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Speaker 1: Hello, 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 2: And I'm David Haven's, the senior credit analyst of Bloomberg

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Speaker 2: Intelligence charged with covering non bank financials, which happens to

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Speaker 2: include alternative asset managers, private credit, and BDC's. This week,

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Speaker 2: we're very pleased to welcome Michael Zuwadsky, who, as happenstance

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Speaker 2: would have it, is the chief investment officer of Blackstone's

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Speaker 2: Credit and Insurance group. Mike, how are you?

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Speaker 3: I'm fantastic, Thanks guys for having me.

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Speaker 2: It's awesome. Are we going with Z or Mike? Let's

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Speaker 2: go with z Okay? Z it is. Z's CIO office

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Speaker 2: at Blackstone includes a team of more than one hundred people,

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Speaker 2: larger than most credit platforms in their entirety, pouring for

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Speaker 2: more than five thousand companies in various investment portfolios. If

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Speaker 2: those figures are off, you're just going to have to

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Speaker 2: take it up with the Blackstone Secured lending folks, because

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Speaker 2: that's what they said on their second quarter conference call.

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Speaker 3: I trust them completely, all.

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Speaker 2: Right, Listeners are going to be deeply interested in your

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Speaker 2: views and observations as it relates to the markets and

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Speaker 2: private credit.

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Speaker 1: Great, and I'll start by saying credit markets are looking

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Speaker 1: pretty complacent at the moment. High grade bond spreads haven't

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Speaker 1: been this tight since the late nineties. Yes, I'm old

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Speaker 1: enough to remember that demand for yield is very strong,

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Speaker 1: Supply of new corporate debt is quite thin. Returns in

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Speaker 1: public markets, though, have been pretty solid, leaving some investors

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Speaker 1: to question the value of going private. Why sacrifice liquidity

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Speaker 1: at a time when the economy is slowing and there's

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Speaker 1: so much headline risk. There's also a fair amount of

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Speaker 1: anxiety about private asset performance. How are those companies managing

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Speaker 1: through trade wars and some pretty big US policy shifts.

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Speaker 1: What's the impact of inflation and high debt service costs?

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Speaker 1: Are there actually a lot more stressed deals into faults

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Speaker 1: out there than actually being reported. So that what you'll

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Speaker 1: take is private credit risk fairly valued at the moment,

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Speaker 1: and all the concerns about the aesset class warranted.

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Speaker 3: Great.

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Speaker 4: Well, Look, I just came back from basically a triple

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Speaker 4: around the world for the last thirty days. I was

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Speaker 4: on four different continents and I met with some of

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Speaker 4: our largest clients in all the regions around the globe,

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Speaker 4: and these are the topics we were discussing. We started

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Speaker 4: with a conversation around the macro, and I would tell

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Speaker 4: you folks are feeling a lot more comfortable with the

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Speaker 4: underlying macro. You mentioned some of the uncertainties that are

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Speaker 4: out there, and that is true, but when you actually

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Speaker 4: look at the fundamentals on the ground, company performance continues

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Speaker 4: to be strong. Eighty percent of companies in the second

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Speaker 4: quarter beat guidance. Consumer balance sheets are healthy, and we're

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Speaker 4: on the verge of some monetary and fiscal stimulus and

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Speaker 4: big capex spending cycles in areas like AI and energy

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Speaker 4: and power. All of those things provide strong macro backdrop

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Speaker 4: for investing in credit. The challenge, as you alluded to, James,

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Speaker 4: is that evaluations the liquid markets have gotten elevated, and

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Speaker 4: that's why you see spreads in liquid fixed income traditional

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Speaker 4: fixed income being awfully tight. The result of that is

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Speaker 4: that's leading to our clients around the world looking to

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Speaker 4: allocate more to private credit because as we look at

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Speaker 4: the market, we see excess spread in private credit, whether

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Speaker 4: it's on the investment grade side or the sub investment

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Speaker 4: grade side, at about two hundred basis points in excess

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Speaker 4: of liquid credit, and that's a really attractive thing for

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Speaker 4: our clients around the world.

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Speaker 2: And is that is the market in equilibrium? Do you

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Speaker 2: think a from sort of a funding perspective, because obviously,

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Speaker 2: if you're going from public into private, you're picking up

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Speaker 2: a lot of spread, but you're also giving up liquidity,

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Speaker 2: so it sort of introduces this whole issue of liquidity risks.

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Speaker 2: So you want to make sure that your assets and

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Speaker 2: liabilities are pretty well tied up, and I know from

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Speaker 2: looking at the BDCs that there is a close match.

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Speaker 2: Does that exist you think across most or all private

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Speaker 2: credit market sectors?

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Speaker 4: Well, it's hard to generalize across private credit because the

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Speaker 4: market is massive, it's expansive, with lots of different asset classes.

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Speaker 4: And then maybe we should come back to that in

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Speaker 4: a bit. But if I were to just make a

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Speaker 4: general comment around liquidity risk asset liability management, actually private

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Speaker 4: credit does a phenomenal job at that. If you actually

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Speaker 4: look at private credit vehicles that are either unlevered or

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Speaker 4: at most one times levered, there's good match between assets

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Speaker 4: and liabilities. There's no cross collateralization of balance sheets, and

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Speaker 4: so when you actually look at the foundation of the

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Speaker 4: asset class, it is built on resilience and prudent management,

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Speaker 4: and that's what we see across the board.

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Speaker 1: So that two hundred basis points differential between I'm assuming

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Speaker 1: it's a high yield the leveraged loan Roady syndicates it

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Speaker 1: against a private direct loan. You're getting two hundred basis

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Speaker 1: points on top of that. Is it the same fray

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Speaker 1: g exactly exactly?

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Speaker 4: And I think the reason why that excess spread exists

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Speaker 4: is what we call this farm to table model, where

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Speaker 4: we bring our capital our investors right up next to

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Speaker 4: the borrowers, and in doing that, we can deliver a

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Speaker 4: customized solution that meets their capital needs without all the

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Speaker 4: leakage that happens along the way if you go to

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Speaker 4: market and have multiple pathsive syndication and so bringing that

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Speaker 4: capital direct to borrower that is a big source.

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Speaker 3: Of premium for our clients.

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Speaker 4: And obviously you're right, David, there is some excess return

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Speaker 4: that comes with clients that could afford some element of

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Speaker 4: ill liquidity in their asset portfolios.

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Speaker 1: But from the borough they're paying more. So, I mean,

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Speaker 1: on the one hand, i'd wonder why they would pay

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Speaker 1: more if they have access to all this liquidity elsewhere.

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Speaker 1: And also how sustainable is it for a risky a

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Speaker 1: borrower to keep paying that high cost.

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Speaker 4: Well, let's talk about that for a second. To the end, borrower,

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Speaker 4: you're basically in the same spot. You're just not paying

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Speaker 4: a bunch of fees along the way. If you look

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Speaker 4: at your all in cost of capital, you get to

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Speaker 4: a much more similar spot. And because we're bringing our

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Speaker 4: clients capital direct to the borrower, that means that all

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Speaker 4: of those economics go to our clients. That's really what matters,

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Speaker 4: and that's the value proposition we're delivering on your common

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Speaker 4: around you know, borrowers being able to accept cost of capital.

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Speaker 4: That goes back to where I started with, which is

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Speaker 4: we're seeing very strong credit performance across the board. If

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Speaker 4: you look at Blackstone's business, for example, we have two

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Speaker 4: thousand non investment grade borrowers and we have a default

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Speaker 4: rate of below fifty basis points across that portfolio. Over

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Speaker 4: the last twelve months, we continue to see strong earnings growth,

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Speaker 4: and so we have a lot of confidence, at least

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Speaker 4: in the companies we tend to partner with, which tends

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Speaker 4: to be the bigger companies in higher growth, more resilient,

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Speaker 4: less cyclical sectors and areas where we can really benefit

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Speaker 4: from the strength of the Blackstone platform. If you look

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Speaker 4: at the areas that we tend to do a lot

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Speaker 4: in right in software, for example, we've got a huge

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Speaker 4: business that invests specifically in software on the private equity side.

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Speaker 4: In healthcare, we've got a dedicated life sciences business and energy,

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Speaker 4: and we've got a huge infrastructure investing business. Being able

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Speaker 4: to access all the insights across Blackstone that drives our

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Speaker 4: credit selection, that drives the lower loss rates we've been

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Speaker 4: able to deliver for our clients over an extended period

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Speaker 4: of time.

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Speaker 2: And for the borrowers, what's the value proposition for them

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Speaker 2: for going with Blackstone as opposed to a bank or

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Speaker 2: you know, sort of some other borrowing channel.

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Speaker 4: Speed, certainty, flexibility, a customized solution. Having one partner on

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Speaker 4: the other end. If you want to do an acquisition

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Speaker 4: or fund a growth project, you know exactly who to call.

