WEBVTT - Blackstone's Michael Zawadzki on How Private Credit Got so Big 0:00:02.720 --> 0:00:16.439 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.360 --> 0:00:21.160 Hello and welcome to another episode of the Odd Lots Podcast. 0:00:21.200 --> 0:00:22.480 I'm Tracy Alloway. 0:00:22.200 --> 0:00:23.320 And I'm Joe Wisenthal. 0:00:23.640 --> 0:00:27.040 Joe, I keep thinking about that Sam Altman hype cycle 0:00:27.160 --> 0:00:30.160 kind of phrase, the whole it's over and then we're 0:00:30.160 --> 0:00:32.880 so back back thing. And obviously he was talking about 0:00:32.880 --> 0:00:35.320 AI and how people you know, feel about AI, but 0:00:35.360 --> 0:00:37.280 I think you could apply it to a bunch of 0:00:37.280 --> 0:00:41.080 different markets at the moment. So AI obviously, but also 0:00:41.159 --> 0:00:44.199 private credit totally. Think back to the end of last year, right, 0:00:44.240 --> 0:00:48.280 we had all the JP Morgan Jamie Diamond's proverbial cockroaches 0:00:48.840 --> 0:00:51.920 emerging from private credit, and people started to get really worried. 0:00:52.360 --> 0:00:56.080 Fast forward to January twenty twenty six, and a lot 0:00:56.080 --> 0:00:58.400 of those concerns seem to have faded into the background. 0:00:58.480 --> 0:01:01.840 Right, you wrote the thing, right, spreads everywhere are super tight, 0:01:01.920 --> 0:01:04.360 and already we know that the stock market is up 0:01:04.400 --> 0:01:06.040 for the year, but credit market is off to a 0:01:06.160 --> 0:01:07.720 very strong start of all flavors. 0:01:07.720 --> 0:01:11.160 From what I understand, right, stock markets stealing all the spotlight. 0:01:11.360 --> 0:01:14.039 But if you look at the corporate bond market, now 0:01:14.040 --> 0:01:16.880 this is the public bond market not private, but spreads 0:01:16.920 --> 0:01:20.559 are at basically historic tights. I think the high Yield 0:01:20.560 --> 0:01:23.480 Index is starting at its tightest level ever in the 0:01:23.520 --> 0:01:26.080 history of the index for the year. This is crazy, 0:01:26.120 --> 0:01:28.760 but it also highlights an important point, which is that 0:01:29.160 --> 0:01:32.199 spreads and returns are all relative. Yeah, right, And so 0:01:32.400 --> 0:01:35.959 if the public market is absolutely booming, that could be 0:01:35.959 --> 0:01:38.319 a good thing for private credit. But also private credit 0:01:38.400 --> 0:01:40.880 competes with the public market, right, so if you're getting 0:01:41.400 --> 0:01:45.480 pretty good returns in public credit, leverage loans, something like that, 0:01:45.680 --> 0:01:47.760 maybe you're not going into private credit as much as 0:01:47.760 --> 0:01:48.120 you used to. 0:01:48.440 --> 0:01:50.440 What if you found a house that just had one 0:01:50.480 --> 0:01:52.720 cockroach that could you imagine. 0:01:52.280 --> 0:01:53.960 There's never one cockroach? That's the point. 0:01:53.960 --> 0:01:55.920 There had to have been a first cockroach that enters 0:01:55.960 --> 0:01:58.360 the house. You get it really quickly in your and 0:01:58.400 --> 0:01:59.960 then you don't have a cockroach problem. 0:02:00.160 --> 0:02:02.560 Did I ever tell you I hate cockroaches so much? 0:02:02.720 --> 0:02:06.200 The first of all, the first Japanese word I ever 0:02:06.520 --> 0:02:09.280 relearned when I moved back to Japan as like a 0:02:09.320 --> 0:02:12.000 fourteen year old was go ki bori hoihoi because I 0:02:12.000 --> 0:02:14.280 had to go down to the local compini, the convenience 0:02:14.320 --> 0:02:18.560 store and buy cockroach hotels because the entire apartment was infested. 0:02:18.760 --> 0:02:21.800 And secondly, I hate cockroach is so much. I once 0:02:22.240 --> 0:02:27.640 read an entire book about cockroaches just to know my enemy. Wow, 0:02:27.760 --> 0:02:29.600 it was like three hundred pages on cockroache. 0:02:29.600 --> 0:02:30.959 Do we get the author on the podcast? 0:02:32.000 --> 0:02:33.720 It was actually a really good book. It was a 0:02:33.760 --> 0:02:36.720 sort of like cultural and scientific study of the history 0:02:36.760 --> 0:02:40.520 of cockroaches. But anyway, we are getting massively off topic. 