Hello, Welcome to the Credit Edge, a weekly markets podcast.

My name is James Crumbie.

I'm a senior editor at Bloomberg.

And I'm David Haven's, the senior credit analyst of Bloomberg Intelligence charged with covering non bank financials, which happens to include alternative asset managers, private credit, and BDC's.

This week, we're very pleased to welcome Michael Zuwadsky, who, as happenstance would have it, is the chief investment officer of Blackstone's Credit and Insurance group.

Mike, how are you?

I'm fantastic, Thanks guys for having me.

It's awesome.

Are we going with Z or Mike?

Let's go with z Okay?

Z it is.

Z's CIO office at Blackstone includes a team of more than one hundred people, larger than most credit platforms in their entirety, pouring for more than five thousand companies in various investment portfolios.

If those figures are off, you're just going to have to take it up with the Blackstone Secured lending folks, because that's what they said on their second quarter conference call.

I trust them completely, all.

Right, Listeners are going to be deeply interested in your views and observations as it relates to the markets and private credit.

Great, and I'll start by saying credit markets are looking pretty complacent at the moment.

High grade bond spreads haven't been this tight since the late nineties.

Yes, I'm old enough to remember that demand for yield is very strong, Supply of new corporate debt is quite thin.

Returns in public markets, though, have been pretty solid, leaving some investors to question the value of going private.

Why sacrifice liquidity at a time when the economy is slowing and there's so much headline risk.

There's also a fair amount of anxiety about private asset performance.

How are those companies managing through trade wars and some pretty big US policy shifts.

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

Are there actually a lot more stressed deals into faults out there than actually being reported.

So that what you'll take is private credit risk fairly valued at the moment, and all the concerns about the aesset class warranted.

Great.

Well, Look, I just came back from basically a triple around the world for the last thirty days.

I was on four different continents and I met with some of our largest clients in all the regions around the globe, and these are the topics we were discussing.

We started with a conversation around the macro, and I would tell you folks are feeling a lot more comfortable with the underlying macro.

You mentioned some of the uncertainties that are out there, and that is true, but when you actually look at the fundamentals on the ground, company performance continues to be strong.

Eighty percent of companies in the second quarter beat guidance.

Consumer balance sheets are healthy, and we're on the verge of some monetary and fiscal stimulus and big capex spending cycles in areas like AI and energy and power.

All of those things provide strong macro backdrop for investing in credit.

The challenge, as you alluded to, James, is that evaluations the liquid markets have gotten elevated, and that's why you see spreads in liquid fixed income traditional fixed income being awfully tight.

The result of that is that's leading to our clients around the world looking to allocate more to private credit because as we look at the market, we see excess spread in private credit, whether it's on the investment grade side or the sub investment grade side, at about two hundred basis points in excess of liquid credit, and that's a really attractive thing for our clients around the world.

And is that is the market in equilibrium?

Do you think a from sort of a funding perspective, because obviously, if you're going from public into private, you're picking up a lot of spread, but you're also giving up liquidity, so it sort of introduces this whole issue of liquidity risks.

So you want to make sure that your assets and liabilities are pretty well tied up, and I know from looking at the BDCs that there is a close match.

Does that exist you think across most or all private credit market sectors?

Well, it's hard to generalize across private credit because the market is massive, it's expansive, with lots of different asset classes.

And then maybe we should come back to that in a bit.

But if I were to just make a general comment around liquidity risk asset liability management, actually private credit does a phenomenal job at that.

If you actually look at private credit vehicles that are either unlevered or at most one times levered, there's good match between assets and liabilities.

There's no cross collateralization of balance sheets, and so when you actually look at the foundation of the asset class, it is built on resilience and prudent management, and that's what we see across the board.

So that two hundred basis points differential between I'm assuming it's a high yield the leveraged loan Roady syndicates it against a private direct loan.

You're getting two hundred basis points on top of that.

Is it the same fray g exactly exactly?

And I think the reason why that excess spread exists is what we call this farm to table model, where we bring our capital our investors right up next to the borrowers, and in doing that, we can deliver a customized solution that meets their capital needs without all the leakage that happens along the way if you go to market and have multiple pathsive syndication and so bringing that capital direct to borrower that is a big source.

