00:00We should note that a lot of the growth at Blackstone has been in your business, the credit business.
00:04You are halfway to your $1 trillion goal now with the latest earnings under your belt.
00:09It seems that both the deal, demand, and capital is insatiable.
00:13What does it say about where we are in this credit cycle or if we even still exist in a cycle to begin with?
00:19Well, look, a couple of big-pictured things.
00:22First, I've been around the world probably twice in the last couple of months,
00:26and the demand for credit, private credit from our clients around the world has never been stronger
00:32because I think what they see is this durable farm-to-table model that we keep talking about,
00:37the excess spread versus liquid markets that we can achieve for our clients by bringing them directly to the borrower.
00:44They also see this massive expanse of the opportunity set from what was solely a direct lending,
00:51private equity sponsor finance, to financing the real economy.
00:55That expands this market from $2 trillion in size to $30 trillion in addressable market.
01:01And there is so much untapped white space.
01:04That's a huge jump. Say that again.
01:07So $2 trillion is the addressable market today, mostly sponsor-backed direct lending.
01:13What we see in an addressable market is $30 trillion.
01:17So that includes financing the real economy.
01:19Think about infrastructure, real estate, energy and power.
01:24A lot of the big secular themes you see driving economic activity in the market,
01:30that's where private credit is playing a huge role.
01:32It's this investment grade and often blue-chip companies.
01:35When it's been happening, especially with a lot of these hyperscalers that are spending a lot,
01:39the question has been asked.
01:40If they're so convinced that this is the right strategy, why not go at it alone?
01:45Why involve private credit and do off-balance sheet financing?
01:48Why is there this demand from these blue-chip companies,
01:51especially because they could get favorable terms in the syndicate market?
01:54When you think about the capital need in these markets, it is massive.
01:59$2 trillion of spend in digital infra alone.
02:03Morgan Stanley expects $800 billion of that to come from private credit.
02:06And so the answer is, it's all of the above.
02:09You're going to need multiple sources of capital to finance this build-out.
02:13And from our seat, if we're financing some of the best companies in the world
02:17with long-term contractual support, that's fantastic risk for our clients.
02:22Dani is steeped in this stuff, so she knows a lot about it already.
02:26I'm sort of a novice looking at it from the outside.
02:30Does the rate environment matter to you?
02:32If we go now from 4% down to 3% at the Fed, if Treasuries, the 10-year, goes down to 3.5%,
02:41does that matter to you in this business, in this cycle?
02:44Big picture, right?
02:45We've generated 10% net returns for our clients over a 20-year period.
02:51And so the absolute performance has been there.
02:54But importantly, what our clients are really focused on is that relative performance.
02:58What can private credit achieve versus what I might get in the liquid markets?
03:03And that has been consistently 200 basis points or greater, whether you're talking about investment-grade risk or sub-investment-grade risk.
03:11And interestingly, when cost of capital is coming down, when rates are coming down, when spreads are coming down,
03:16that is when the excess spread that private credit can deliver is even more impactful to our client portfolios.
03:24It's not a coincidence that a huge inflection point for private credit came in 2021 when rates were zero.
03:30So you've been around the world twice in recent weeks.
03:32So two questions.
03:32One, do you sleep?
03:33I'm guessing the answer to that is probably no.
03:35Two, is the cockroach of it all still being brought up?
03:39Is that still a top question among clients if there are hidden risks in the private credit market that aren't appreciated?
03:44Look, it's on the sleep question, not as much as I would like, certainly.
03:48On the risk, of course it's being asked.
03:50And the clients are right to be asking because they're reading about it and they want to know what's going on.
03:55And that's where facts really matter.
03:58And what we see actually is something that I think is really underreported is that defaults are actually down in the leveraged loan and high-yield market,
04:0637% on a year-to-date basis versus where they were two years ago.
04:11The economy is performing quite strongly.
04:13I know you've spent a lot of time talking about Q3 earnings, which continue to be robust.
04:18So you have a very nice backdrop in credit.
04:21And what we're doing is mostly senior secured, 40% loan-to-value loans, or lending to investment-grade companies.
04:29That is a great way to get safe yield for our clients.
04:33And so once you sit down and you talk to them about the facts that we see on the ground
04:37and that we don't see anything near what the noise is about some looming crack or issues in the market,
04:44they understand and that's why they continue to deploy with us.
04:47Maybe there is some confirmation bias that when these things pop up, people read a lot into them.
04:51The most recent one this week, decidedly not Blackstone, BlackRock and their HBS business, another fraud uncovered.
04:58Is there any new incremental new information in that when that fraud pops up?
05:02Is there anything besides just idiosyncratic problems in individual companies?
05:06Yeah, look, we're learning about that situation as well.
05:10I just read about it too.
05:11A couple of things.
05:13One, it's hard to draw a through line of fraud into broader credit issues.
05:17Those tend to be quite idiosyncratic and we still believe that.
05:21But another thing that we always talk about is where you invest and who you invest with matters.
05:25And so on where you invest, these issues that have come up have been around the asset-backed finance marketplace.
05:31But asset-backed finance is a broad marketplace with dozens of different verticals.
05:35And what we tend to focus on is hard assets, infrastructure assets, data centers, energy and power projects, residential mortgages.
05:44Those are much more resilient, much easier to diligence.
05:48We have zero exposure to inventory and receivables finance.
05:51So that's one piece of it.
05:53And then who you partner with also matters.
05:5598% of our direct lending portfolio is with private equity sponsors and public companies.
06:02All of the situations that have been in the press, non-institutional ownership.
06:05And so that's another thing to focus on as well.
06:07I want to ask about your, I mean, when you travel around and when you do these deals, you gather really valuable intel that investors want to hear.
06:16So what are CEOs telling you about it?
06:19It seems they're very confident about the economy going forward, considering the amount of deals they're making.
06:23And do you think we're going to continue to see a lot more M&A, especially around something like Sabre, you know, providing energy for this AI build-out?
06:31Look, we mentioned last week we do see this deal dam breaking, right?
06:35When consumers are confident, when earnings are strong, when valuations are healthy, that's the environment we're in today, companies transact.
06:43And so you saw M&A volumes up over 60% last quarter.
06:46If I look at our pipeline within our credit business, it's up over 20%.
06:50And that's why you see increases in deal activity.
06:53You saw a big deal we announced this week with Signin Health in the healthcare and life sciences space.
06:58You see a deal like you referenced Sabre Power in the energy and infrastructure space.
07:03But it's not just the fact that deal activity is picking up.
07:06It's also these thematic areas.
07:08And you had a great point around insights.
07:10I'm lucky to work at Blackstone.
07:11We have 5,000 credits that we monitor, tens of thousands of real estate assets, hundreds of private equity portfolio companies.
07:18That allows us to focus on the long-term thematic drivers where we see tremendous investment opportunity.
07:25Obviously, AI, energy, and power, top of the list.
07:28And then you get to brag that you're the biggest data center owner.
07:32But for the rest that aren't there yet, is there kind of like a FOMO trade underway in the rest of private capital that wants to try to rival you in that data center ownership?
07:42Well, I won't comment on that other than to say we just see great investment opportunities in that market.
07:49We have tremendous insights, like you said, through private equity ownership, but also what we're doing on the ground in credit.
07:55And you'll see us continue to deploy behind these themes.
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