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Speaker 4: And then what I'll call value creation services. We've got

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Speaker 4: a dedicated team within the credit bitness a Blackstone that

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Speaker 4: will go in and help borrowers drive cross sell across

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Speaker 4: the Blackstone portfolio help them take out operating costs and

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Speaker 4: run more streamline, do things like cybersecurity assessments. We've created

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Speaker 4: over five billion dollars of enterprise value in our credit

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Speaker 4: book alone through these value added services. And so when

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Speaker 4: you put all of that together, it's really quite a

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Speaker 4: compelling solution for borrowers, whether they are investment grade or

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Speaker 4: sub investment grade.

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Speaker 2: Yeah, and you know, it's obviously a competitive market the

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Speaker 2: banks for whatever reason, and there seem to be various,

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Speaker 2: you know, sort of topics that are brought up as

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Speaker 2: to why the banks have sort of seeded, you know,

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Speaker 2: this beachhead and not more than a beachhead. I guess

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Speaker 2: it's continent in private credit. But they seem to want

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Speaker 2: to get back into the market now. Now they've got

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Speaker 2: leverage shoe, I don't mean financial leverage. They've got the

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Speaker 2: ability to sort of lean on, you know, some of

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Speaker 2: the borrowers to get back into the into the marketplace.

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Speaker 2: Are you seeing them becoming more aggressive these days or

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Speaker 2: or just not yet.

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Speaker 4: I would say we've got to again look at the

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Speaker 4: market holistically.

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Speaker 3: Right.

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Speaker 4: A lot of the conversation, and most of what we've

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Speaker 4: spoken about today is focused on sponsored back direct lending,

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Speaker 4: that's about a two trillion dollar asset class. The overall

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Speaker 4: private credit market is thirty trillion dollars an addressable size.

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Speaker 4: And so when you look at big areas of our market,

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Speaker 4: from private investment grade to asset back finance, REZI mortgages,

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Speaker 4: in for credit, these are huge market opportunities with significant

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Speaker 4: secular growth drivers where capital from both banks and private

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Speaker 4: lenders are needed. Those are markets where the supply demand

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Speaker 4: dynamic for US as a lender today is incredibly favorable.

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Speaker 4: And so there's tremendous amounts of white space for us

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Speaker 4: to go out and do direct lending. Yes, the banks

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Speaker 4: will participate as well, but these are huge markets, and

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Speaker 4: in fact, in many of these markets, you're seeing us

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Speaker 4: partner with banks to go and deliver solutions to asset

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Speaker 4: originators and clients. And you saw us do that in

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Speaker 4: fun finance with Key Bank. You've seen us do that

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Speaker 4: in infrastructure credit with Santander. You've seen us do that

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Speaker 4: in credit cards with Barclay's. I think this model of

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Speaker 4: there is such a large market opportunity out there in

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Speaker 4: the broadly defined private credit marketplace.

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Speaker 3: Can we work jointly with.

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Speaker 4: Banks to deliver solutions to our borrowers in the way

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Speaker 4: that meets their needs.

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Speaker 1: Glad you brought up scale. So I was going to

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Speaker 1: ask because your colleague Rob Hone came on the show

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Speaker 1: last year and pegged at thirty trillion. Then Public came

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Speaker 1: on a few weeks lation and said it's actually forty trillion,

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Speaker 1: and they said half of it was already you know,

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Speaker 1: in existence, so that we're already a twenty trillion market,

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Speaker 1: but it's going to grow to forty trillion. So there's

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Speaker 1: kind of a lot of you know, big numbers being

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Speaker 1: thrown out, but we already How big is the actual

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Speaker 1: market right now?

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Speaker 4: Well, look, I think you've got to talk about the

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Speaker 4: actual funded market versus the actual addressable market. And most

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Speaker 4: folks publicly report the actual funded market at two trillion.

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Speaker 4: So whether the addressable market is twenty or thirty or forty, frankly,

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Speaker 4: I don't worry too much about that. What I worry

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Speaker 4: what I focus on is in any of those contexts,

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Speaker 4: you have an extraordinary long runway ahead. You're in the

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Speaker 4: very early innings, particularly in areas like private investment, grade

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Speaker 4: and asset bashed finance.

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Speaker 2: Those are the.

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Speaker 4: Fastest growing part of the overall private credit ecosystem, and

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Speaker 4: that's where the largest capital needs are, whether it's in digital,

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Speaker 4: infront data centers, energy and power and so on and

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Speaker 4: so forth.

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Speaker 2: Yeah, there's also been a lot written recently about insurance

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Speaker 2: companies and private credit, private assets coming on to insurance companies.

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Speaker 2: And I've been looking at life insurance companies since nineteen ninety,

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Speaker 2: sort of dating myself a little bit there, but it's

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Speaker 2: interesting when insurance companies, you know, sort of get involved

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Speaker 2: in a sector, they tend to stampede into a sector.

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Speaker 2: Sometimes they do so, you know, maybe not having done

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Speaker 2: their homework entirely, But it does seem to me that

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Speaker 2: this sort of private investment grade credit is a really

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Speaker 2: interesting area for insurance companies, you know, because you've got

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Speaker 2: well rated I guess credit, so minimal credit risk, substantial spreads.

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Speaker 2: What are you doing there? Like what's you've got an

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Speaker 2: insurance operation or you've got insurance affiliates investments in insurance companies.

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Speaker 2: It's a huge area.

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Speaker 4: Yeah, So let's start with how we are set up

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Speaker 4: and how we're partnering with our insurance clients, and then

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Speaker 4: we can talk about the opportunity set so at Blackstone.

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Speaker 4: We have a little bit of a different model than

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Speaker 4: some of the other players in the market, where we

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Speaker 4: are fully asset light balance sheet light. We serve our

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Speaker 4: clients in the insurance market as an asset manager. We

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Speaker 4: originate and manage asset portfolios on their behalf, and all

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Speaker 4: of our clients set shoulder to shoulder and we use

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Speaker 4: their collective buying power to do very large deals. We

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Speaker 4: did a five billion dollar deal, for example, with Rogers

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Speaker 4: up in Canada where we finance against their infrastructure network

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Speaker 4: back haul, and so our model is very much true

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Speaker 4: to the way Blackstone approaches partner with our clients across

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Speaker 4: every part of our ecosystem, not just credit, but private equity,

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Speaker 4: real estate, infrastructure. Why the private investment create marketplace has

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Speaker 4: resonated with insurers is they have long duration liabilities and

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Speaker 4: so they want to match that up with long duration assets.

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Speaker 4: And because they have law duration liabilities, they don't necessarily

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Speaker 4: need access to liquidity over the short term, and so

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Speaker 4: it lends themselves to investing in high quality, resilient, investment

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Speaker 4: grade assets where you can get excess spread. I mentioned

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Speaker 4: one hundred and fifty two hundred basis points of excess

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Speaker 4: spread for taking some illiquidity, and that is why we

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Speaker 4: have seen our insurance partners actively invest in this market

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Speaker 4: with a lot of success. I would also add that

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Speaker 4: it provides a lot of diversification into real assets. It's

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Speaker 4: a highly scalable opportunity. I mentioned some of the big

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Speaker 4: deals we've been involved in, but these are large growing markets.

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Speaker 4: If you look at the hyperscalers, they'll invest nearly four

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Speaker 4: hundred billion dollars in digital Infra Alan this year. And

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Speaker 4: so these are big markets, rapidly growing markets, and asset

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Speaker 4: pools that fit insurance balance sheets very well. I think

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Speaker 4: the interesting thing to me, David, is the next chapter

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Speaker 4: of this. And I think the next chapter of this

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Speaker 4: comes in two forms. One non insurance clients traditional institutions, pensions,

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Speaker 4: sovereign wealth funds saying hey, we want to get excess

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Speaker 4: spread and access to high quality, non correlated real assets

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Speaker 4: in the private investment grade landscape, and so we want

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Speaker 4: to start allocating here. And then all of our non

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Speaker 4: US clients. If you look at Asia base insurers, for example,

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Speaker 4: only five percent of their balance sheets are in private

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Speaker 4: credit versus a US basinsure might have thirty five or

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Speaker 4: forty percent and so those are two markets that are

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Speaker 4: largely unpenetrated but absolutely should grow, like we've seen the

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Speaker 4: market grow with US based insurers.

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Speaker 2: You were, I presume you're over in Asia on your

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Speaker 2: four continent tour, it was one of them. Yeah, the

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Speaker 2: Asian insurance market, at least on the life and saving side,

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Speaker 2: seems to you'll be it's catching up, I think to

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Speaker 2: where we are in the US right. I mean, it

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Speaker 2: still tends to be a little bit more of an underwriting,

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Speaker 2: you know, sort of market as opposed to sort of

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Speaker 2: an investment spread market. But I assume that that's going

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Speaker 2: to change, and I assume that that's going to create

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Speaker 2: a lot of demand.

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Speaker 4: It's going to change, and it's going to create demand

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Speaker 4: just like you say, David, because those clients need the

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Speaker 4: same thing that our US clients need, which is access

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Speaker 4: to high quality, low risk assets at scale with excess spread.