Of premium for our clients.

And obviously you're right, David, there is some excess return that comes with clients that could afford some element of ill liquidity in their asset portfolios.

But from the borough they're paying more.

So, I mean, on the one hand, i'd wonder why they would pay more if they have access to all this liquidity elsewhere.

And also how sustainable is it for a risky a borrower to keep paying that high cost.

Well, let's talk about that for a second.

To the end, borrower, you're basically in the same spot.

You're just not paying a bunch of fees along the way.

If you look at your all in cost of capital, you get to a much more similar spot.

And because we're bringing our clients capital direct to the borrower, that means that all of those economics go to our clients.

That's really what matters, and that's the value proposition we're delivering on your common around you know, borrowers being able to accept cost of capital.

That goes back to where I started with, which is we're seeing very strong credit performance across the board.

If you look at Blackstone's business, for example, we have two thousand non investment grade borrowers and we have a default rate of below fifty basis points across that portfolio.

Over the last twelve months, we continue to see strong earnings growth, and so we have a lot of confidence, at least in the companies we tend to partner with, which tends to be the bigger companies in higher growth, more resilient, less cyclical sectors and areas where we can really benefit from the strength of the Blackstone platform.

If you look at the areas that we tend to do a lot in right in software, for example, we've got a huge business that invests specifically in software on the private equity side.

In healthcare, we've got a dedicated life sciences business and energy, and we've got a huge infrastructure investing business.

Being able to access all the insights across Blackstone that drives our credit selection, that drives the lower loss rates we've been able to deliver for our clients over an extended period of time.

And for the borrowers, what's the value proposition for them for going with Blackstone as opposed to a bank or you know, sort of some other borrowing channel.

Speed, certainty, flexibility, a customized solution.

Having one partner on the other end.

If you want to do an acquisition or fund a growth project, you know exactly who to call.

And then what I'll call value creation services.

We've got a dedicated team within the credit bitness a Blackstone that will go in and help borrowers drive cross sell across the Blackstone portfolio help them take out operating costs and run more streamline, do things like cybersecurity assessments.

We've created over five billion dollars of enterprise value in our credit book alone through these value added services.

And so when you put all of that together, it's really quite a compelling solution for borrowers, whether they are investment grade or sub investment grade.

Yeah, and you know, it's obviously a competitive market the banks for whatever reason, and there seem to be various, you know, sort of topics that are brought up as to why the banks have sort of seeded, you know, this beachhead and not more than a beachhead.

I guess it's continent in private credit.

But they seem to want to get back into the market now.

Now they've got leverage shoe, I don't mean financial leverage.

They've got the ability to sort of lean on, you know, some of the borrowers to get back into the into the marketplace.

Are you seeing them becoming more aggressive these days or or just not yet.

I would say we've got to again look at the market holistically.

Right.

A lot of the conversation, and most of what we've spoken about today is focused on sponsored back direct lending, that's about a two trillion dollar asset class.

The overall private credit market is thirty trillion dollars an addressable size.

And so when you look at big areas of our market, from private investment grade to asset back finance, REZI mortgages, in for credit, these are huge market opportunities with significant secular growth drivers where capital from both banks and private lenders are needed.

Those are markets where the supply demand dynamic for US as a lender today is incredibly favorable.

And so there's tremendous amounts of white space for us to go out and do direct lending.

Yes, the banks will participate as well, but these are huge markets, and in fact, in many of these markets, you're seeing us partner with banks to go and deliver solutions to asset originators and clients.

And you saw us do that in fun finance with Key Bank.

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

You've seen us do that in credit cards with Barclay's.

I think this model of there is such a large market opportunity out there in the broadly defined private credit marketplace.

Can we work jointly with.

Banks to deliver solutions to our borrowers in the way that meets their needs.

Glad you brought up scale.

So I was going to ask because your colleague Rob Hone came on the show last year and pegged at thirty trillion.

Then Public came on a few weeks lation and said it's actually forty trillion, and they said half of it was already you know, in existence, so that we're already a twenty trillion market, but it's going to grow to forty trillion.

So there's kind of a lot of you know, big numbers being thrown out, but we already How big is the actual market right now?

Well, look, I think you've got to talk about the actual funded market versus the actual addressable market.

