The recent failures of auto lender Tricolor and auto-parts manufacturer First Brands, which JPMorgan CEO Jamie Dimon dubbed “cockroaches,” had the biggest names on Wall Street pointing fingers last week.
Blackstone has been paying attention too, but on its third-quarter earnings call on Thursday, the company had a clear message: any attempts to tie these bankruptcies to private credit are fake news.
“These events have been erroneously linked to the traditional private credit market as a result of misunderstandings and misinformation,” said Steve Schwarzman, the chief executive of the world’s largest private investment firm.
Schwarzman blamed the “bank-led and bank-syndicated credits, not private credit,” referencing the more than $2 billion in asset-backed securities arranged by Barclays and JPMorgan for subprime auto-lender Tricolor, and loans syndicated by Jefferies and others for auto-parts maker First Brands.
And even though “we’ll see some increases in defaults” because of the late-credit cycle, these bankruptcies “are widely believed to involve the fraudulent pledging of the same collateral to multiple parties,” Schwarzman said.
In other words, “this really isn’t a private credit story,” said Blackstone president Jon Gray, noting that the specific circumstances of these bankruptcies don’t speak to credit more broadly. Gray said he doesn’t see “any sort of pullback from the banks,” and that “the markets have concluded that this was pretty isolated.”
The firm’s stock price is down more than 5%, trading at $152.50 as of midmorning on Thursday.
Private credit will continue to be a growth driver, even as returns cool
The firm’s investors appear to have been optimistic about credit over the last quarter, too, even as interest rates (and yield) are dropping. The firm’s non-real estate credit assets under management increased to $432.3 billion, with $36 billion in inflows in the period.
With real estate credit factored in, Blackstone now manages $500 billion in credit, up 18% from a year ago, Gray said. Credit is its largest asset class, making up around 40% of its $1.24 trillion in total assets under management.
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In the third quarter, retail investors poured money into credit, with $3.6 billion in inflows to BCRED, Blackstone’s perpetual credit vehicle for wealthy individuals, and the firm’s largest private wealth vehicle with nearly $85 billion in AUM.
When asked if the chatter around a possible credit crisis would hurt the firm’s fundraising from private wealth channels, Gray said that the firm expects “strong flows in credit in November,” even as the yield goes down amid a lower cost of capital from the Fed.
Lower rates will mean lower returns for investors. For example, BCRED, has a “97% floating rate,” Gray said, meaning the yield on its loans moves with the Fed’s lending rate and rises when rates are higher. Still, the selling point is that they outperform the public market, Gray said.
The firm reported 2.6% returns for private credit (1.8% net of fees) in the quarter and 1.6% (1.5% net of fees) returns for liquid credit in the quarter.
A late-cycle credit market may mean “some increases in defaults,” Schwarzman said, but he rattled off the firm’s track record to inspire confidence in its ability to beat the market.
He noted that annual losses have averaged just 0.1%, even during the global financial crisis.
“And our investment-grade focused private credit platform in BXCI has experienced zero realized losses to date,” Schwarzman said.
