tailwinds. You know,

744
00:46:43,640 --> 00:46:47,080
Speaker 2: we talked about data centers, but really what it is

745
00:46:47,080 --> 00:46:50,920
Speaker 2: is what you're seeing is private private capital, alternative capital

746
00:46:50,960 --> 00:46:55,120
Speaker 2: providers entering that market in what is a massive market

747
00:46:55,160 --> 00:46:57,400
Speaker 2: with a lot of white space, with a lot of

748
00:46:57,480 --> 00:47:01,759
Speaker 2: room for different market participants. But again, we're we're financing

749
00:47:01,800 --> 00:47:05,440
Speaker 2: things that are actually quite basic that everyone can see,

750
00:47:05,520 --> 00:47:07,600
Speaker 2: that you you know that you have in your home,

751
00:47:07,640 --> 00:47:09,960
Speaker 2: that you you know you touch in your daily lives.

752
00:47:10,480 --> 00:47:13,040
Speaker 1: What gives you the edge the blackstone? And why why

753
00:47:13,520 --> 00:47:16,560
Speaker 1: are you thinking that you're going to be successful in this?

754
00:47:17,280 --> 00:47:20,000
Speaker 2: So I think there's a few areas that give the

755
00:47:20,160 --> 00:47:25,319
Speaker 2: large players very significant advantages. One is the data that

756
00:47:25,360 --> 00:47:29,440
Speaker 2: we have. Investing is all about pattern recognition and having

757
00:47:29,480 --> 00:47:33,040
Speaker 2: the data to see trends early and adjust your activity.

758
00:47:33,440 --> 00:47:36,080
Speaker 2: So I mentioned earlier in our credit portfolio, we have

759
00:47:36,160 --> 00:47:40,840
Speaker 2: nearly five thousand portfolio companies, We have over ten thousand

760
00:47:40,920 --> 00:47:44,360
Speaker 2: real estate assets, We manage over five thousand secondaries funds.

761
00:47:45,120 --> 00:47:48,279
Speaker 2: All that is data that comes off the system that

762
00:47:48,480 --> 00:47:52,600
Speaker 2: we incorporate into our investment activity and incorporate into our

763
00:47:52,640 --> 00:47:57,239
Speaker 2: investment processes. So that is one one advantage. The other

764
00:47:57,640 --> 00:48:00,520
Speaker 2: is just scale. When you think about the markets that

765
00:48:00,560 --> 00:48:05,200
Speaker 2: we've talked about in participating alongside banks or participate participating

766
00:48:05,239 --> 00:48:09,720
Speaker 2: in markets where they've been active. We're working on several

767
00:48:09,760 --> 00:48:13,400
Speaker 2: deals that are multi billion dollar deals. There is really

768
00:48:13,520 --> 00:48:17,360
Speaker 2: just a handful of players that can participate in that market.

769
00:48:17,880 --> 00:48:21,320
Speaker 2: What goes along with that is also cost of capital.

770
00:48:22,200 --> 00:48:25,560
Speaker 2: If you're in a fixed income replacement market, yes there

771
00:48:25,640 --> 00:48:28,840
Speaker 2: is there is a home for you know, twelve percent returns,

772
00:48:28,840 --> 00:48:32,200
Speaker 2: fifteen percent returns, but a big chunk of that market

773
00:48:32,400 --> 00:48:35,400
Speaker 2: is low cost capital, and so they're really only going

774
00:48:35,480 --> 00:48:38,399
Speaker 2: to be a few winners in this space that have

775
00:48:38,480 --> 00:48:41,560
Speaker 2: the capital in scale and have it at the right

776
00:48:41,680 --> 00:48:44,640
Speaker 2: price point or the right cost of capital to add

777
00:48:44,760 --> 00:48:48,120
Speaker 2: value to our borrower. I think the last is how

778
00:48:48,160 --> 00:48:52,319
Speaker 2: we put together are everything that we do at Blackstone