And most folks publicly report the actual funded market at two trillion.

So whether the addressable market is twenty or thirty or forty, frankly, I don't worry too much about that.

What I worry what I focus on is in any of those contexts, you have an extraordinary long runway ahead.

You're in the very early innings, particularly in areas like private investment, grade and asset bashed finance.

Those are the.

Fastest growing part of the overall private credit ecosystem, and that's where the largest capital needs are, whether it's in digital, infront data centers, energy and power and so on and so forth.

Yeah, there's also been a lot written recently about insurance companies and private credit, private assets coming on to insurance companies.

And I've been looking at life insurance companies since nineteen ninety, sort of dating myself a little bit there, but it's interesting when insurance companies, you know, sort of get involved in a sector, they tend to stampede into a sector.

Sometimes they do so, you know, maybe not having done their homework entirely, But it does seem to me that this sort of private investment grade credit is a really interesting area for insurance companies, you know, because you've got well rated I guess credit, so minimal credit risk, substantial spreads.

What are you doing there?

Like what's you've got an insurance operation or you've got insurance affiliates investments in insurance companies.

It's a huge area.

Yeah, So let's start with how we are set up and how we're partnering with our insurance clients, and then we can talk about the opportunity set so at Blackstone.

We have a little bit of a different model than some of the other players in the market, where we are fully asset light balance sheet light.

We serve our clients in the insurance market as an asset manager.

We originate and manage asset portfolios on their behalf, and all of our clients set shoulder to shoulder and we use their collective buying power to do very large deals.

We did a five billion dollar deal, for example, with Rogers up in Canada where we finance against their infrastructure network back haul, and so our model is very much true to the way Blackstone approaches partner with our clients across every part of our ecosystem, not just credit, but private equity, real estate, infrastructure.

Why the private investment create marketplace has resonated with insurers is they have long duration liabilities and so they want to match that up with long duration assets.

And because they have law duration liabilities, they don't necessarily need access to liquidity over the short term, and so it lends themselves to investing in high quality, resilient, investment grade assets where you can get excess spread.

I mentioned one hundred and fifty two hundred basis points of excess spread for taking some illiquidity, and that is why we have seen our insurance partners actively invest in this market with a lot of success.

I would also add that it provides a lot of diversification into real assets.

It's a highly scalable opportunity.

I mentioned some of the big deals we've been involved in, but these are large growing markets.

If you look at the hyperscalers, they'll invest nearly four hundred billion dollars in digital Infra Alan this year.

And so these are big markets, rapidly growing markets, and asset pools that fit insurance balance sheets very well.

I think the interesting thing to me, David, is the next chapter of this.

And I think the next chapter of this comes in two forms.

One non insurance clients traditional institutions, pensions, sovereign wealth funds saying hey, we want to get excess spread and access to high quality, non correlated real assets in the private investment grade landscape, and so we want to start allocating here.

And then all of our non US clients.

If you look at Asia base insurers, for example, only five percent of their balance sheets are in private credit versus a US basinsure might have thirty five or forty percent and so those are two markets that are largely unpenetrated but absolutely should grow, like we've seen the market grow with US based insurers.

You were, I presume you're over in Asia on your four continent tour, it was one of them.

Yeah, the Asian insurance market, at least on the life and saving side, seems to you'll be it's catching up, I think to where we are in the US right.

I mean, it still tends to be a little bit more of an underwriting, you know, sort of market as opposed to sort of an investment spread market.

But I assume that that's going to change, and I assume that that's going to create a lot of demand.

It's going to change, and it's going to create demand just like you say, David, because those clients need the same thing that our US clients need, which is access to high quality, low risk assets at scale with excess spread.

And that is what day in day out, our one hundred person team focused on this market looks to deliver.

And we've got well over one hundred billion dollars of private investment grade assets today.

But when we look forward, we think that's going to be the fastest growing part of our credit ecosystem, what.

Do these assets look like it?

Because again I'm confused.

I mean, I can see it from the investor side, they want the access spread, it makes absolute sense.

But from the boro aside, you know, in the US, a big company just go to the high grade bone market and get very good execution and you know very well bid at monkey at the moment, say what kinds of borrow is?

What kinds of real assets are we talking about?