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Speaker 4: And that is what day in day out, our one

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Speaker 4: hundred person team focused on this market looks to deliver.

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Speaker 4: And we've got well over one hundred billion dollars of

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Speaker 4: private investment grade assets today. But when we look forward,

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Speaker 4: we think that's going to be the fastest growing part

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Speaker 4: of our credit ecosystem, what.

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Speaker 1: Do these assets look like it? Because again I'm confused.

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Speaker 1: I mean, I can see it from the investor side,

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Speaker 1: they want the access spread, it makes absolute sense. But

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Speaker 1: from the boro aside, you know, in the US, a

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Speaker 1: big company just go to the high grade bone market

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Speaker 1: and get very good execution and you know very well

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Speaker 1: bid at monkey at the moment, say what kinds of

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Speaker 1: borrow is? What kinds of real assets are we talking about?

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Speaker 4: Yeah, so if you look at our business, we generally

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Speaker 4: organize in four or five verticals, I would say most

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Speaker 4: of what we're doing is financing against hard assets. And

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Speaker 4: so I gave you an example of Rogers up in

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Speaker 4: Canada where we basically took an asset off their balance sheet,

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Speaker 4: their network infrastructure, and we finance against that. It was

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Speaker 4: a five billion dollar customized financing. That is not something

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Speaker 4: that you could easily go to the public high grade

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Speaker 4: market with. We did a similar thing with a company

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Speaker 4: here in the US called EQT around one of their

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Speaker 4: pipeline assets. And when I look at our business today,

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Speaker 4: we have a very long pipeline of deals that looks

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Speaker 4: similar to that, and so we call those deals corporate

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Speaker 4: solutions deals where we work with an investment grade borrower

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Speaker 4: and deliver a scale, customized solution that meets their needs.

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Speaker 4: But we're also financing digital in for a data center

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Speaker 4: build out. I mentioned the size of that market. Morgan

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Speaker 4: Stanley put out a report two weeks ago they thought

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Speaker 4: seven hundred billion dollars of private credit capital alone would

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Speaker 4: be needed to build out data center and digital info assets.

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Speaker 4: And then think about all the corresponding energy and power

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Speaker 4: assets and infrastructure assets that go alongside that, things like

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Speaker 4: heart assets. We have a large deal in the aviation

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Speaker 4: finance space, we have a pending deal in aircraft engines, railcars.

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Speaker 4: Think about all the heart assets and transportation. What we're delivering, James,

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Speaker 4: is a customized solution at scale, direct to borrower. Yes,

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Speaker 4: many of these bars will access the public high grade market.

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Speaker 4: But when you can deliver scale, customized solution to help

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Speaker 4: meet a need, whether it's fund and acquisition fund capital needs,

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Speaker 4: that is super valuable and that is what our clients

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Speaker 4: look for.

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Speaker 2: So it sounds like the leverage there or the wedge

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Speaker 2: is something a situation where you've got something you know,

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Speaker 2: sort of turnplane vanilla came up. Some of these is

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Speaker 2: not I planed in all something that has a you

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Speaker 2: know sort of there's a specific asset, there's a specific

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Speaker 2: pool that might be a little bit different than you know,

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Speaker 2: sort of what everyone else is looking at. Is that

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Speaker 2: the look?

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Speaker 4: I think again, if I think back about what's made

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Speaker 4: us very successful in direct lending, it's speed, it's certainty,

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Speaker 4: it's value added services, it's capital at scale and provide

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Speaker 4: a customized solution for almost.

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Speaker 3: Every deal we do. One or more of.

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Speaker 4: Those factors is driving the decision to do something direct

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Speaker 4: with us versus potentially a public market alternative.

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Speaker 1: I think, as you say, data centers is something that

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Speaker 1: everyone's getting very excited about. We've had the big advantage

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Speaker 1: data center deal Meta black Stains obviously got a long

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Speaker 1: history of doing that kind of stuff. But you know what,

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Speaker 1: what do you make of those deals? What the risks

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Speaker 1: to lenders? How can they protect themselves? And you know,

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Speaker 1: how active do you want to be in that space?

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Speaker 4: I think we're going to be extraordinarily active.

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Speaker 2: We already are.

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Speaker 4: And part of it is what I mentioned earlier, which

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Speaker 4: is when we have an investment theme at Blackstone on

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Speaker 4: the private equity side or the infrastructure equity side, the

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Speaker 4: amount of benefit that gives us on the credit side.

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Speaker 3: Is really extraordinary.

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Speaker 4: Right, Blackstone owns QTS, which is the largest developer of

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Speaker 4: data centers here in the US. We have a large

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Speaker 4: ownership stake in air Trunk, which is the largest developer

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Speaker 4: of data centers in the Asia Pacific market. That gives

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Speaker 4: us extraordinary insights into what's going into that market. And

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Speaker 4: so when we look at a credit deal, it's really

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Speaker 4: valuable to know firsthand what's going on in these markets.

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Speaker 4: And so that's where I would start. The second thing

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Speaker 4: I would say is as a lender lending against fifteen

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Speaker 4: twenty year triplenet contracts from the highest quality credit counter

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Speaker 4: parties in the world, which is what money of these

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Speaker 4: data centers look like, is a really great place for.

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Speaker 3: Us to play.

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Speaker 4: You mentioned a couple of deals. You are basically taking

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Speaker 4: credit risk against one of the big hyperscalers, but you're

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Speaker 4: doing it via this asset and getting paid, like I said,

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Speaker 4: excess spread typically one hundred and fifty to two hundred

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Speaker 4: basis points. What gives us a ton of comfort is

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Speaker 4: not just the insights on the equity side, but the

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Speaker 4: contractual protections you get as a lender into these deals

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Speaker 4: where you're basically just facing off against that counterparty, whether

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Speaker 4: it's Amazon or Meta or Microsoft, but doing it via

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Speaker 4: an asset.

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Speaker 2: That's really attractive.

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Speaker 1: And is it a twenty year deal?

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Speaker 3: They can be.

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Speaker 4: Ten, they can be fifteen, they can be twenty. But

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Speaker 4: what we're seeing is very attractive laun duration triple net

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Speaker 4: contracts that are fantastic for us to finance.

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Speaker 1: What kind of tickets are you take?

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Speaker 4: Look, we can do very large ticket size. It's not

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Speaker 4: I mentioned we did five billion dollars alone in that

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Speaker 4: Rogers deal. So if you think about the size of

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Speaker 4: these deals and you think about the size of some

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Speaker 4: of these data center complexes, they can be quite large.

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Speaker 4: And we're going to continue to be a leading player

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Speaker 4: in this market.

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Speaker 1: Because these are going up to tens of billions of

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Speaker 1: dollars each time you come out with a deal. And

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Speaker 1: we've talked before this school about livving its tendencies. Do

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Speaker 1: few bigger deals with a few puntnas. But what about

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Speaker 1: the risk?

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Speaker 4: Again, we'll underwrite the deal to its bespoke risk. That's

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Speaker 4: why we have an incredibly robust investment committee process. When

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Speaker 4: we do a large deal like that, we're spreading it

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Speaker 4: across many different clients, and so each individual one of

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Speaker 4: our clients. That's what I mentioned around our business model,

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Speaker 4: where we're aggregating almost brick by brick client relationships in

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Speaker 4: the insurance space. So every single client will have an

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Speaker 4: allocation to a deal that meets their investment guidelines, So

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Speaker 4: we're diversifying risk in their portfolio. But the aggregate buying

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Speaker 4: power of our platform, because of the breath of our

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Speaker 4: client base, that's what allows us to go into the

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Speaker 4: market and do these really large, interesting deals with excess spread.

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Speaker 2: It seems to integrate nicely with the power part of

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Speaker 2: Blackstone's you know, sort of overall ecosystem as well.

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Speaker 3: Yeah, exactly right.

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Speaker 4: Look, these are themes that we have very very high

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Speaker 4: conviction is we look at large thematic growth trends, AI

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Speaker 4: the power that's required to fund that. Those are two

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Speaker 4: at the very top of the list, and when we

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Speaker 4: see these thematics across our platform, we instruct our team

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Speaker 4: to go out and originate in these markets.

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Speaker 1: You mentioned software though, also, and that seems to being

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Speaker 1: area that some people are concerned about, giving how levit

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Speaker 1: is and how easy it is to replace it with

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Speaker 1: AI at the moment, So how are you changing your

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Speaker 1: approach to lending to that business.

