Private credit has felt like the hot new toy on Wall Street this year, with asset managers and banks alike trying to angle their way into the $1.5 trillion market. But as with anything that gains sudden popularity, some market watchers are worried about the industry—and fear that its buzziness will propel it into bubble territory.
That apprehensive feeling is something
Blackstone
aimed to combat at its first-ever investor day for its five-year old
Blackstone Secured Lending Fund,
or BXSL, on Thursday.
At its core, private credit is a form of lending by nonbank entities to privately-owned companies. The borrowers are typically businesses that aren’t able to access financing through banks and other traditional lenders. To offset the risks, interest rates on the loans tend to be higher, but it’s something borrowers are willing to pay because of the certainty of financing.
“What we’re basically doing is allowing individual investors to lend directly—it’s almost like a direct-to-customer model with private equity sponsors who are originating the loan,”Jonathan Gray, president of Blackstone, told Barron’s.
As for BXSL, it’s really a business development company, or BDC, whose portfolio consists of floating rate senior secured loans, largely in industries such as software, healthcare, and commercial and professional services.
BXSL has gained 10.9% since launching in 2018, outpacing the 9.3% gain other BDCs have earned in the same span. Earlier this year, Meryl Witmer, general partner at Eagle Capital Partners, named it one of her investing picks for Barron’s 2023 Roundtable.
So far this year, the fund has gained 14.5% and offers an 11.6% dividend yield—the latter of which entices and scares investors. The opportunity is great, but high yields can sometimes be a sign of distress.
Gray, however, counters this notion of excess risk, noting that the loans it originates are done at less than 50% loan-to-value ratios, whereas in the lead up to the global financial crisis in 2006-07, the loans had loan-to-value ratios in excess of 70%. Also, 98.4% of BXSL’s loans are first lien senior secured, which should offer greater protection.
BXSL’s investor day comes at an interesting time for markets. In November, the 60/40 portfolio posted its best return in more than 30 years after facing years of calls over its irrelevance. After more than a decade of low interest rates, the last year-and-a-half of higher interest rates have made the bond side of the portfolio more interesting.
“We’re definitely in a moment in time now where people are looking more intensely at returns they can generate in credit—particularly private credit—and what BXSL offers is an opportunity to play private credit but to do it through a liquid security,” Gray said.
Write to Carleton English at [email protected]
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