Yeah, so if you look at our business, we generally organize in four or five verticals, I would say most of what we're doing is financing against hard assets.

And so I gave you an example of Rogers up in Canada where we basically took an asset off their balance sheet, their network infrastructure, and we finance against that.

It was a five billion dollar customized financing.

That is not something that you could easily go to the public high grade market with.

We did a similar thing with a company here in the US called EQT around one of their pipeline assets.

And when I look at our business today, we have a very long pipeline of deals that looks similar to that, and so we call those deals corporate solutions deals where we work with an investment grade borrower and deliver a scale, customized solution that meets their needs.

But we're also financing digital in for a data center build out.

I mentioned the size of that market.

Morgan Stanley put out a report two weeks ago they thought seven hundred billion dollars of private credit capital alone would be needed to build out data center and digital info assets.

And then think about all the corresponding energy and power assets and infrastructure assets that go alongside that, things like heart assets.

We have a large deal in the aviation finance space, we have a pending deal in aircraft engines, railcars.

Think about all the heart assets and transportation.

What we're delivering, James, is a customized solution at scale, direct to borrower.

Yes, many of these bars will access the public high grade market.

But when you can deliver scale, customized solution to help meet a need, whether it's fund and acquisition fund capital needs, that is super valuable and that is what our clients look for.

So it sounds like the leverage there or the wedge is something a situation where you've got something you know, sort of turnplane vanilla came up.

Some of these is not I planed in all something that has a you know sort of there's a specific asset, there's a specific pool that might be a little bit different than you know, sort of what everyone else is looking at.

Is that the look?

I think again, if I think back about what's made us very successful in direct lending, it's speed, it's certainty, it's value added services, it's capital at scale and provide a customized solution for almost.

Every deal we do.

One or more of.

Those factors is driving the decision to do something direct with us versus potentially a public market alternative.

I think, as you say, data centers is something that everyone's getting very excited about.

We've had the big advantage data center deal Meta black Stains obviously got a long history of doing that kind of stuff.

But you know what, what do you make of those deals?

What the risks to lenders?

How can they protect themselves?

And you know, how active do you want to be in that space?

I think we're going to be extraordinarily active.

We already are.

And part of it is what I mentioned earlier, which is when we have an investment theme at Blackstone on the private equity side or the infrastructure equity side, the amount of benefit that gives us on the credit side.

Is really extraordinary.

Right, Blackstone owns QTS, which is the largest developer of data centers here in the US.

We have a large ownership stake in air Trunk, which is the largest developer of data centers in the Asia Pacific market.

That gives us extraordinary insights into what's going into that market.

And so when we look at a credit deal, it's really valuable to know firsthand what's going on in these markets.

And so that's where I would start.

The second thing I would say is as a lender lending against fifteen twenty year triplenet contracts from the highest quality credit counter parties in the world, which is what money of these data centers look like, is a really great place for.

Us to play.

You mentioned a couple of deals.

You are basically taking credit risk against one of the big hyperscalers, but you're doing it via this asset and getting paid, like I said, excess spread typically one hundred and fifty to two hundred basis points.

What gives us a ton of comfort is not just the insights on the equity side, but the contractual protections you get as a lender into these deals where you're basically just facing off against that counterparty, whether it's Amazon or Meta or Microsoft, but doing it via an asset.

That's really attractive.

And is it a twenty year deal?

They can be.

Ten, they can be fifteen, they can be twenty.

But what we're seeing is very attractive laun duration triple net contracts that are fantastic for us to finance.

What kind of tickets are you take?

Look, we can do very large ticket size.

It's not I mentioned we did five billion dollars alone in that Rogers deal.

So if you think about the size of these deals and you think about the size of some of these data center complexes, they can be quite large.

And we're going to continue to be a leading player in this market.

Because these are going up to tens of billions of dollars each time you come out with a deal.

And we've talked before this school about livving its tendencies.

Do few bigger deals with a few puntnas.

But what about the risk?

Again, we'll underwrite the deal to its bespoke risk.

That's why we have an incredibly robust investment committee process.

When we do a large deal like that, we're spreading it across many different clients, and so each individual one of our clients.

That's what I mentioned around our business model, where we're aggregating almost brick by brick client relationships in the insurance space.