779
00:48:52,760 --> 00:48:57,160
Speaker 2: to originate and have very unique origination, so we really

780
00:48:57,280 --> 00:49:01,319
Speaker 2: leverage the platform. So when I say we're, you know,

781
00:49:01,400 --> 00:49:06,920
Speaker 2: the number one energy lender, we really leverage the benefits

782
00:49:07,600 --> 00:49:10,400
Speaker 2: that we have. You know, we also have unique capabilities

783
00:49:10,400 --> 00:49:12,319
Speaker 2: in the private equity side of the market, and so

784
00:49:12,360 --> 00:49:16,520
Speaker 2: we leverage everything that we have across the platform. So

785
00:49:16,560 --> 00:49:20,200
Speaker 2: we have very unique origination franchises in energy and digital,

786
00:49:20,480 --> 00:49:23,800
Speaker 2: in real estate. We have a large infrastructure both equity

787
00:49:23,840 --> 00:49:27,600
Speaker 2: and lending business in the fund finance market, you know,

788
00:49:27,719 --> 00:49:30,319
Speaker 2: as the largest alternative asset manager in the world, we

789
00:49:30,400 --> 00:49:32,280
Speaker 2: have a lot of data and a lot of access

790
00:49:32,320 --> 00:49:35,439
Speaker 2: points that drives our fund finance activities. So the last

791
00:49:35,440 --> 00:49:37,239
Speaker 2: thing I'd highlight is just origination.

792
00:49:38,160 --> 00:49:41,520
Speaker 3: I have one more question. If I'm given what you

793
00:49:41,520 --> 00:49:47,680
Speaker 3: said about Blackstone's clearly dominant position in certain markets, would

794
00:49:47,719 --> 00:49:51,399
Speaker 3: you say then that Blackstone is big enough or do

795
00:49:51,440 --> 00:49:55,959
Speaker 3: you think then that there's room still for Blackstone to grow?

796
00:49:56,320 --> 00:49:59,520
Speaker 3: And a second sort of linked question, I guess one

797
00:49:59,560 --> 00:50:04,320
Speaker 3: of the issues use with being large is that sometimes

798
00:50:04,360 --> 00:50:08,400
Speaker 3: you may not be able to replicate the very high

799
00:50:08,560 --> 00:50:13,520
Speaker 3: returns that you sometimes get with the scale that you have.

800
00:50:14,239 --> 00:50:17,719
Speaker 3: Is that a concern for Blackstone that what is a

801
00:50:18,040 --> 00:50:22,960
Speaker 3: fifteen percent return on a much smaller fund may just

802
00:50:23,040 --> 00:50:26,239
Speaker 3: not be interesting enough or may not be scalable enough,

803
00:50:26,280 --> 00:50:28,759
Speaker 3: And so you miss out on that if you like,

804
00:50:29,080 --> 00:50:32,960
Speaker 3: because it's not a scalable opportunity. So on one side,

805
00:50:33,000 --> 00:50:36,040
Speaker 3: I'm asking is Blackstone big enough? And on the other

806
00:50:36,160 --> 00:50:39,760
Speaker 3: I'm asking, how do you capture the smaller opportunities.

807
00:50:40,719 --> 00:50:43,879
Speaker 2: Yeah, So what we've seen over time is scale has

808
00:50:43,960 --> 00:50:47,680
Speaker 2: been our biggest advantage. And you think about a number

809
00:50:47,680 --> 00:50:49,960
Speaker 2: of the deals that we do. Think about the Barclays

810
00:50:50,000 --> 00:50:53,239
Speaker 2: credit card deal. It's a billion four deal. There's only

811
00:50:53,280 --> 00:50:56,440
Speaker 2: a few people on the planet that can do that deal.