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Speaker 4: Well, look, we've been focused. It's a great question. We've

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Speaker 4: been focused on AI for some period of time, and

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Speaker 4: we've got a large team right now led by Rodney Zemmel,

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Speaker 4: who used to run the digital practice at McKenzie, who

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Speaker 4: helps us, deal by deal assess what is the risk

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Speaker 4: of AI disruption and for us as a lender, that's

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Speaker 4: a key part of our underwriting. And so we're in

440
00:22:52,040 --> 00:22:55,040
Speaker 4: the investment committee room. We actually for every software deal,

441
00:22:55,080 --> 00:22:57,160
Speaker 4: we have a scorecard that the team needs to fill

442
00:22:57,160 --> 00:23:00,960
Speaker 4: out to ascertain how likely is this company to be

443
00:23:01,040 --> 00:23:03,960
Speaker 4: disrupted by, how embedded are they in the workflow is,

444
00:23:03,960 --> 00:23:06,240
Speaker 4: how hard it is it to switch, how does their

445
00:23:06,240 --> 00:23:09,800
Speaker 4: technology stack up versus alternatives, And so when we're underwriting

446
00:23:09,800 --> 00:23:12,080
Speaker 4: a deal in the software space, it's not just the

447
00:23:12,119 --> 00:23:16,200
Speaker 4: financial underwright, it's the product underwright. And in fact, Blacktone

448
00:23:16,240 --> 00:23:19,480
Speaker 4: has a team of over five hundred technologists who all

449
00:23:19,520 --> 00:23:23,120
Speaker 4: what they do is procure software for our portfolio companies.

450
00:23:23,440 --> 00:23:26,000
Speaker 4: And so when we want to make an investment in

451
00:23:26,040 --> 00:23:28,240
Speaker 4: a software business, it's really nice to be able to

452
00:23:28,240 --> 00:23:30,040
Speaker 4: call our team and say, hey, are you buying this

453
00:23:30,080 --> 00:23:33,040
Speaker 4: for our portfolio companies? Is they're a better product out there,

454
00:23:33,280 --> 00:23:35,959
Speaker 4: and I think that gives us a holistic view of

455
00:23:36,000 --> 00:23:36,640
Speaker 4: the underwrite.

456
00:23:36,680 --> 00:23:38,320
Speaker 3: I would tell you when we look at.

457
00:23:38,240 --> 00:23:41,480
Speaker 4: Our software portfolio today, we feel quite good about the

458
00:23:41,560 --> 00:23:46,120
Speaker 4: performance and overall we see continued strong growth and free

459
00:23:46,119 --> 00:23:46,959
Speaker 4: cash flow generation.

460
00:23:47,440 --> 00:23:49,719
Speaker 2: What are the weak spots out there right now? Like

461
00:23:49,760 --> 00:23:54,200
Speaker 2: you have Blackzone, I think probably has close to unparalleled

462
00:23:54,240 --> 00:23:59,280
Speaker 2: I guess, insight into multiple industries and probably information that

463
00:23:59,800 --> 00:24:02,000
Speaker 2: might be a little bit more immediate than what the

464
00:24:02,000 --> 00:24:04,399
Speaker 2: markets tend to see and be able to digest. So

465
00:24:04,560 --> 00:24:06,919
Speaker 2: are there any soft spots that you see developing? You know,

466
00:24:07,240 --> 00:24:10,720
Speaker 2: obviously we had terrif Liberation Day not too long ago.

467
00:24:11,280 --> 00:24:13,880
Speaker 2: That felt horrible, then it felt better, and now you're

468
00:24:13,920 --> 00:24:16,879
Speaker 2: sort of wondering, you know, maybe the economy is beginning

469
00:24:16,880 --> 00:24:17,840
Speaker 2: to soften up a little.

470
00:24:18,440 --> 00:24:22,000
Speaker 4: I'd say the things we're watching is borrow or size.

471
00:24:22,080 --> 00:24:25,840
Speaker 4: We tend to focus on larger scale borrowers. I think

472
00:24:25,880 --> 00:24:29,720
Speaker 4: when we look at the market, subscale, lower middle market

473
00:24:29,760 --> 00:24:33,000
Speaker 4: type borrow wars have definitely had a harder time navigating

474
00:24:33,080 --> 00:24:35,840
Speaker 4: some of the uncertainty and volatility.

475
00:24:35,400 --> 00:24:36,040
Speaker 3: In the macro.

476
00:24:36,119 --> 00:24:38,600
Speaker 4: So that's one thing we look at. Sector is a

477
00:24:38,760 --> 00:24:43,080
Speaker 4: huge area for us to focus on software continues to

478
00:24:43,119 --> 00:24:47,520
Speaker 4: perform well in our portfolio, business services, insurance services, all

479
00:24:47,560 --> 00:24:51,680
Speaker 4: of those markets continue to be incredibly strong. But deep cyclicals,

480
00:24:52,040 --> 00:24:56,280
Speaker 4: high cap X investments, areas that had huge runups post COVID,

481
00:24:56,320 --> 00:24:59,640
Speaker 4: like freight logistics or building products. Those are markets where

482
00:24:59,680 --> 00:25:03,000
Speaker 4: we see a little bit of weakness, and accordingly, we're

483
00:25:03,200 --> 00:25:07,160
Speaker 4: pretty careful about deploying capital into those areas.

484
00:25:08,280 --> 00:25:13,520
Speaker 1: So you've see more payment in kind defers, interests, quiet restructuring.

485
00:25:13,560 --> 00:25:15,600
Speaker 1: Is that sort of thing going on in your portfolio?

486
00:25:15,800 --> 00:25:18,399
Speaker 4: Away from you, I would say that's an area that

487
00:25:18,440 --> 00:25:22,199
Speaker 4: has gotten a lot published on it, but holistically I

488
00:25:22,280 --> 00:25:25,200
Speaker 4: don't view that as a massive issue. If we look

489
00:25:25,200 --> 00:25:30,360
Speaker 4: at our portfolio, for example, less than one percent of

490
00:25:30,400 --> 00:25:33,480
Speaker 4: our income comes from paiding kind assets that are marked

491
00:25:33,480 --> 00:25:35,280
Speaker 4: below eighty five cents in the dollar, and so you

492
00:25:35,280 --> 00:25:39,399
Speaker 4: don't have this large issue there. More often what we

493
00:25:39,440 --> 00:25:42,640
Speaker 4: see in the market is new deals having a bit

494
00:25:42,680 --> 00:25:45,720
Speaker 4: of paid in kind capacity as part of the setup.

495
00:25:45,960 --> 00:25:47,800
Speaker 4: But again that's baked into the underwright and we looked

496
00:25:47,800 --> 00:25:49,400
Speaker 4: at the credit metrics, and we look at the loan

497
00:25:49,440 --> 00:25:52,120
Speaker 4: to value incorporating that as part of the structure.

498
00:25:52,359 --> 00:25:54,520
Speaker 1: So we're not seeing more stress away from you in

499
00:25:54,720 --> 00:25:56,240
Speaker 1: other parts of the market, because that is talked about

500
00:25:56,240 --> 00:25:57,880
Speaker 1: a love as you say, and people do talk about

501
00:25:58,440 --> 00:26:00,800
Speaker 1: new entrance to the space. Been here a long time,

502
00:26:00,840 --> 00:26:03,800
Speaker 1: so you pretty you know, not as vunderable that they're

503
00:26:03,800 --> 00:26:07,000
Speaker 1: a small and new entrance that people cool tourists and

504
00:26:07,160 --> 00:26:08,400
Speaker 1: think that they might be preblence with.

505
00:26:08,720 --> 00:26:11,160
Speaker 4: I think this theme of dispersion is the one we'll

506
00:26:11,200 --> 00:26:14,040
Speaker 4: talk a lot about. You know, I obviously have the

507
00:26:14,080 --> 00:26:17,879
Speaker 4: fortune of looking at our portfolio, which is performing extraordinarily well.

508
00:26:18,520 --> 00:26:20,880
Speaker 4: But when you step back and look at what's happening

509
00:26:20,960 --> 00:26:24,200
Speaker 4: in the macro, yes, overall, I feel pretty good about

510
00:26:24,200 --> 00:26:26,840
Speaker 4: what's there. But I think you will see some dispersion

511
00:26:26,880 --> 00:26:30,240
Speaker 4: where managers who don't have the origination capabilities or the

512
00:26:30,280 --> 00:26:33,840
Speaker 4: asset management capabilities are exposed to some of the sectors

513
00:26:33,920 --> 00:26:37,199
Speaker 4: or companies that may be more vulnerable in environment like that,

514
00:26:37,280 --> 00:26:40,639
Speaker 4: I think it is natural to see some uptick in

515
00:26:40,760 --> 00:26:42,600
Speaker 4: dispersion in manager performance.

516
00:26:42,640 --> 00:26:43,800
Speaker 3: But I would tell you that's a good thing.

517
00:26:43,920 --> 00:26:46,360
Speaker 4: And I think for us, as someone who has been

518
00:26:46,359 --> 00:26:48,520
Speaker 4: in this market for over twenty years as a proven

519
00:26:48,560 --> 00:26:52,760
Speaker 4: investment process, has lots of asset management and other capabilities

520
00:26:53,520 --> 00:26:55,560
Speaker 4: We don't shy away from that because we think our

521
00:26:55,640 --> 00:26:59,200
Speaker 4: underwriting and our capabilities on the investment side will continue

522
00:26:59,240 --> 00:26:59,879
Speaker 4: to differentiate.