So every single client will have an allocation to a deal that meets their investment guidelines, So we're diversifying risk in their portfolio.

But the aggregate buying power of our platform, because of the breath of our client base, that's what allows us to go into the market and do these really large, interesting deals with excess spread.

It seems to integrate nicely with the power part of Blackstone's you know, sort of overall ecosystem as well.

Yeah, exactly right.

Look, these are themes that we have very very high conviction is we look at large thematic growth trends, AI the power that's required to fund that.

Those are two at the very top of the list, and when we see these thematics across our platform, we instruct our team to go out and originate in these markets.

You mentioned software though, also, and that seems to being area that some people are concerned about, giving how levit is and how easy it is to replace it with AI at the moment, So how are you changing your approach to lending to that business.

Well, look, we've been focused.

It's a great question.

We've been focused on AI for some period of time, and we've got a large team right now led by Rodney Zemmel, who used to run the digital practice at McKenzie, who helps us, deal by deal assess what is the risk of AI disruption and for us as a lender, that's a key part of our underwriting.

And so we're in the investment committee room.

We actually for every software deal, we have a scorecard that the team needs to fill out to ascertain how likely is this company to be disrupted by, how embedded are they in the workflow is, how hard it is it to switch, how does their technology stack up versus alternatives, And so when we're underwriting a deal in the software space, it's not just the financial underwright, it's the product underwright.

And in fact, Blacktone has a team of over five hundred technologists who all what they do is procure software for our portfolio companies.

And so when we want to make an investment in a software business, it's really nice to be able to call our team and say, hey, are you buying this for our portfolio companies?

Is they're a better product out there, and I think that gives us a holistic view of the underwrite.

I would tell you when we look at.

Our software portfolio today, we feel quite good about the performance and overall we see continued strong growth and free cash flow generation.

What are the weak spots out there right now?

Like you have Blackzone, I think probably has close to unparalleled I guess, insight into multiple industries and probably information that might be a little bit more immediate than what the markets tend to see and be able to digest.

So are there any soft spots that you see developing?

You know, obviously we had terrif Liberation Day not too long ago.

That felt horrible, then it felt better, and now you're sort of wondering, you know, maybe the economy is beginning to soften up a little.

I'd say the things we're watching is borrow or size.

We tend to focus on larger scale borrowers.

I think when we look at the market, subscale, lower middle market type borrow wars have definitely had a harder time navigating some of the uncertainty and volatility.

In the macro.

So that's one thing we look at.

Sector is a huge area for us to focus on software continues to perform well in our portfolio, business services, insurance services, all of those markets continue to be incredibly strong.

But deep cyclicals, high cap X investments, areas that had huge runups post COVID, like freight logistics or building products.

Those are markets where we see a little bit of weakness, and accordingly, we're pretty careful about deploying capital into those areas.

So you've see more payment in kind defers, interests, quiet restructuring.

Is that sort of thing going on in your portfolio?

Away from you, I would say that's an area that has gotten a lot published on it, but holistically I don't view that as a massive issue.

If we look at our portfolio, for example, less than one percent of our income comes from paiding kind assets that are marked below eighty five cents in the dollar, and so you don't have this large issue there.

More often what we see in the market is new deals having a bit of paid in kind capacity as part of the setup.

But again that's baked into the underwright and we looked at the credit metrics, and we look at the loan to value incorporating that as part of the structure.

So we're not seeing more stress away from you in other parts of the market, because that is talked about a love as you say, and people do talk about new entrance to the space.

Been here a long time, so you pretty you know, not as vunderable that they're a small and new entrance that people cool tourists and think that they might be preblence with.

I think this theme of dispersion is the one we'll talk a lot about.

You know, I obviously have the fortune of looking at our portfolio, which is performing extraordinarily well.

But when you step back and look at what's happening in the macro, yes, overall, I feel pretty good about what's there.

But I think you will see some dispersion where managers who don't have the origination capabilities or the asset management capabilities are exposed to some of the sectors or companies that may be more vulnerable in environment like that, I think it is natural to see some uptick in dispersion in manager performance.

But I would tell you that's a good thing.

And I think for us, as someone who has been in this market for over twenty years as a proven investment process, has lots of asset management and other capabilities We don't shy away from that because we think our underwriting and our capabilities on the investment side will continue to differentiate.