0:02:41.120 --> 0:02:43.400 Shall I introduce our guest. We do, in fact have 0:02:43.520 --> 0:02:45.320 the perfect guest. All right, So we're going to be 0:02:45.400 --> 0:02:48.760 talking all things private credit, including how private credit is 0:02:48.800 --> 0:02:51.480 relating to the AI space. At the moment, we're speaking 0:02:51.520 --> 0:02:55.400 with Michael Zowatsky, also known as Ze. He is the 0:02:55.440 --> 0:02:59.800 global Chief Investment Officer for Blackstone Credit and Insurance. So Z, 0:03:00.240 --> 0:03:01.880 thank you so much for coming on the podcast. 0:03:02.040 --> 0:03:03.720 Wonderful to be here, Thanks for having me. 0:03:04.040 --> 0:03:09.320 So I am told by your lovely Blackstone representatives that 0:03:09.400 --> 0:03:12.200 over the last twenty years you have grown Blackstone's credit 0:03:12.240 --> 0:03:16.639 franchise into the largest business by assets at Blackstone. How 0:03:16.680 --> 0:03:19.040 hard was that? Were you just sort of like riding 0:03:19.080 --> 0:03:20.920 a wave of corporate issuance. 0:03:21.280 --> 0:03:23.680 Well, let's talk about a few things that have happened here. 0:03:24.040 --> 0:03:26.240 You know, I often get asked about this growth of 0:03:26.280 --> 0:03:29.079 private credit, and I think there's a misconception that that 0:03:29.160 --> 0:03:32.360 growth was driven by excess risk taking. But when you 0:03:32.400 --> 0:03:34.960 actually step back and think about what's happened in the market, 0:03:35.080 --> 0:03:40.080 you basically had a innovative breakthrough that changed the way 0:03:40.160 --> 0:03:43.000 business was done that was better for all market participants. 0:03:43.080 --> 0:03:45.520 The way I like to analogize it to is what 0:03:45.600 --> 0:03:48.800 happened with Amazon in the retail space. Right before Amazon, 0:03:48.800 --> 0:03:50.080 if you want to go buy something, you had to 0:03:50.080 --> 0:03:52.280 go to the store. But Amazon kind of took out 0:03:52.320 --> 0:03:55.880 that middleman and brought you the consumer directly in the 0:03:55.880 --> 0:03:59.960 manufacture and in the process created something that was simpler, 0:04:00.280 --> 0:04:04.480 more efficient, better for the economy, more transparent. What's private 0:04:04.480 --> 0:04:07.120 credit done. It's done the same thing. It's brought the 0:04:07.160 --> 0:04:11.400 borrower right up directly to our investor's capital least. Sometimes 0:04:11.440 --> 0:04:13.960 call it this farm to table model. Right, what have 0:04:14.040 --> 0:04:16.440 you done in that process? You've cut out all the middlemen, 0:04:16.520 --> 0:04:19.400 all the syndication, all the trading desks, all the stuff 0:04:19.440 --> 0:04:21.680 that led to leakage along the way, and in the 0:04:21.760 --> 0:04:25.200 process you built something that was better for all market participants. 0:04:25.400 --> 0:04:27.880 If you're a borrower, you get to speak directly to 0:04:27.880 --> 0:04:30.360 your lender. You get a customized solution, you get speed, 0:04:30.480 --> 0:04:33.719 certainty of execution. If you're an investor, you capture all 0:04:33.760 --> 0:04:36.160 of that excess leakage in the form of higher returns. 0:04:36.160 --> 0:04:37.840 And that's been the case for the last twenty years. 0:04:37.880 --> 0:04:39.919 And by the way, if you're the financial markets, you 0:04:40.000 --> 0:04:43.960 have an ecosystem that is less levered. More asset liability 0:04:44.000 --> 0:04:48.680 management brings more financial stability to the overall ecosystem. When 0:04:48.680 --> 0:04:51.440 you have something that's really good for all market participants, 0:04:51.720 --> 0:04:53.400 it tends to grow a lot. And that's what's happened 0:04:53.440 --> 0:04:54.120 in private credit. 0:04:54.440 --> 0:04:57.400 What is the equivalent of like in this analogy, which 0:04:57.400 --> 0:04:59.640 I really like, what is the equivalent of the web? 0:04:59.720 --> 0:04:59.920 Right? 