523
00:27:00,480 --> 00:27:03,280
Speaker 2: Yeah, at least looking at the BDCs. We just did

524
00:27:03,720 --> 00:27:07,240
Speaker 2: a report called the BDC Beat available to you on

525
00:27:07,400 --> 00:27:10,320
Speaker 2: the terminal, just came out today, but it sort of

526
00:27:10,359 --> 00:27:13,080
Speaker 2: looks at information that we've been writing about for a while.

527
00:27:13,200 --> 00:27:16,760
Speaker 2: We look at pick rates. We look at non accrual

528
00:27:16,840 --> 00:27:21,080
Speaker 2: rates across a portfolio of about thirty of the larger BDC's,

529
00:27:21,119 --> 00:27:24,520
Speaker 2: the ones that've issued public bonds, and there definitely is dispersion.

530
00:27:25,080 --> 00:27:28,600
Speaker 2: You know, the aggregate numbers haven't really changed all that much.

531
00:27:29,400 --> 00:27:31,080
Speaker 2: If you look at non accrural rates, I think they've

532
00:27:31,119 --> 00:27:34,520
Speaker 2: been between one and two percent since the pandemic. If

533
00:27:34,560 --> 00:27:38,159
Speaker 2: you look at the PICK rate, which I try to

534
00:27:38,200 --> 00:27:42,320
Speaker 2: focus on investment income pick specifically, but if you look

535
00:27:42,320 --> 00:27:44,640
Speaker 2: at the pickrate, it's held steady around six percent. It's

536
00:27:44,640 --> 00:27:47,920
Speaker 2: actually down a little bit this year. That surprises a

537
00:27:47,960 --> 00:27:53,400
Speaker 2: lot of people. It may even disappoint people, you knowlines, Yeah,

538
00:27:53,400 --> 00:27:55,400
Speaker 2: I would tell you that it may disappoint some people

539
00:27:55,400 --> 00:27:57,320
Speaker 2: who've sort of been rooting about now's the time that

540
00:27:57,359 --> 00:27:59,000
Speaker 2: these guys are going to get it. But it just

541
00:27:59,040 --> 00:27:59,840
Speaker 2: doesn't seem to.

542
00:28:00,560 --> 00:28:04,480
Speaker 4: Well, I guess just doesn't see fundamentally, fundamentally, you step

543
00:28:04,520 --> 00:28:07,520
Speaker 4: back and what are we doing? What are most people

544
00:28:07,560 --> 00:28:10,680
Speaker 4: in the direct lending market doing? There writing first lean

545
00:28:11,080 --> 00:28:14,240
Speaker 4: senior secured loans at forty percent loan to value and

546
00:28:14,320 --> 00:28:16,480
Speaker 4: putting them in vehicles that are either un levered or

547
00:28:16,480 --> 00:28:19,560
Speaker 4: at most one times levered. That is not fundamentally a

548
00:28:19,680 --> 00:28:24,159
Speaker 4: risky activity. Might you see an idiosyncratic event here or

549
00:28:24,160 --> 00:28:27,560
Speaker 4: there where a company underperforms, of course, but the grand

550
00:28:27,680 --> 00:28:30,760
Speaker 4: scheme of what's going on in the asset class is

551
00:28:31,400 --> 00:28:36,240
Speaker 4: pretty straightforward senior secured, lower risk lending. Well, you see dispersion, sure,

552
00:28:36,320 --> 00:28:38,280
Speaker 4: but when I step back and look at what's happening

553
00:28:38,280 --> 00:28:40,920
Speaker 4: in the asset class, we continue to feel like it's

554
00:28:40,960 --> 00:28:45,160
Speaker 4: a great thing for our client portfolios, whether they be institutional,

555
00:28:45,480 --> 00:28:47,120
Speaker 4: insurance or individuals.

556
00:28:47,480 --> 00:28:49,360
Speaker 1: Do you know worry a tool though, that some of

557
00:28:49,400 --> 00:28:51,640
Speaker 1: this risk is being mispriced? I mean, you know, if

558
00:28:51,680 --> 00:28:55,160
Speaker 1: every time the market grows this quickly to this scale,

559
00:28:55,960 --> 00:28:59,760
Speaker 1: something happens, and you know, I've never seen a market

560
00:28:59,800 --> 00:29:03,960
Speaker 1: that has this amount of access demand US supply no

561
00:29:04,640 --> 00:29:08,640
Speaker 1: create some kind of issues. Do you think that that's

562
00:29:09,520 --> 00:29:11,480
Speaker 1: me just exaggerating because I'm generalist.

563
00:29:12,800 --> 00:29:16,160
Speaker 2: Or before you answer. One of the things I've sort

564
00:29:16,200 --> 00:29:19,560
Speaker 2: of thought about this is that this whole private credit market,

565
00:29:19,560 --> 00:29:23,120
Speaker 2: it's not a new market, it's a new form of

566
00:29:23,160 --> 00:29:26,160
Speaker 2: the market because what we're talking about private credit used

567
00:29:26,160 --> 00:29:28,720
Speaker 2: to be done by the banks. So people talk about

568
00:29:28,760 --> 00:29:32,480
Speaker 2: how much private credit is growing like crazy. It is,

569
00:29:32,880 --> 00:29:37,560
Speaker 2: but not overall like sort of corporate credit overall isn't

570
00:29:37,560 --> 00:29:40,320
Speaker 2: growing like crazy. It's just been transferred from the banking

571
00:29:40,360 --> 00:29:42,200
Speaker 2: sector into these other sectors.

572
00:29:42,320 --> 00:29:43,960
Speaker 4: And again, I think this goes back to what we're

573
00:29:44,000 --> 00:29:46,920
Speaker 4: talking about about some of the misconceptions of the market. Again,

574
00:29:47,320 --> 00:29:50,600
Speaker 4: you have, you know, senior secured lending at low loan

575
00:29:50,680 --> 00:29:53,280
Speaker 4: to values that is existent for a very long period

576
00:29:53,320 --> 00:29:55,400
Speaker 4: of time. Who is doing it, the form of which

577
00:29:55,400 --> 00:29:56,000
Speaker 4: it's done.

578
00:29:56,160 --> 00:29:57,040
Speaker 3: I think that has.

579
00:29:57,040 --> 00:29:59,280
Speaker 4: Evolved, and I think we'll continue to evolve. Again, the

580
00:29:59,280 --> 00:30:01,880
Speaker 4: most interesting thing to me is all of the areas

581
00:30:01,920 --> 00:30:05,160
Speaker 4: outside of direct lending, because again, you've got a two

582
00:30:05,280 --> 00:30:07,880
Speaker 4: trillion dollar direct lending market, but you've got a thirty

583
00:30:07,880 --> 00:30:11,080
Speaker 4: trillion dollar opportunity set. And as we think about these

584
00:30:11,160 --> 00:30:14,600
Speaker 4: new AZTEC classes and we think about international expansion, to me,

585
00:30:14,880 --> 00:30:18,720
Speaker 4: like that is what folks aren't talking enough about here.

586
00:30:18,760 --> 00:30:21,680
Speaker 4: But when I went on my tour around the world,

587
00:30:21,720 --> 00:30:23,760
Speaker 4: that's where our clients were most focused.

588
00:30:24,240 --> 00:30:27,000
Speaker 1: So talk about international expansion. There was this big you know,

589
00:30:27,120 --> 00:30:31,400
Speaker 1: April whenever it was the tires Day, pushed against American exceptionalism,

590
00:30:31,400 --> 00:30:33,960
Speaker 1: and then this idea that you needed to diversify geographically.

591
00:30:34,040 --> 00:30:36,360
Speaker 1: Is that parts of the international side or is it

592
00:30:36,440 --> 00:30:37,120
Speaker 1: a different story.

593
00:30:37,840 --> 00:30:40,320
Speaker 4: Look, I think most of our clients will still have

594
00:30:40,440 --> 00:30:44,960
Speaker 4: their portfolios largely concentrated in the US, but I do

595
00:30:45,000 --> 00:30:47,200
Speaker 4: think there is a desire for some of our clients

596
00:30:47,240 --> 00:30:50,800
Speaker 4: abroad to strengthen their local origination, and I think that

597
00:30:50,880 --> 00:30:53,760
Speaker 4: is what is driving some of the activity, whether it's

598
00:30:53,800 --> 00:30:57,040
Speaker 4: in Europe or an Apac. And you've seen us add

599
00:30:57,080 --> 00:31:00,959
Speaker 4: to our team significantly. We just added someone in Japan

600
00:31:01,040 --> 00:31:03,440
Speaker 4: on the credit side, We've added someone in India. We'll

601
00:31:03,440 --> 00:31:05,959
Speaker 4: be up to one hundred and fifty people across Europe

602
00:31:06,080 --> 00:31:09,120
Speaker 4: within credit alone. So this is a market where we

603
00:31:09,200 --> 00:31:12,160
Speaker 4: see lots of opportunities for our clients. But I would

604
00:31:12,160 --> 00:31:14,120
Speaker 4: say a lot of clients in that region who haven't

605
00:31:14,160 --> 00:31:17,200
Speaker 4: had access to local origination are now trying to partner

606
00:31:17,200 --> 00:31:20,959
Speaker 4: with managers to capitalize on the opportunity set that we

607
00:31:21,000 --> 00:31:21,600
Speaker 4: know is coming.