Yeah, at least looking at the BDCs.

We just did a report called the BDC Beat available to you on the terminal, just came out today, but it sort of looks at information that we've been writing about for a while.

We look at pick rates.

We look at non accrual rates across a portfolio of about thirty of the larger BDC's, the ones that've issued public bonds, and there definitely is dispersion.

You know, the aggregate numbers haven't really changed all that much.

If you look at non accrural rates, I think they've been between one and two percent since the pandemic.

If you look at the PICK rate, which I try to focus on investment income pick specifically, but if you look at the pickrate, it's held steady around six percent.

It's actually down a little bit this year.

That surprises a lot of people.

It may even disappoint people, you knowlines, Yeah, I would tell you that it may disappoint some people who've sort of been rooting about now's the time that these guys are going to get it.

But it just doesn't seem to.

Well, I guess just doesn't see fundamentally, fundamentally, you step back and what are we doing?

What are most people in the direct lending market doing?

There writing first lean senior secured loans at forty percent loan to value and putting them in vehicles that are either un levered or at most one times levered.

That is not fundamentally a risky activity.

Might you see an idiosyncratic event here or there where a company underperforms, of course, but the grand scheme of what's going on in the asset class is pretty straightforward senior secured, lower risk lending.

Well, you see dispersion, sure, but when I step back and look at what's happening in the asset class, we continue to feel like it's a great thing for our client portfolios, whether they be institutional, insurance or individuals.

Do you know worry a tool though, that some of this risk is being mispriced?

I mean, you know, if every time the market grows this quickly to this scale, something happens, and you know, I've never seen a market that has this amount of access demand US supply no create some kind of issues.

Do you think that that's me just exaggerating because I'm generalist.

Or before you answer.

One of the things I've sort of thought about this is that this whole private credit market, it's not a new market, it's a new form of the market because what we're talking about private credit used to be done by the banks.

So people talk about how much private credit is growing like crazy.

It is, but not overall like sort of corporate credit overall isn't growing like crazy.

It's just been transferred from the banking sector into these other sectors.

And again, I think this goes back to what we're talking about about some of the misconceptions of the market.

Again, you have, you know, senior secured lending at low loan to values that is existent for a very long period of time.

Who is doing it, the form of which it's done.

I think that has.

Evolved, and I think we'll continue to evolve.

Again, the most interesting thing to me is all of the areas outside of direct lending, because again, you've got a two trillion dollar direct lending market, but you've got a thirty trillion dollar opportunity set.

And as we think about these new AZTEC classes and we think about international expansion, to me, like that is what folks aren't talking enough about here.

But when I went on my tour around the world, that's where our clients were most focused.

So talk about international expansion.

There was this big you know, April whenever it was the tires Day, pushed against American exceptionalism, and then this idea that you needed to diversify geographically.

Is that parts of the international side or is it a different story.

Look, I think most of our clients will still have their portfolios largely concentrated in the US, but I do think there is a desire for some of our clients abroad to strengthen their local origination, and I think that is what is driving some of the activity, whether it's in Europe or an Apac.

And you've seen us add to our team significantly.

We just added someone in Japan on the credit side, We've added someone in India.

We'll be up to one hundred and fifty people across Europe within credit alone.

So this is a market where we see lots of opportunities for our clients.

But I would say a lot of clients in that region who haven't had access to local origination are now trying to partner with managers to capitalize on the opportunity set that we know is coming.

It seems to be a little bit of a lower leveraged world outside the US.

Would you agree with that?

I would say generally speaking yes, But again, when we look at most of what we're doing is unlevered.

Everything in the private investment create space, it is un levered, and so I think that is the norm for the vast amount of what we're doing in the markets.

Yeah, we wrote about black crooks attempts to build up in Asia private credit specifically and just not able to get the deals.

And you know, we need the fundraising stumps partly because there was an acquisition going on this separate But that do seem to be challenges when you're raising money and you don't have enough to invest in.

So how what's your view of Asia in that context?

Well, again, I think you've got to be prudent as you think about your growth plans.

And we've had a team on the ground there for many years.