0:05:00.080 --> 0:05:03.120 So, the reason Amazon could cut out the physical bookstore 0:05:03.560 --> 0:05:06.280 or the various other retailers, et cetera, is because the 0:05:06.320 --> 0:05:11.159 Internet exists and that creates solves some information problems, et cetera. 0:05:11.440 --> 0:05:14.039 How would you described the sort of like the thing 0:05:14.120 --> 0:05:18.920 that exists now such that so many different middleman and 0:05:19.080 --> 0:05:21.880 so forth can be cut out? Scale okay, scale? 0:05:22.200 --> 0:05:25.599 Right. The reason we couldn't do what we do today 0:05:25.800 --> 0:05:27.800 twenty years ago, Yeah, is because we didn't have the 0:05:27.839 --> 0:05:31.120 capital base, We couldn't write a billion dollar plus deal. 0:05:31.160 --> 0:05:34.040 Here's an interesting fact. Before twenty twenty one, there were 0:05:34.080 --> 0:05:37.880 only five billion dollar plus private credit deals done. Ever 0:05:38.480 --> 0:05:41.560 since twenty twenty one, one hundred plus, and we have 0:05:41.600 --> 0:05:44.560 Blackstone have done most of them. So what does that mean. 0:05:45.000 --> 0:05:47.279 We have the scale of capital to actually solve the 0:05:47.320 --> 0:05:50.880 problems for our clients. We have the breadth of team 0:05:51.080 --> 0:05:53.520 to go out and cover the market and bring these 0:05:53.520 --> 0:05:55.720 solutions direct to our bart worst. And then the other 0:05:55.760 --> 0:05:59.880 thing that's happened is the expansion of private credit beyond 0:06:00.120 --> 0:06:01.800 what a lot of people think of it as, which 0:06:01.839 --> 0:06:05.160 is middle market sponsored back back lending, into what we 0:06:05.240 --> 0:06:07.680 call the real economy. Right, taking what is a two 0:06:07.800 --> 0:06:11.440 trillion dollar market today and thinking about a thirty plus 0:06:11.520 --> 0:06:14.560 trillion dollar addressable market when you think about areas like 0:06:14.640 --> 0:06:18.520 private investment, grade real assets, asset back finans, and so 0:06:18.880 --> 0:06:21.679 the other big piece of this is just the massive 0:06:21.720 --> 0:06:24.440 expansion in the addressable market that's come about. 0:06:24.640 --> 0:06:28.120 So I take the point about you know, customized financing 0:06:28.160 --> 0:06:31.960 solutions and bringing investors closer to capital and all of that, 0:06:32.200 --> 0:06:35.560 but at the same time, like the concern is that 0:06:35.600 --> 0:06:40.719 as the space grows, competition for deals increases, and that's 0:06:40.760 --> 0:06:43.799 when you start to see not just potentially lower spreads, 0:06:43.839 --> 0:06:47.280 but also more leverage. And we have seen, you know, 0:06:47.320 --> 0:06:50.760 some first leans that are now UNI tranches and things 0:06:50.839 --> 0:06:54.719 that would normally spark a little bit of worry. Is 0:06:54.760 --> 0:06:56.280 that something that you're seeing in the market. 0:06:56.560 --> 0:06:59.120 It's funny. Look, I've been doing private credit for two decades. 0:06:59.560 --> 0:07:02.400 I think to the deals that we were first doing 0:07:02.440 --> 0:07:04.760 in private credit twenty years ago, and I would tell 0:07:04.760 --> 0:07:06.279 you I don't know that a single one of them 0:07:06.320 --> 0:07:09.360 would pass our investment committee today. They were small, they 0:07:09.360 --> 0:07:11.880 were cyclical, they were basically the stuff the banks wouldn't do. 0:07:12.680 --> 0:07:16.400 Fast forward to today. Think about the average direct lending 0:07:16.440 --> 0:07:19.720 deal we do. It's a two hundred million dollar EBITDAV business. 0:07:20.280 --> 0:07:23.760 It's forty percent loan to value. Pre GFC loan to 0:07:23.840 --> 0:07:26.320 values on deals were sixty five percent plus. And so 0:07:26.680 --> 0:07:30.600 when I think about the risk posture of a senior 0:07:30.640 --> 0:07:34.040 secured loan today, it feels pretty good relative to history. 0:07:34.480 --> 0:07:37.400 And then that needs to be combined with the fact 0:07:37.440 --> 0:07:41.800 that this opportunity in investment grade private credit, I would say, 0:07:41.880 --> 0:07:45.600 is the fastest growing opportunity we see in credit at Blackstone. 