812
00:50:57,000 --> 00:50:59,120
Speaker 2: If you show up to an issuer and you say

813
00:50:59,760 --> 00:51:03,880
Speaker 2: I one hundred million dollars, that may not be relevant

814
00:51:03,880 --> 00:51:06,640
Speaker 2: to them. In fact, they the issuer may direct you

815
00:51:06,719 --> 00:51:09,440
Speaker 2: to Blackstone and say, if Blackstone wants you in the deal,

816
00:51:09,760 --> 00:51:12,560
Speaker 2: maybe they'll let you in the deal. So we can

817
00:51:12,640 --> 00:51:17,560
Speaker 2: really provide comprehensive financing solutions. We've done deals, for example,

818
00:51:17,600 --> 00:51:21,480
Speaker 2: with home improvement lenders where we may commit four billion

819
00:51:21,560 --> 00:51:26,719
Speaker 2: dollars and control the entire collateral pool. Our investment with

820
00:51:26,760 --> 00:51:29,560
Speaker 2: them actually might enable them to be the number one

821
00:51:29,600 --> 00:51:32,719
Speaker 2: player in the market because our capital gives them stability.

822
00:51:32,840 --> 00:51:36,600
Speaker 2: So we're driving the success of our issuers. And then

823
00:51:36,680 --> 00:51:40,239
Speaker 2: we can take that four billion dollar collateral pool, we

824
00:51:40,320 --> 00:51:43,680
Speaker 2: can finance some of it in the investment grade markets.

825
00:51:44,040 --> 00:51:46,200
Speaker 2: We can also trunch it up so that we might

826
00:51:46,280 --> 00:51:50,040
Speaker 2: have some junior opportunity, so that scale really allows us

827
00:51:50,080 --> 00:51:54,720
Speaker 2: to be very very relevant to our issuers, to our banks,

828
00:51:54,760 --> 00:51:59,040
Speaker 2: to our partners, and capture the largest opportunities in the market.

829
00:51:59,000 --> 00:52:01,600
Speaker 3: The biggest. Don't be a fall for a Blackstone.

830
00:52:01,080 --> 00:52:04,960
Speaker 1: Then absolutely great stuff. Rob Horn, Global head of Infrastructure

831
00:52:04,960 --> 00:52:06,960
Speaker 1: and Asset based Credit at Blackstone, has been a pleasure

832
00:52:06,960 --> 00:52:08,000
Speaker 1: having you on the credit edge.

833
00:52:08,120 --> 00:52:09,280
Speaker 2: Pleasure to be here, James.

834
00:52:09,280 --> 00:52:12,520
Speaker 1: Thank you, And to Tolu Alamutu with Bloomberg Intelligence, thank

835
00:52:12,560 --> 00:52:13,720
Speaker 1: you so much for joining us today.

836
00:52:13,920 --> 00:52:15,240
Speaker 3: Thank you for having me James.

837
00:52:15,440 --> 00:52:17,680
Speaker 1: For even more analysis, read all of Tolu's great work

838
00:52:17,719 --> 00:52:20,480
Speaker 1: on the Bloomberg terminal. Bloomberg Intelligence is part of our

839
00:52:20,480 --> 00:52:23,760
Speaker 1: research department, with five hundred analysts and strategists working across

840
00:52:23,800 --> 00:52:27,200
Speaker 1: all markets. Coverage includes over two thousand equities and credits

841
00:52:27,400 --> 00:52:30,240
Speaker 1: and outlooks on more than ninety industries and one hundred

842
00:52:30,239 --> 00:52:34,360
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843
00:52:34,400 --> 00:52:37,360
Speaker 1: Credit Edge wherever you get your podcasts. We're on Apple, Spotify,

844
00:52:37,400 --> 00:52:40,440
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845
00:52:40,480 --> 00:52:43,800
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846
00:52:43,840 --> 00:52:47,800
Speaker 1: or email me directly at jcromb eight at Bloomberg dot net.

847
00:52:48,480 --> 00:52:50,520
Speaker 1: I'm James Cromby. It's been a pleasure having you join

848
00:52:50,600 --> 00:53:09,440
Speaker 1: us again next week on the Credit Edge