608
00:31:22,160 --> 00:31:24,200
Speaker 2: It seems to be a little bit of a lower

609
00:31:24,880 --> 00:31:27,640
Speaker 2: leveraged world outside the US. Would you agree with that?

610
00:31:28,200 --> 00:31:31,480
Speaker 4: I would say generally speaking yes, But again, when we

611
00:31:31,520 --> 00:31:34,400
Speaker 4: look at most of what we're doing is unlevered. Everything

612
00:31:34,440 --> 00:31:37,200
Speaker 4: in the private investment create space, it is un levered,

613
00:31:37,240 --> 00:31:39,240
Speaker 4: and so I think that is the norm for the

614
00:31:39,360 --> 00:31:41,680
Speaker 4: vast amount of what we're doing in the markets.

615
00:31:41,880 --> 00:31:45,640
Speaker 1: Yeah, we wrote about black crooks attempts to build up

616
00:31:45,760 --> 00:31:49,680
Speaker 1: in Asia private credit specifically and just not able to

617
00:31:49,720 --> 00:31:52,320
Speaker 1: get the deals. And you know, we need the fundraising

618
00:31:52,360 --> 00:31:55,400
Speaker 1: stumps partly because there was an acquisition going on this

619
00:31:55,760 --> 00:31:59,080
Speaker 1: separate But that do seem to be challenges when you're

620
00:31:59,240 --> 00:32:01,440
Speaker 1: raising money and you don't have enough to invest in.

621
00:32:01,480 --> 00:32:04,680
Speaker 1: So how what's your view of Asia in that context?

622
00:32:04,920 --> 00:32:07,320
Speaker 4: Well, again, I think you've got to be prudent as

623
00:32:07,360 --> 00:32:10,200
Speaker 4: you think about your growth plans. And we've had a

624
00:32:10,240 --> 00:32:13,560
Speaker 4: team on the ground there for many years. We leverage

625
00:32:13,640 --> 00:32:16,800
Speaker 4: the capabilities and insights of our private equity and our

626
00:32:16,840 --> 00:32:20,840
Speaker 4: real estate franchises that are very strong in those markets,

627
00:32:21,160 --> 00:32:24,240
Speaker 4: and then we continue to build and I would tell

628
00:32:24,280 --> 00:32:28,960
Speaker 4: you it is logical to expect you're an Asia to

629
00:32:29,080 --> 00:32:33,280
Speaker 4: lag the growth that we see in the US, But

630
00:32:33,560 --> 00:32:35,760
Speaker 4: that's a timing thing. You know, all of the themes

631
00:32:35,800 --> 00:32:37,680
Speaker 4: that are driving a lot of the growth, for example

632
00:32:37,680 --> 00:32:40,560
Speaker 4: on the asset bat market in the US, whether it's digital, infra,

633
00:32:40,920 --> 00:32:44,920
Speaker 4: or energy and power, those same themes exist globally, and

634
00:32:44,960 --> 00:32:48,000
Speaker 4: the same needs for private capital, especially on the credit side,

635
00:32:48,000 --> 00:32:52,200
Speaker 4: to support those secular capital needs, those exist globally, and

636
00:32:52,240 --> 00:32:54,520
Speaker 4: so you're really just talking about a timing from when

637
00:32:54,560 --> 00:32:57,200
Speaker 4: you start to see it really take off.

638
00:32:57,480 --> 00:33:00,760
Speaker 1: And in there's a big defense story. Is that an

639
00:33:00,800 --> 00:33:02,400
Speaker 1: opportunity for private.

640
00:33:02,720 --> 00:33:03,640
Speaker 3: I think it's part of it.

641
00:33:03,680 --> 00:33:06,640
Speaker 4: And I think the narrative around Europe definitely is a

642
00:33:06,640 --> 00:33:09,600
Speaker 4: bit more constructive than it was in the recent past,

643
00:33:09,680 --> 00:33:15,040
Speaker 4: with more supportive government around infrastructure spend, defense, defense spend.

644
00:33:15,840 --> 00:33:18,240
Speaker 4: We tend to see a little bit of excess spread

645
00:33:18,560 --> 00:33:21,560
Speaker 4: in Europe relative to the US, and we've seen a

646
00:33:21,600 --> 00:33:24,600
Speaker 4: recovery and deal activity and so all of that is

647
00:33:24,720 --> 00:33:27,560
Speaker 4: definitely supporting client interest in that market.

648
00:33:28,280 --> 00:33:31,120
Speaker 1: So I take your point about the proposition from the

649
00:33:31,120 --> 00:33:33,680
Speaker 1: investment standpoint, but still we are looking at you know,

650
00:33:33,720 --> 00:33:37,920
Speaker 1: aggregated numbers from Pitchbook for example, saying that traditional private

651
00:33:37,960 --> 00:33:42,760
Speaker 1: credit fundraising is at the lowest since twenty nineteen, which

652
00:33:42,760 --> 00:33:45,320
Speaker 1: begs the question, you know why our institution investors becoming

653
00:33:45,600 --> 00:33:50,080
Speaker 1: less interested according to the data in private debt, and

654
00:33:50,480 --> 00:33:52,680
Speaker 1: you know, shouldn't it silly growing in terms of the

655
00:33:52,680 --> 00:33:53,719
Speaker 1: factional fundraising.

656
00:33:54,120 --> 00:33:58,160
Speaker 4: So what we're seeing is a consolidation of where people

657
00:33:58,200 --> 00:34:01,480
Speaker 4: are deploying their capital. So the other massive theme I

658
00:34:01,640 --> 00:34:06,080
Speaker 4: see is the large managers like Blackstone who are able

659
00:34:06,080 --> 00:34:09,279
Speaker 4: to originate in scale across all of these markets, who

660
00:34:09,320 --> 00:34:13,000
Speaker 4: are able to partner with large sophisticated clients around the

661
00:34:13,040 --> 00:34:17,200
Speaker 4: world to deliver customized solutions. We're seeing a consolidation of

662
00:34:17,239 --> 00:34:21,160
Speaker 4: the capital there. And so a big theme that I

663
00:34:21,200 --> 00:34:25,920
Speaker 4: see around the world is these multi asset credit partnerships

664
00:34:25,920 --> 00:34:29,440
Speaker 4: where we partner with a sophisticated institution and we figure out, Okay,

665
00:34:29,600 --> 00:34:32,840
Speaker 4: here's all the things we're seeing across Blackstone, from direct

666
00:34:32,920 --> 00:34:36,200
Speaker 4: lending to asset bat finands, to infrastructure credit to private

667
00:34:36,239 --> 00:34:38,719
Speaker 4: ig all over the world. How can we work with

668
00:34:38,800 --> 00:34:43,239
Speaker 4: you holistically to partner across all of those things that

669
00:34:43,280 --> 00:34:48,840
Speaker 4: we're seeing to deliver a resilient, diversified, customized portfolio that

670
00:34:48,920 --> 00:34:52,359
Speaker 4: delivers the best of all of the things we do

671
00:34:52,680 --> 00:34:56,120
Speaker 4: across Blackstone in credit, and so we're seeing that from

672
00:34:56,360 --> 00:35:00,600
Speaker 4: our largest institutional clients, We're seeing that from our insurance partners,

673
00:35:00,840 --> 00:35:03,880
Speaker 4: and increasingly individuals are saying, Okay, how do I access

674
00:35:04,360 --> 00:35:07,320
Speaker 4: more of the credit opportunity beyond just direct lending?

675
00:35:08,400 --> 00:35:10,920
Speaker 1: And does that mean that only those sorts of players

676
00:35:10,960 --> 00:35:13,000
Speaker 1: will ultimately exist in this market?

677
00:35:13,200 --> 00:35:14,600
Speaker 3: Is that that scale matters?

678
00:35:14,680 --> 00:35:16,920
Speaker 4: You brought it up earlier, James, I think, more than

679
00:35:17,000 --> 00:35:20,480
Speaker 4: anything in credits, scale is a massive differentiator. Allows you

680
00:35:20,560 --> 00:35:22,640
Speaker 4: to do those large deals which we spoke about. It

681
00:35:22,680 --> 00:35:25,160
Speaker 4: allows you to access the biggest and best borrowers. It

682
00:35:25,200 --> 00:35:29,200
Speaker 4: allows you to offer unique solutions to clients, and it

683
00:35:29,239 --> 00:35:31,560
Speaker 4: allows us to invest in some of those resources that

684
00:35:31,640 --> 00:35:33,960
Speaker 4: I mentioned on the value creation side, on the asset

685
00:35:33,960 --> 00:35:37,720
Speaker 4: management side, that allow us to deliver performance on behalf

686
00:35:37,719 --> 00:35:38,400
Speaker 4: of our clients.

