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Investment Strategy

A Broader Toolkit to Capitalize on the Credit Opportunity

February 13, 2025

By Mike Zawadzki

Much has been written about private credit’s “Golden Moment,” characterized by historically high rates and wide spreads.

While some of this excess return has normalized, we believe the “Golden Moment” will endure into a “Golden Age,” with an extended runway of growth and an addressable market that now exceeds an estimated $30 trillion. [ 1 ]

Secular tailwinds have driven a rapid expansion across private credit asset classes, creating the need for large scale financing solutions across many of Blackstone’s investing megatrends including digital infrastructure, power, and housing. The resulting emergence of asset-based finance, infrastructure credit, opportunistic credit, and other verticals provide broad options, or ‘tools’ for investors in search of excess yield and portfolio diversification.

Scaled and experienced credit managers like Blackstone can use these tools to deliver clients flexible and dynamic multi-asset credit solutions to take full advantage of this massive market opportunity and aim to deliver attractive risk-adjusted returns through cycles.

Attractive Backdrop as Credit Enters 2025

2024 delivered robust performance and the environment remains favorable for credit in 2025 for several reasons.

Corporate balance sheets have held up despite the higher rate environment and earnings growth has allowed for a reduction in leverage compared to pre-Covid. [ 2 ] Loan-to-values remain at historically low levels, [ 3 ] and more help is on the way as recent rate cuts work through the system, the new administration implements likely pro-growth policies and healthy capital markets facilitate maturity extensions. We also expect a strong rebound in M&A activity from a 30-year low, [ 4 ] which should yield increasing financing opportunities.

The US consumer is similarly healthy, well supported by record home equity, declining debt-to-disposable income and higher real wages. [ 5 ]

Today’s base rates are supportive of elevated all-in credit yields. As shown in the chart below, bonds currently offer their highest premium compared to the S&P 500 earnings yield since 2003.

Of course, against this broadly supportive backdrop, we are closely monitoring increased interest rate volatility, tight spreads in traditional fixed income assets, and geopolitical uncertainty that may drive increased performance dispersion.

Credit Yields Remain Historically Attractive [ 6 ]
US BBB Bond Yield Less S&P 500 Earnings Yield

The Connection - Winter 2025

A Growing Universe of Private Credit Strategies

We continue to see accelerated growth in the private credit markets, with private lenders stepping in to fill the void left by constrained bank balance sheets.

While private credit has historically been associated with middle-market corporate direct lending, a significant expansion of strategies is underway across the industry, including financings for physical assets, infrastructure, residential and commercial real estate, and fund portfolios.

But that’s just the start. In our view, there’s a long runway ahead that opens up a massive addressable market that exceeds $30 trillion. [ 7 ]

In what we call “financing the real economy,” managers have the ability to directly originate or partner with banks to provide capital to all the assets that make the economy run.

These tailwinds are fueling the need for large-scale solutions to finance the significant secular growth underway across many of Blackstone’s high conviction investment themes. From AI and data centers to power and energy transition, we believe that private credit has become essential financing for the infrastructure of the future.

Investible Credit Universe Continues to Expand [ 8 ]

The Connection - Winter 2025

The Multi-Asset Credit Solution

We believe that allocating to a dynamic multi-asset credit (MAC) strategy enables investors to capitalize on this expansive opportunity set across the broader landscape.

By using the tools in the enhanced toolkit, managers can build diversified and resilient portfolios, overweight higher relative value strategies, and navigate shifting opportunities and obstacles in the market.

Broad Opportunity Set Exists Across the Full Credit Spectrum [ 9 ]
Illustrative Asset-Level Yield

The Connection - Winter 2025

A comprehensive MAC portfolio combines high-quality assets across an extensive range of liquid, private, structured and real asset credit strategies. Managers with capabilities in all these areas have numerous asset allocation levers to pull to drive investment performance, beyond simply credit selection.

  • By tapping into diversified sources of credit spread, a manager can navigate a range of macro environments, reducing risk and volatility while enhancing performance. For example, focusing on shorter duration assets amidst today’s high and volatile interest rates.
  • A manager can tactically adjust allocations to optimize portfolios to changing market conditions and capitalize on dislocations whenever and wherever they arise.
  • Identifying asset classes that are undercapitalized can drive sustained outperformance. For example, the significant growth of data centers, power and energy transition combined with the balance sheet constraints of banks is creating a uniquely favorable supply/demand mismatch in asset-based finance.
  • Expanding the toolkit means accessing more complex opportunities that may provide excess return. For example, structured credit asset classes such as collateralized loan obligation (CLO) securities and commercial mortgage-backed securities (CMBS) currently offer spreads that are far more attractive in their historical context compared to other parts of the liquid credit market. [ 10 ]
  • Perhaps most importantly, through direct origination a manager can generate excess yield by providing customized solutions and eliminating the friction of intermediaries and syndication processes. As shown in the chart below, investors can potentially earn an additional 200 basis points of yield for equal or less risk in the private markets. [ 11 ]

    Private Credit Offers Excess Yield Compared to Public Credit [ 12 ]
    Investment Grade Yields

    MZ - The Connection - Winter 2025 charts


    Below Investment Grade Yields

    MZ - The Connection - Winter 2025 charts

    In addition to these return drivers, a MAC portfolio can serve as a powerful risk mitigant. Investing across multiple strategies enables managers to find the proper balance of risk and return, current income and appreciation, and liquidity and origination premium, all while benefitting from the lower correlation and volatility that comes with asset class diversification.

    Bringing it All Together

    We believe that managers with scale, flexibility and a fully integrated platform have a strong competitive advantage in credit when it comes to executing on the breadth of strategies and the opportunity set ahead.