We leverage the capabilities and insights of our private equity and our real estate franchises that are very strong in those markets, and then we continue to build and I would tell you it is logical to expect you're an Asia to lag the growth that we see in the US, But that's a timing thing.

You know, all of the themes that are driving a lot of the growth, for example on the asset bat market in the US, whether it's digital, infra, or energy and power, those same themes exist globally, and the same needs for private capital, especially on the credit side, to support those secular capital needs, those exist globally, and so you're really just talking about a timing from when you start to see it really take off.

And in there's a big defense story.

Is that an opportunity for private.

I think it's part of it.

And I think the narrative around Europe definitely is a bit more constructive than it was in the recent past, with more supportive government around infrastructure spend, defense, defense spend.

We tend to see a little bit of excess spread in Europe relative to the US, and we've seen a recovery and deal activity and so all of that is definitely supporting client interest in that market.

So I take your point about the proposition from the investment standpoint, but still we are looking at you know, aggregated numbers from Pitchbook for example, saying that traditional private credit fundraising is at the lowest since twenty nineteen, which begs the question, you know why our institution investors becoming less interested according to the data in private debt, and you know, shouldn't it silly growing in terms of the factional fundraising.

So what we're seeing is a consolidation of where people are deploying their capital.

So the other massive theme I see is the large managers like Blackstone who are able to originate in scale across all of these markets, who are able to partner with large sophisticated clients around the world to deliver customized solutions.

We're seeing a consolidation of the capital there.

And so a big theme that I see around the world is these multi asset credit partnerships where we partner with a sophisticated institution and we figure out, Okay, here's all the things we're seeing across Blackstone, from direct lending to asset bat finands, to infrastructure credit to private ig all over the world.

How can we work with you holistically to partner across all of those things that we're seeing to deliver a resilient, diversified, customized portfolio that delivers the best of all of the things we do across Blackstone in credit, and so we're seeing that from our largest institutional clients, We're seeing that from our insurance partners, and increasingly individuals are saying, Okay, how do I access more of the credit opportunity beyond just direct lending?

And does that mean that only those sorts of players will ultimately exist in this market?

Is that that scale matters?

You brought it up earlier, James, I think, more than anything in credits, scale is a massive differentiator.

Allows you to do those large deals which we spoke about.

It allows you to access the biggest and best borrowers.

It allows you to offer unique solutions to clients, and it allows us to invest in some of those resources that I mentioned on the value creation side, on the asset management side, that allow us to deliver performance on behalf of our clients.

Do you need to get bigger?

Well, I think you will see us continue to scale because scale is a huge advantage.

And there's white space I mentioned.

I mentioned Europe and APAC as an area of white space.

I mentioned private investment grade where I think we've only scratched the surface, and so I think you will absolutely see us get.

Bigger in those markets.

And I think the other thing we haven't spent a lot of time on and this conversation is deal activity is picking up in a very material way.

And I don't know that this has really been picked up on, but this summer was the third highest summer for M and A activity since two thousand and eight.

August was the single biggest month we had in investment committee in the last three years.

And August is supposed to be a slow month.

We'll close thirty deals.

Basically in the next two weeks, and so we are seeing a significant uptick in deal activity across all of our markets because the underlying macro feels a little bit better, because you're seeing rates and cost of capital coming down, because you're seeing increased confidence in strong corporate earnings.

And so I think this deal machine that has been a little bit slow to get out of the blocks over the last couple of years, I think you're at a real inflection point.

I think that's another reason why we're seeing strong client interest in credit and another reason why scale and flexibility of capital and a broad capability set are the big differentiators.

Evaluations are still very high.

For the right assets, and again I think the right assets, you are seeing buyers, whether that's strategic or financial buyers step up, and I expect to continue.

To see that and LBOs as well.

You're starting to see it.

You're starting to see it.

It was a market that for a while was just characterized by refinancings, and I think you're going to see deal activity pickup.

And like I said, we have.

We've had a very active August and I expect the fourth quarter to be quite busy as well.

Is that more of a direct lending opportunity or is it a leveraged loan, high yield traditional finance or is it a mixture of all.

I think it's all the above.

If you look just in the last week to ten days, We've announced a deal with Parkplace, which is a data center services provider.

We've announced a deal with just Right.

We've announced a deal this morning with am Trust.