0:07:45.880 --> 0:07:48.040 Right, So this is the other new thing that's happening 0:07:48.120 --> 0:07:52.160 is ig private credit. So you know, private credit extended 0:07:52.160 --> 0:07:55.000 to companies with very good balance sheets, not junk graded, 0:07:55.760 --> 0:07:57.920 has become more of a thing. It's going mainstream, and 0:07:57.960 --> 0:08:00.480 a lot of that is driven by AI is ands 0:08:00.560 --> 0:08:03.600 and tech related issuance. Talk more about what you're seeing 0:08:03.640 --> 0:08:04.320 in that space. 0:08:04.480 --> 0:08:06.000 Well, I think that's a big part of it. Right. 0:08:06.040 --> 0:08:09.480 Anytime you see a significant need for capital, which we 0:08:09.560 --> 0:08:12.560 obviously see in the data center build out, and then 0:08:13.400 --> 0:08:16.360 connected to that all the energy, power and infrastructure that 0:08:16.440 --> 0:08:20.640 needs to accompany that, you see huge capital needs and 0:08:21.000 --> 0:08:24.160 markets that need that much capital need to access all 0:08:24.200 --> 0:08:27.800 available options, and that includes public credit, but that also 0:08:27.840 --> 0:08:30.440 includes private credit. Morgan Stanley put out a piece late 0:08:30.520 --> 0:08:33.240 last year that estimated that eight hundred billion dollars of 0:08:33.280 --> 0:08:37.599 private credit alone is needed to finance the digital infrastructure 0:08:37.600 --> 0:08:39.920 build out over the next five years. Okay, so that's 0:08:39.920 --> 0:08:43.040 a massive number. I think what gets missed when people 0:08:43.080 --> 0:08:47.520 think about the financing element of financing a data center, 0:08:47.559 --> 0:08:52.320 for example, is we're financing fifteen to twenty year take 0:08:52.400 --> 0:08:57.920 er pay contracts with some take pay contract meaning think 0:08:57.920 --> 0:09:01.080 about a triple net lease contract, matter what your usage is, 0:09:01.120 --> 0:09:03.960 no matter what your operating costs are, you're getting a 0:09:04.040 --> 0:09:06.800 fixed sum every single month from your tenement. And they 0:09:06.800 --> 0:09:09.160 can't get out of that contract. Okay, okay. And you're 0:09:09.200 --> 0:09:11.960 getting that from some of the highest quality credit counter 0:09:12.000 --> 0:09:15.400 parties in the world, right, Hyperscalers are the tenants in 0:09:16.080 --> 0:09:18.040 most of the data centers today. And so as I 0:09:18.160 --> 0:09:21.560 sit with my credit hat on, if I can lend 0:09:21.760 --> 0:09:24.679 against some of the best counter parties in the world 0:09:25.320 --> 0:09:28.960 against a known, defined stream of cash flows, and I 0:09:29.000 --> 0:09:31.120 can do that with one hundred and fifty to two 0:09:31.160 --> 0:09:37.320 hundred basis points of excess spread versus like rated public credit. 0:09:37.480 --> 0:09:41.600 Yeah, well, so explain that. So we the most credit 0:09:41.640 --> 0:09:44.439 worthy companies in the world are these cash flow gushers, 0:09:44.480 --> 0:09:47.679 the big tech companies, et cetera. What is the I 0:09:47.720 --> 0:09:50.719 still don't quite get what is the advantage for them 0:09:50.880 --> 0:09:55.000 of the private credit market spreads as you mentioned, are wider. 0:09:55.559 --> 0:09:57.480 They can access the bond market. They do it all 0:09:57.559 --> 0:10:00.480 the time, or they certainly can. So what is what 0:10:00.600 --> 0:10:03.240 is private credit solve for the metas of the world 0:10:03.320 --> 0:10:06.000 and the apples of the world, such that they can't 0:10:06.320 --> 0:10:09.160 borrow versus the public credit market. 0:10:09.120 --> 0:10:15.400 Customization, speed, certainty, flexibility, bringing that solution direct to the borrower. 0:10:15.559 --> 0:10:18.360 Sometimes there's certain elements in terms of the timing or 0:10:18.360 --> 0:10:21.280 whatever the case may be that requires a private solution. 0:10:21.400 --> 0:10:23.880 Confidentially, you just explain that a little further, Like what 0:10:24.000 --> 0:10:28.000 is it about these projects specifically when you say like customization. 0:10:27.480 --> 0:10:30.680 If people say customization all the time, give us a specific. 