687
00:35:38,640 --> 00:35:39,600
Speaker 1: Do you need to get bigger?

688
00:35:40,840 --> 00:35:42,880
Speaker 4: Well, I think you will see us continue to scale

689
00:35:42,960 --> 00:35:45,280
Speaker 4: because scale is a huge advantage. And there's white space

690
00:35:45,360 --> 00:35:48,880
Speaker 4: I mentioned. I mentioned Europe and APAC as an area

691
00:35:49,080 --> 00:35:51,600
Speaker 4: of white space. I mentioned private investment grade where I

692
00:35:51,600 --> 00:35:53,920
Speaker 4: think we've only scratched the surface, and so I think

693
00:35:53,960 --> 00:35:56,200
Speaker 4: you will absolutely see us get.

694
00:35:56,040 --> 00:35:57,160
Speaker 3: Bigger in those markets.

695
00:35:57,160 --> 00:35:58,840
Speaker 4: And I think the other thing we haven't spent a

696
00:35:58,840 --> 00:36:02,680
Speaker 4: lot of time on and this conversation is deal activity

697
00:36:02,719 --> 00:36:05,319
Speaker 4: is picking up in a very material way. And I

698
00:36:05,360 --> 00:36:07,400
Speaker 4: don't know that this has really been picked up on,

699
00:36:07,520 --> 00:36:12,440
Speaker 4: but this summer was the third highest summer for M

700
00:36:12,440 --> 00:36:14,920
Speaker 4: and A activity since two thousand and eight. August was

701
00:36:14,920 --> 00:36:18,680
Speaker 4: the single biggest month we had in investment committee in

702
00:36:18,719 --> 00:36:19,600
Speaker 4: the last three years.

703
00:36:19,600 --> 00:36:21,879
Speaker 3: And August is supposed to be a slow month. We'll

704
00:36:21,880 --> 00:36:23,640
Speaker 3: close thirty deals.

705
00:36:23,400 --> 00:36:25,719
Speaker 4: Basically in the next two weeks, and so we are

706
00:36:25,760 --> 00:36:30,480
Speaker 4: seeing a significant uptick in deal activity across all of

707
00:36:30,520 --> 00:36:34,000
Speaker 4: our markets because the underlying macro feels a little bit better,

708
00:36:34,080 --> 00:36:37,160
Speaker 4: because you're seeing rates and cost of capital coming down,

709
00:36:37,280 --> 00:36:40,960
Speaker 4: because you're seeing increased confidence in strong corporate earnings. And

710
00:36:41,000 --> 00:36:43,799
Speaker 4: so I think this deal machine that has been a

711
00:36:43,800 --> 00:36:45,520
Speaker 4: little bit slow to get out of the blocks over

712
00:36:45,520 --> 00:36:47,000
Speaker 4: the last couple of years, I think you're at a

713
00:36:47,040 --> 00:36:49,759
Speaker 4: real inflection point. I think that's another reason why we're

714
00:36:49,760 --> 00:36:53,319
Speaker 4: seeing strong client interest in credit and another reason why

715
00:36:53,440 --> 00:36:58,160
Speaker 4: scale and flexibility of capital and a broad capability set

716
00:36:58,440 --> 00:36:59,800
Speaker 4: are the big differentiators.

717
00:37:00,080 --> 00:37:03,560
Speaker 1: Evaluations are still very high.

718
00:37:02,400 --> 00:37:05,719
Speaker 4: For the right assets, and again I think the right assets,

719
00:37:05,840 --> 00:37:09,240
Speaker 4: you are seeing buyers, whether that's strategic or financial buyers

720
00:37:09,440 --> 00:37:11,680
Speaker 4: step up, and I expect to continue.

721
00:37:11,239 --> 00:37:13,480
Speaker 1: To see that and LBOs as well.

722
00:37:14,239 --> 00:37:15,880
Speaker 3: You're starting to see it. You're starting to see it.

723
00:37:15,800 --> 00:37:17,640
Speaker 4: It was a market that for a while was just

724
00:37:17,760 --> 00:37:21,440
Speaker 4: characterized by refinancings, and I think you're going to see

725
00:37:21,560 --> 00:37:25,120
Speaker 4: deal activity pickup. And like I said, we have. We've

726
00:37:25,120 --> 00:37:27,480
Speaker 4: had a very active August and I expect the fourth

727
00:37:27,560 --> 00:37:29,000
Speaker 4: quarter to be quite busy as well.

728
00:37:29,280 --> 00:37:31,640
Speaker 1: Is that more of a direct lending opportunity or is

729
00:37:31,680 --> 00:37:34,080
Speaker 1: it a leveraged loan, high yield traditional finance or is

730
00:37:34,080 --> 00:37:34,799
Speaker 1: it a mixture of all.

731
00:37:35,239 --> 00:37:37,160
Speaker 4: I think it's all the above. If you look just

732
00:37:37,200 --> 00:37:42,320
Speaker 4: in the last week to ten days, We've announced a

733
00:37:42,320 --> 00:37:45,240
Speaker 4: deal with Parkplace, which is a data center services provider.

734
00:37:45,239 --> 00:37:48,200
Speaker 4: We've announced a deal with just Right. We've announced a

735
00:37:48,239 --> 00:37:50,480
Speaker 4: deal this morning with am Trust. We did a big

736
00:37:50,560 --> 00:37:53,400
Speaker 4: data center deal with Aligned. We probably announced half a

737
00:37:53,440 --> 00:37:55,759
Speaker 4: dozen deals just in the last week. And that is

738
00:37:55,800 --> 00:37:59,239
Speaker 4: a good indication of the deal activity and pipeline we

739
00:37:59,280 --> 00:38:01,240
Speaker 4: have at our at our fingertips today.

740
00:38:01,400 --> 00:38:04,160
Speaker 1: So it continues through the fourth quarter into next year.

741
00:38:04,200 --> 00:38:07,040
Speaker 4: You think this I think, look, obviously we're we're in

742
00:38:07,080 --> 00:38:10,240
Speaker 4: a world with lots of volatility and macro question marks

743
00:38:10,280 --> 00:38:11,799
Speaker 4: out there. But I think if we stay in the

744
00:38:11,840 --> 00:38:14,759
Speaker 4: current backdrop we're in right now, I think that's going

745
00:38:14,840 --> 00:38:16,520
Speaker 4: to be a really good thing for deal activity.

746
00:38:17,200 --> 00:38:19,839
Speaker 2: And the issue of suitability has come up also, how

747
00:38:20,200 --> 00:38:21,520
Speaker 2: how do you address that?

748
00:38:22,560 --> 00:38:25,439
Speaker 4: Well, again, I think each client in their advisors will

749
00:38:25,480 --> 00:38:28,680
Speaker 4: have to make the determination of how much illiquidity they

750
00:38:28,680 --> 00:38:31,120
Speaker 4: can have in their portfolio. But when you think about

751
00:38:31,120 --> 00:38:35,000
Speaker 4: something like retirement savings, by definition, that is a longer

752
00:38:35,280 --> 00:38:39,319
Speaker 4: dated decision, and as a result, there should be some

753
00:38:39,400 --> 00:38:44,080
Speaker 4: amount of illiquidity that individuals can tolerate within their portfolios.

754
00:38:44,320 --> 00:38:45,040
Speaker 2: Maybe not for me.

755
00:38:46,480 --> 00:38:48,280
Speaker 4: I'll let you your own decision, David.

756
00:38:48,880 --> 00:38:52,400
Speaker 1: As this monkey becomes called democratization, that's what people have

757
00:38:52,400 --> 00:38:56,800
Speaker 1: been talking about for well, and more regulation, presumedly more transparency.

758
00:38:57,640 --> 00:39:00,440
Speaker 1: Does that not a road that one hundred fifty to

759
00:39:00,480 --> 00:39:04,440
Speaker 1: two hundred basis points premium on private ve's is public?

760
00:39:04,640 --> 00:39:08,440
Speaker 4: Well, again, I would separate those two things, James. I

761
00:39:08,440 --> 00:39:11,360
Speaker 4: think what we deliver on a deal by deal basis

762
00:39:11,400 --> 00:39:14,160
Speaker 4: for our client, for our borrowers, by built bringing our

763
00:39:14,200 --> 00:39:17,040
Speaker 4: capital all the way to them and delivering a customized

764
00:39:17,080 --> 00:39:21,399
Speaker 4: solution alongside value creation services, alongside all the other things

765
00:39:21,400 --> 00:39:24,319
Speaker 4: that Blastom delivers its borrowers. I think that's one thing

766
00:39:24,400 --> 00:39:26,640
Speaker 4: on the deal side. I think that will continue. On

767
00:39:26,719 --> 00:39:31,160
Speaker 4: your common around transparency, we embrace transparency fully.

768
00:39:31,320 --> 00:39:31,960
Speaker 3: David knows this.