We did a big data center deal with Aligned.

We probably announced half a dozen deals just in the last week.

And that is a good indication of the deal activity and pipeline we have at our at our fingertips today.

So it continues through the fourth quarter into next year.

You think this I think, look, obviously we're we're in a world with lots of volatility and macro question marks out there.

But I think if we stay in the current backdrop we're in right now, I think that's going to be a really good thing for deal activity.

And the issue of suitability has come up also, how how do you address that?

Well, again, I think each client in their advisors will have to make the determination of how much illiquidity they can have in their portfolio.

But when you think about something like retirement savings, by definition, that is a longer dated decision, and as a result, there should be some amount of illiquidity that individuals can tolerate within their portfolios.

Maybe not for me.

I'll let you your own decision, David.

As this monkey becomes called democratization, that's what people have been talking about for well, and more regulation, presumedly more transparency.

Does that not a road that one hundred fifty to two hundred basis points premium on private ve's is public?

Well, again, I would separate those two things, James.

I think what we deliver on a deal by deal basis for our client, for our borrowers, by built bringing our capital all the way to them and delivering a customized solution alongside value creation services, alongside all the other things that Blastom delivers its borrowers.

I think that's one thing on the deal side.

I think that will continue.

On your common around transparency, we embrace transparency fully.

David knows this.

If you look at any of our BDCs, you can pull up a ten Q and see every position we have and we can see you know where we're marking them and when they mature, and what the interest rate is on them.

And I would.

Tell you that is great for clients to be able to have that transparency, and so we welcome.

That, and you'll still trading them as well.

Well.

We haven't been as.

Engaged on trading private credit.

I think most of our clients think about private credit as just that they want to earn that liquidity premium.

In most of our borrowers, they partner with Blackstone because they want Blackstone to own the loan, not whoever we might trade it to.

And so I think we'll continue to look at this asset class as one where we're originating to term on behalf of our clients.

Yeah, and just by the way you do, you did bring up the issue of transparency and just so listeners understand the all of this information does reside in the in the public markets and SEC documentation.

It's also available on the Bloomberg terminals, on our BBC page and on some of our other loan pages, so you know that information has been transferred to the terminal.

I've been on those pages.

I must say, and.

You do a great job and to stay until do you need to acquient other thumbs?

Are you going to grow organically?

What's the longusen vision and sons of youal platform.

Look, we've done really a remarkable job growing our business, and we've done it virtually all organic.

Our bias is to build from within.

We've got a proving capability of doing that.

We've got extraordinary, extraordinary people all over our organization.

We've got seven hundred and fifty people in credit.

When there's new opportunities, we want to tap our existing team to go capitalize on it.

And we were talking about Asia Pacific and what we've done there, and that's another that's a great example of an area where I think you'll see us grow organically.

Do you see more insurance partnerships coming down the coming down the line?

It is interesting.

I think you know the different approaches that alternative asset managers have taken to insurance.

You know, obviously Apollo is all in the theme, Kkar is all in with with Global Atlantic, and you guys have taken a different attack on that where I think you own ten to twenty percent of AIG, Is that right?

Corbridge?

Corbridge?

Yeah, we had a minority staking Corbridge.

But you know the model that we have again very different from what those others are doing where they've kind of taken whole ownership of an insurance balance sheet.

For us, it's really an asset management relationship, yep.

And do you see more of these partnerships coming down the line.

It wouldn't surprise me, right.

I think when you look at insurers, private credit is a really nice fit for what they're trying to do in terms of excess spread, low risk, taking some inliquity to do that.

The challenge is origination, and so if you're a standalone insurer and you don't have either an asset management partner or a balance sheet partner to help you originate, I think it's logical to expect to see more of that.

I think the models that people employ will continue to look a little bit differently, and the ability for folks to execute to originate in scale, I think that also will look very different.

It's nice for us to have, you know, one hundred and twenty five billion dollar head start in private investment grade when we go and we talk to some potential clients on the insurance side.

Great stuff.

Michael Zowski, CIA of Blackston's Credit and Insures Group, many thanks for joining us on the Credit Edge.

Thanks for having me guys, and.

Of course very grateful to David Havens from Bloomberg Intelligence.

Thank you very much.

Great being with your for.

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