0:10:30.200 --> 0:10:34.360 Exam Yeah, okay, Well, sometimes there's a construction element. Okay, 0:10:34.640 --> 0:10:37.400 So you need to fund over time as opposed to 0:10:37.400 --> 0:10:41.680 funding all of your capital day one. That's a good example, right. 0:10:41.800 --> 0:10:45.240 Sometimes you need to structure in a certain way in 0:10:45.320 --> 0:10:48.640 terms of the timing of the cash flows. That's another example. 0:10:48.679 --> 0:10:51.640 So there are things that are needed that don't necessarily 0:10:51.720 --> 0:10:54.360 increase credit risk, but they don't fit the cookie cutter 0:10:54.480 --> 0:10:58.480 mold of a straight away investment grade public on. 0:11:14.559 --> 0:11:16.800 So this might be a difficult question to answer. But 0:11:16.840 --> 0:11:19.560 when you look at your own portfolio, your own very 0:11:19.679 --> 0:11:22.400 large portfolio, can you give like a rough estimate of 0:11:22.440 --> 0:11:26.120 how much AI exposure has increased over the years. 0:11:26.960 --> 0:11:31.080 Well, that's a fascinating question, right, because I tend to 0:11:31.080 --> 0:11:34.680 think about AI exposure pretty broadly, Right, because I think 0:11:35.000 --> 0:11:40.520 AI will impact not just data centers and the direct right, 0:11:41.679 --> 0:11:45.320 you know, first derivative impact, but the second derivative impact, 0:11:45.360 --> 0:11:46.720 the third derivative impact. 0:11:46.840 --> 0:11:49.360 So you're looking at companies that could be disrupted as. 0:11:49.240 --> 0:11:50.960 We're looking at it all and we have been looking 0:11:50.960 --> 0:11:53.120 at all and this is this is part of working 0:11:53.120 --> 0:11:56.080 at Blackstone right, Like, we have unbelievable insights into what's 0:11:56.120 --> 0:11:58.800 going on all around the globe in all of these markets, 0:11:58.800 --> 0:12:01.040 not just within our credit business that has five thousand 0:12:01.040 --> 0:12:04.320 plus barwords, but our private equity business, our infrastructure business, 0:12:04.320 --> 0:12:06.680 our real estate business. We happen to own a couple 0:12:06.720 --> 0:12:09.440 of the largest data center developers in the world. We 0:12:09.520 --> 0:12:14.480 have a huge operating team that helps companies implement AI capabilities, 0:12:14.679 --> 0:12:17.480 help them play offense and defense when needed. And so 0:12:17.520 --> 0:12:20.680 we leverage all of these resources. And I think about 0:12:20.920 --> 0:12:24.920 AI impact across almost every business in our portfolio, the 0:12:25.000 --> 0:12:27.200 varying degrees, But I think you have to be front 0:12:27.200 --> 0:12:29.040 footed in thinking about that as an investor. 0:12:29.480 --> 0:12:34.520 What about direct exposures, I forget about I take the point, 0:12:34.559 --> 0:12:36.840 but like, the reason I'm asking is because there are 0:12:36.880 --> 0:12:40.920 some concerns around concentration limits at places like insurers. 0:12:41.040 --> 0:12:44.680 Yeah, Look, we have over five hundred billion dollars of 0:12:44.800 --> 0:12:47.640 assets and credit at Blackstone, and I would tell you, 0:12:47.679 --> 0:12:51.440 like the amount of direct data center exposure is a 0:12:51.440 --> 0:12:54.720 small minority that it would not rise to the level 0:12:54.760 --> 0:12:56.880 of something where any of our clients would feel like 0:12:56.880 --> 0:12:57.800 they have concentration. 0:12:58.320 --> 0:13:01.240 What about in terms of I guess said like formal 0:13:01.280 --> 0:13:04.680 concentration limits. Just in terms of like on a day 0:13:04.720 --> 0:13:07.720 to day business right now or over the last year, 0:13:08.280 --> 0:13:11.440 how much of new new activity would you say is 0:13:11.520 --> 0:13:15.520 related to either sort of data centers or maybe some 0:13:15.559 --> 0:13:19.679 of the power the power financing that is also needed 0:13:19.679 --> 0:13:20.400 for data centers. 