769
00:39:32,040 --> 00:39:33,759
Speaker 4: If you look at any of our BDCs, you can

770
00:39:33,800 --> 00:39:36,319
Speaker 4: pull up a ten Q and see every position we

771
00:39:36,400 --> 00:39:39,240
Speaker 4: have and we can see you know where we're marking

772
00:39:39,239 --> 00:39:42,000
Speaker 4: them and when they mature, and what the interest rate

773
00:39:42,080 --> 00:39:42,440
Speaker 4: is on them.

774
00:39:42,480 --> 00:39:43,920
Speaker 3: And I would.

775
00:39:43,719 --> 00:39:46,439
Speaker 4: Tell you that is great for clients to be able

776
00:39:46,480 --> 00:39:49,520
Speaker 4: to have that transparency, and so we welcome.

777
00:39:49,239 --> 00:39:51,200
Speaker 1: That, and you'll still trading them as well.

778
00:39:52,239 --> 00:39:54,480
Speaker 3: Well. We haven't been as.

779
00:39:55,719 --> 00:39:58,600
Speaker 4: Engaged on trading private credit. I think most of our

780
00:39:58,640 --> 00:40:02,759
Speaker 4: clients think about private credit as just that they want

781
00:40:02,760 --> 00:40:05,280
Speaker 4: to earn that liquidity premium. In most of our borrowers,

782
00:40:05,360 --> 00:40:07,680
Speaker 4: they partner with Blackstone because they want Blackstone to own

783
00:40:07,680 --> 00:40:10,560
Speaker 4: the loan, not whoever we might trade it to. And

784
00:40:10,600 --> 00:40:13,880
Speaker 4: so I think we'll continue to look at this asset

785
00:40:13,880 --> 00:40:17,200
Speaker 4: class as one where we're originating to term on behalf

786
00:40:17,200 --> 00:40:17,880
Speaker 4: of our clients.

787
00:40:20,200 --> 00:40:23,160
Speaker 2: Yeah, and just by the way you do, you did

788
00:40:23,160 --> 00:40:26,560
Speaker 2: bring up the issue of transparency and just so listeners

789
00:40:27,120 --> 00:40:30,520
Speaker 2: understand the all of this information does reside in the

790
00:40:30,840 --> 00:40:34,120
Speaker 2: in the public markets and SEC documentation. It's also available

791
00:40:34,160 --> 00:40:37,200
Speaker 2: on the Bloomberg terminals, on our BBC page and on

792
00:40:37,239 --> 00:40:39,400
Speaker 2: some of our other loan pages, so you know that

793
00:40:39,440 --> 00:40:41,240
Speaker 2: information has been transferred to the terminal.

794
00:40:41,280 --> 00:40:43,920
Speaker 3: I've been on those pages. I must say, and.

795
00:40:43,880 --> 00:40:46,680
Speaker 1: You do a great job and to stay until do

796
00:40:46,719 --> 00:40:49,719
Speaker 1: you need to acquient other thumbs? Are you going to

797
00:40:49,719 --> 00:40:53,360
Speaker 1: grow organically? What's the longusen vision and sons of youal platform.

798
00:40:53,560 --> 00:40:58,000
Speaker 4: Look, we've done really a remarkable job growing our business,

799
00:40:58,000 --> 00:41:01,239
Speaker 4: and we've done it virtually all organic. Our bias is

800
00:41:01,280 --> 00:41:04,160
Speaker 4: to build from within. We've got a proving capability of

801
00:41:04,239 --> 00:41:08,840
Speaker 4: doing that. We've got extraordinary, extraordinary people all over our organization.

802
00:41:08,880 --> 00:41:11,080
Speaker 4: We've got seven hundred and fifty people in credit. When

803
00:41:11,080 --> 00:41:14,200
Speaker 4: there's new opportunities, we want to tap our existing team

804
00:41:14,280 --> 00:41:17,280
Speaker 4: to go capitalize on it. And we were talking about

805
00:41:17,360 --> 00:41:19,480
Speaker 4: Asia Pacific and what we've done there, and that's another

806
00:41:19,640 --> 00:41:21,839
Speaker 4: that's a great example of an area where I think

807
00:41:21,840 --> 00:41:23,200
Speaker 4: you'll see us grow organically.

808
00:41:24,680 --> 00:41:27,720
Speaker 2: Do you see more insurance partnerships coming down the coming

809
00:41:27,760 --> 00:41:30,040
Speaker 2: down the line? It is interesting. I think you know

810
00:41:30,120 --> 00:41:34,120
Speaker 2: the different approaches that alternative asset managers have taken to insurance.

811
00:41:34,200 --> 00:41:38,880
Speaker 2: You know, obviously Apollo is all in the theme, Kkar

812
00:41:39,040 --> 00:41:41,319
Speaker 2: is all in with with Global Atlantic, and you guys

813
00:41:41,320 --> 00:41:44,000
Speaker 2: have taken a different attack on that where I think

814
00:41:44,040 --> 00:41:50,320
Speaker 2: you own ten to twenty percent of AIG, Is that right? Corbridge? Corbridge?

815
00:41:50,400 --> 00:41:52,840
Speaker 4: Yeah, we had a minority staking Corbridge. But you know

816
00:41:52,960 --> 00:41:55,680
Speaker 4: the model that we have again very different from what

817
00:41:55,719 --> 00:41:58,399
Speaker 4: those others are doing where they've kind of taken whole

818
00:41:58,440 --> 00:42:01,640
Speaker 4: ownership of an insurance balance sheet. For us, it's really

819
00:42:01,680 --> 00:42:03,439
Speaker 4: an asset management relationship, yep.

820
00:42:03,480 --> 00:42:05,480
Speaker 2: And do you see more of these partnerships coming down

821
00:42:05,560 --> 00:42:06,640
Speaker 2: the line.

822
00:42:06,840 --> 00:42:09,319
Speaker 4: It wouldn't surprise me, right. I think when you look

823
00:42:09,320 --> 00:42:14,200
Speaker 4: at insurers, private credit is a really nice fit for

824
00:42:14,320 --> 00:42:16,680
Speaker 4: what they're trying to do in terms of excess spread,

825
00:42:16,880 --> 00:42:21,320
Speaker 4: low risk, taking some inliquity to do that. The challenge

826
00:42:21,320 --> 00:42:24,920
Speaker 4: is origination, and so if you're a standalone insurer and

827
00:42:24,960 --> 00:42:28,400
Speaker 4: you don't have either an asset management partner or a

828
00:42:28,440 --> 00:42:31,520
Speaker 4: balance sheet partner to help you originate, I think it's

829
00:42:31,640 --> 00:42:34,839
Speaker 4: logical to expect to see more of that. I think

830
00:42:34,880 --> 00:42:37,239
Speaker 4: the models that people employ will continue to look a

831
00:42:37,320 --> 00:42:41,640
Speaker 4: little bit differently, and the ability for folks to execute

832
00:42:41,680 --> 00:42:44,919
Speaker 4: to originate in scale, I think that also will look

833
00:42:45,040 --> 00:42:47,560
Speaker 4: very different. It's nice for us to have, you know,

834
00:42:47,560 --> 00:42:50,279
Speaker 4: one hundred and twenty five billion dollar head start in

835
00:42:50,400 --> 00:42:52,600
Speaker 4: private investment grade when we go and we talk to

836
00:42:52,680 --> 00:42:56,200
Speaker 4: some potential clients on the insurance side.

837
00:42:56,560 --> 00:43:00,479
Speaker 1: Great stuff. Michael Zowski, CIA of Blackston's Credit and Insures Group,

838
00:43:00,480 --> 00:43:02,200
Speaker 1: many thanks for joining us on the Credit Edge.

839
00:43:02,360 --> 00:43:04,000
Speaker 3: Thanks for having me guys, and.

840
00:43:03,920 --> 00:43:06,280
Speaker 1: Of course very grateful to David Havens from Bloomberg Intelligence.

841
00:43:06,320 --> 00:43:06,960
Speaker 1: Thank you very much.

842
00:43:07,040 --> 00:43:08,319
Speaker 2: Great being with your for.

843
00:43:08,320 --> 00:43:10,839
Speaker 1: Even more credit market analysis and insight. Read all David

844
00:43:10,840 --> 00:43:13,719
Speaker 1: Havees's great work on the terminal. Bloomberg Intelligence is part

845
00:43:13,760 --> 00:43:16,560
Speaker 1: of our research department with five hundred analysts and strategists

846
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847
00:43:19,920 --> 00:43:22,560
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848
00:43:22,640 --> 00:43:26,760
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849
00:43:26,800 --> 00:43:29,120
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Speaker 1: review tell your friends, or email me directly at jcromb

853
00:43:38,960 --> 00:43:42,920
Speaker 1: eight at bloomberg dot net. I'm James Crombi. It's been

854
00:43:42,960 --> 00:43:45,040
Speaker 1: a pleasure having you join us again next week on

855
00:43:45,080 --> 00:44:01,640
Speaker 1: the Credit Edge