0:13:20.600 --> 0:13:24.800 Look, I would tell you it's a material portion of 0:13:24.840 --> 0:13:27.199 what we're doing because it is such a capital intensive, 0:13:27.920 --> 0:13:31.280 credit intensive part of the market. But when I think 0:13:31.320 --> 0:13:36.040 about everything we're doing across our business and credit, it 0:13:36.080 --> 0:13:40.560 doesn't it doesn't screen as something that's you know, significantly overweight. 0:13:40.679 --> 0:13:42.839 Like if I think about what we're doing in our 0:13:42.880 --> 0:13:47.040 private investment grade business, that's a real asset strategy broadly 0:13:47.080 --> 0:13:51.000 defined right that includes obviously digital infrastructure and includes energy 0:13:51.040 --> 0:13:53.920 and power, but it includes residential mortgages, which is a 0:13:53.920 --> 0:13:57.720 massive asset class. It includes equipment, finance. We just announced 0:13:57.720 --> 0:14:02.840 a deal recently to do an aircraft engine partnership, and frankly, 0:14:02.880 --> 0:14:06.200 I'd say the single biggest thing that it includes is 0:14:06.200 --> 0:14:10.200 what we call corporate solutions, and these are large scale, 0:14:10.600 --> 0:14:16.360 customized private credit partnerships with public investment grade companies. And 0:14:16.400 --> 0:14:19.440 so recently we did a deal with Rogers up in 0:14:19.520 --> 0:14:22.640 Canada where we did a five billion dollar financing for 0:14:22.680 --> 0:14:27.040 them against their network infrastructure back haul. We then did 0:14:27.080 --> 0:14:29.800 a deal late last year with Cempra Infrastructure to help 0:14:29.880 --> 0:14:33.760 them build out an LENNG project. And we're seeing that 0:14:33.920 --> 0:14:36.000 not just in the US, we're seeing that globally. We 0:14:36.040 --> 0:14:39.960 announced the deal yesterday in fact, with Ahold, the European 0:14:40.000 --> 0:14:43.200 supermarket company, to help expand their logistics footprint. And so 0:14:43.640 --> 0:14:45.800 I would tell you the biggest theme I see across 0:14:45.880 --> 0:14:49.040 our private investment grade business is this notion of what 0:14:49.080 --> 0:14:50.600 we call corporate solutions. 0:14:52.360 --> 0:14:55.440 What's it like sourcing deals at the moment? So Blackstone 0:14:55.480 --> 0:14:59.080 obviously very big, So I imagine people are coming to you constantly. 0:14:59.160 --> 0:15:00.800 But at the same time, I'm one of the things 0:15:00.840 --> 0:15:03.440 we heard when the private credit market was very, very hot, 0:15:03.680 --> 0:15:06.800 was there's a lot of competition for deals, right, and 0:15:06.880 --> 0:15:11.720 everyone wants in on certain financing transactions. So what's it like? 0:15:11.880 --> 0:15:13.800 You got to ticket market by market, right, we were 0:15:13.800 --> 0:15:16.920 just talking about private investment, great corporate solutions, some of 0:15:16.960 --> 0:15:19.800 these big infrastructure credit areas. I would tell you in 0:15:19.800 --> 0:15:24.200 that market there is more demand for capital. Then there 0:15:24.200 --> 0:15:26.800 are players like Black Zone with the scale to actually 0:15:26.800 --> 0:15:29.320 meet those needs. And so that is a market where 0:15:29.360 --> 0:15:32.000 I would tell you we have robust deal activity, and 0:15:32.040 --> 0:15:33.320 that is a market where I see a lot of 0:15:33.400 --> 0:15:36.000 excess spread. I know you mentioned earlier that spreads are tight. 0:15:36.040 --> 0:15:38.120 That's an area where I would say spreads are actually 0:15:38.160 --> 0:15:41.800 quite attractive. Right. If you think about public IG spreads 0:15:41.840 --> 0:15:45.600 today are eighty basis points, if you can make two 0:15:45.680 --> 0:15:49.240 hundred and fifty basis points it like for like credit 0:15:49.320 --> 0:15:52.080 rated risk like, that's a lot of relative excess spread. 0:15:52.200 --> 0:15:55.120 And that's happening because the demand for capital relative to 0:15:55.120 --> 0:15:57.800 the supply of capital is quite attractive, and that's showing 0:15:57.880 --> 0:15:59.800 up for us as lenders. I'd say in the direct 0:15:59.840 --> 0:16:03.720 line market, that's a market where spreads have tighten in 0:16:03.800 --> 0:16:08.600 sympathy with the liquid subinvestment grade markets, but the excess 0:16:08.600 --> 0:16:11.040 spread remains. Right, that excess spread of a couple hundred 0:16:11.040 --> 0:16:14.800 basis points persists. I think what is helping is you 0:16:14.960 --> 0:16:18.640 are seeing this increase in deal activity. We saw very 0:16:18.640 --> 0:16:20.840 strong M and A activity in the back half of 0:16:20.920 --> 0:16:23.920 last year. If I look at our Q four pipeline, 0:16:24.280 --> 0:16:26.760 it's actually up twenty five percent versus what it was 0:16:27.040 --> 0:16:29.280 at this time last year, and so I think we 0:16:29.320 --> 0:16:33.240 are optimistic about a strong recovery and deal activity that 0:16:33.280 --> 0:16:36.240 will help on your point in terms of sourcing deals 0:16:36.280 --> 0:16:38.760 in that market specifically, I think the other thing that's 0:16:38.800 --> 0:16:41.640 really important, and you asked this question around how do 0:16:41.680 --> 0:16:44.480 we scale a business. Part of it is not just 0:16:44.560 --> 0:16:47.280 waiting and sitting for the phone touring. A huge part 0:16:47.280 --> 0:16:51.600 of what we do is think about the thematic areas 0:16:51.920 --> 0:16:54.400 within all of Blackstone, not just credit that we want 0:16:54.400 --> 0:16:57.960 to deploy capital in and digital, infra, energy and power. 0:16:58.000 --> 0:17:02.400 Those are good examples in the investment grade space, but 0:17:02.400 --> 0:17:05.879 there are also examples in the subinvestment grade space life sciences, 0:17:06.000 --> 0:17:09.840 utility services. And what our team does is we proactively 0:17:10.200 --> 0:17:14.280 identify these companies and pitch them customized solutions. And because 0:17:14.280 --> 0:17:16.800 we have the scale of capital to actually solve that problem, 0:17:16.840 --> 0:17:18.920 we can do that. We did a deal late last 0:17:18.960 --> 0:17:21.000 year with a company called Signant Health in a life 0:17:21.000 --> 0:17:24.320 sciences space. The billion dollar plus transaction that we led. 0:17:24.359 --> 0:17:26.639 How did we do that? Well, we had financed their 0:17:26.720 --> 0:17:29.679 number one competitor. We had followed this loan because we 0:17:29.680 --> 0:17:32.080 had held it in our liquid book, and so we 0:17:32.119 --> 0:17:34.080 had the idea, Hey, let's call this company and say 0:17:34.080 --> 0:17:36.760 you should do a private loan. And that's where the idea, 0:17:36.840 --> 0:17:40.080 aation comes, and that's where the differentiation in the market comes. 0:17:40.119 --> 0:17:42.040 A lot of people can pick up the phone, not 0:17:42.080 --> 0:17:44.639 a lot of people can create their own ideas and 0:17:44.760 --> 0:17:47.400 actually effectuate them. And I think that's something we're uniquely 0:17:47.400 --> 0:17:47.800 good at. 0:17:48.240 --> 0:17:52.199 Everything is just sort of like scale empower laws and 0:17:52.320 --> 0:17:56.919 compounding return from having grown and having that network the 0:17:56.960 --> 0:17:59.639 big get bigger. It's really such an extraordinary thing and 0:17:59.680 --> 0:18:02.080 we see in tech, but we also clearly see it 0:18:02.280 --> 0:18:04.879 in finance. I think with like you know, the percentage 0:18:04.880 --> 0:18:07.480 of market share, that a cruise to the biggest players 0:18:08.400 --> 0:18:12.359 clearly an advantage. Obviously, want to talk more about the 0:18:12.400 --> 0:18:15.960 industry overall, going back to you know, Tracy mentioned, we're 0:18:16.000 --> 0:18:19.680 so it's so over we're so back, we're so so cycleed. 0:18:19.840 --> 0:18:22.200 So at the end of last year, there were two 0:18:22.280 --> 0:18:26.600 things there were like two like kind of blow ups 0:18:27.520 --> 0:18:31.800 in but both were both related to auto. So tree clore, 0:18:32.280 --> 0:18:33.320 I don't know if I'm pronouncing it. 0:18:33.320 --> 0:18:38.080 Try That's one of those words where I feel like 0:18:38.640 --> 0:18:40.479 very stupid pronouncing it the right way. 0:18:40.600 --> 0:18:43.720 Yeah, I M yeah, And I'm like, should I just 0:18:43.720 --> 0:18:44.440 say try color? 0:18:44.480 --> 0:18:44.680 Yeah? 0:18:45.280 --> 0:18:48.000 So there was a pre color and then first brands, 0:18:48.040 --> 0:18:51.000 which I'm pretty sure pronouncing correctly, and then there was 0:18:51.040 --> 0:18:53.119 like so that was like in the auto space, and 0:18:53.160 --> 0:18:54.760 then there was all this stuff that went viral for 0:18:54.800 --> 0:18:57.600 about five minutes, something about the chips and maybe they're 0:18:57.600 --> 0:19:00.480 going to depreciate faster than people expected. Bunch of people 0:19:00.480 --> 0:19:01.880 are going to be holding the bag and I want 0:19:01.880 --> 0:19:04.840 to back get that out aside, you get those blow 0:19:04.920 --> 0:19:07.520 ups in the auto area. Jamie Diamond comes out with 0:19:07.600 --> 0:19:11.480 the cockroaches. What was your read on that moment? Was 0:19:11.520 --> 0:19:15.000 there reason to think that there are more Creek colors? 0:19:15.680 --> 0:19:18.040 I just want to say that, I like saying you 0:19:18.119 --> 0:19:20.679 do well, thank you, more three colors out there. 0:19:20.920 --> 0:19:22.920 I would tell you when all of that was going down, 0:19:23.240 --> 0:19:25.080 we were scratching our heads. And the biggest reason we 0:19:25.080 --> 0:19:27.920 were scratching our heads were all of those examples were 0:19:28.000 --> 0:19:32.679 bank led BEG syndicated bag underwritten deals that somehow got 0:19:32.720 --> 0:19:35.680 confused with private credit. And this is the biggest frustration 0:19:35.760 --> 0:19:38.040 for us, because we looked at those deals and we said, hey, 0:19:38.320 --> 0:19:40.479 one of the advantages of private credit is you can 0:19:40.520 --> 0:19:42.960 actually do private level due diligence, you can get access 0:19:43.000 --> 0:19:44.760 to management team, you can do weeks of work, you 0:19:44.800 --> 0:19:47.560 can get private access to information. And so one of 0:19:47.760 --> 0:19:50.560 our observations there was there was this misconception, and that's 0:19:50.560 --> 0:19:53.000 why we think it's so important to continue to educate 0:19:53.000 --> 0:19:55.960 on the distinctions between public credit and private credit, and 0:19:56.000 --> 0:19:59.280 those situations were public credit. I think the other thing 0:19:59.280 --> 0:20:02.800 that I think people maybe don't appreciate is while private 0:20:02.840 --> 0:20:04.920 credit has gotten a lot of attention recently, private credit 0:20:04.960 --> 0:20:06.440 has been around for a long time. You can look 0:20:06.440 --> 0:20:09.000 at twenty year returns in private credit and you can 0:20:09.040 --> 0:20:12.600 see that they've outperformed liquid credit by several hundred basis 0:20:12.640 --> 0:20:16.239 points over twenty years through cycles. Also, you can look 0:20:16.280 --> 0:20:18.560 at the fact that realize losses over that twenty year 0:20:18.640 --> 0:20:21.679 period for the industry have been one percent. And so 0:20:21.920 --> 0:20:23.800 I think we look to the data, we look to 0:20:23.840 --> 0:20:26.160 the clarification, But then I think the last thing That's 0:20:26.160 --> 0:20:30.879 also important to highlight here is defaults happen in some 0:20:31.040 --> 0:20:32.560 the best bit great credit. And I think this is 0:20:32.560 --> 0:20:34.400 the other thing that I think gets missed. People see 0:20:34.440 --> 0:20:37.560 a headline about a credit issue. We have thousands of 0:20:37.560 --> 0:20:41.119 credit in our portfolios. Some of them are going to 0:20:41.160 --> 0:20:43.679 have issues. That is normal. If you look at the 0:20:43.840 --> 0:20:47.719 long term default rate in the leverage loan market, in 0:20:47.760 --> 0:20:51.040 the public high yield market, it's three percent. These things happen. 0:20:51.320 --> 0:20:54.000 We account for them in our underwriting, we account for 0:20:54.040 --> 0:20:57.639 them in how we mark our portfolio, and most importantly, 0:20:58.040 --> 0:21:00.879 we have the resources to deal with those situations. We 0:21:00.960 --> 0:21:03.760 have operating people, We've got a big workout team, and 0:21:03.800 --> 0:21:06.080 if we do have challenges in our book, I think 0:21:06.080 --> 0:21:09.960