    At Blackstone, we benefit from our market-leading credit business that spans over 4,750 borrowers and 20 distinct strategies. We believe that our leading franchises across the credit spectrum and geographies position us to assess risk return through a broader lens and capitalize when opportunities present themselves. Critically, Blackstone’s global footprint encompasses leading private equity, real estate and infrastructure platforms. The insights that come from this vast library of financial and operating data, real-time CEO surveys, and human capital help us make better decisions on underlying credits and portfolio positioning.

    Bringing it all together is our nearly 100-person Office of the CIO team. This team serves as the “central nervous system” of Blackstone’s credit investing apparatus, leveraging dedicated expertise in areas including underwriting, asset management, value creation, portfolio insights, asset allocation and data sciences. This integrated approach allows us to harness the power of our data to connect dots and spot trends earlier and hone our decision-making processes from investment committee to asset allocation forums.

    The combination of the attractive credit market opportunity, a growing range of investment strategies, and the ability of a manager to wield a deeper and more sophisticated toolkit makes multi-asset credit a great way for investors to capitalize on an enduring Golden Age in credit.

    With contribution from Sarah Husband, Principal, Blackstone Credit & Insurance (BXCI).

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    Important Disclosures

    This commentary does not constitute an offer to sell any securities or the solicitation of an offer to purchase any securities. This commentary discusses broad market, industry or sector trends, or other general economic, market or political conditions and has not been provided in a fiduciary capacity under ERISA and should not be construed as research, investment advice, or any investment recommendation. Past performance does not predict future returns.

    The views expressed in this commentary are the personal views of the authors and do not necessarily reflect the views of Blackstone. The views expressed reflect the current views of the authors as of the date hereof, and neither the authors nor Blackstone undertake any responsibility to advise you of any changes in the views expressed herein.

    Blackstone and others associated with it may have positions in and effect transactions in securities of companies mentioned or indirectly referenced in this commentary and may also perform or seek to perform services for those companies. Blackstone and others associated with it may also offer strategies to third parties for compensation within those asset classes mentioned or described in this commentary.
     
    Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specific investment objectives and financial position. Tax considerations, margin requirements, commissions and other transaction costs may significantly affect the economic consequences of any transaction concepts referenced in this commentary and should be reviewed carefully with one’s investment and tax advisors. All information in this commentary is believed to be reliable as of the date on which this commentary was issued and has been obtained from public sources believed to be reliable. No representation or warranty, either express or implied, is provided in relation to the accuracy or completeness of the information contained herein.

    McKinsey & Company, The Next Era of Private Credit, September 2024.
    JPM, as of 2Q24. Historical Avg. Debt / EBITDA represent the year-over-year credit statistics of the loan-only portion of the JPM Leveraged Loan Index; broader issuers of the JPM High Yield Index.
    PitchBook Data, Inc., as of September 30, 2024. Equity Contribution only reflects contributed equity for All LBOs.
    Morgan Stanley Global Equity & Credit Research Report as of November 11, 2024. (1) Dealogic, Morgan Stanley Research.
    Blackstone views and beliefs, October CMF Takeaways, as of October 24, 2024.
    Bloomberg, as of July 30, 2024.
    McKinsey & Company, The Next Era of Private Credit, September 2024.
    Represents Blackstone Credit & Insurance views and beliefs, as of November 2024. For illustrative purposes only.
    For illustrative purposes only. Yields represent asset yields at origination. The yields presented are not to be interpreted as a measure of performance, rather, an indication of potential yields that investments in the fund could achieve at origination utilizing current market data. Performance at the fund level will be separately calculated as an IRR. Estimates / Targets: IG Bonds: Bloomberg, as of October 30, 2024. Infrastructure Debt: Blackstone Private Credit data. Assumes 2%-4% spread and 3.7% base rate. Base rate represents 7Y UST, as of October 2024. IG Asset Based Finance: Blackstone Private Credit data. Assumes 2%-4% spread and 4.1% base rate. Base rate represents 4Y UST, as of October 2024. High Yield Bonds: Bloomberg, as of October 30, 2024. Leveraged Loans: JP Morgan LL Index, as of October 30, 2024. Real Estate Lending: Blackstone Private Credit and Real Estate data. Assumes 3%-6% spread and 5.3% base rate. Base rate represents 3M SOFR, as of October 2024. Senior Direct Lending: Blackstone Private Credit data. Assumes 4%-7% spread and 5.3% base rate. Base rate represents 3M SOFR, as of October 2024. HY ABF: Only includes ABF residuals. Blackstone Private Credit data. Assumes 7%-10% spread and 4.1% base rate. Base rate represents 4Y UST, as of October 2024. Opportunistic Credit: Blackstone Private Credit data. Assumes 8%-11% spread and 5.3% base rate. Base rate represents 3M SOFR, as of October 2024. CLO Equity: Bloomberg, as of October 30, 2024.
    CLO BB spread data relative to LL B spreads. LL B data point represents JPM B-Rated Loan Index; CLO BB represents JPM CLO Primary: USD – CLO BB Spread to 3M Term SOFR, both as of November 22, 2024. Real Estate CMBS BBB spread data relative to Corp BBB Index, both as of Bloomberg, as of February 11, 2025.
    Public IG represents the Bloomberg US Agg Corporate Avg OAS, as of November 22, 2024. The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers. Private IG data, as of November 22, 2024, based on BIS spread data, Blackstone. B Liquid Loan New Issue is sourced from LFO, Bloomberg, Blackstone representing BSL B Loan New Issue (B2 Moody’s / $1bn+). Direct Lending new issue is sourced from Lincoln Private Credit Report and Blackstone’s Europe DL Pipeline and US DL Pipeline.
    Represents Blackstone’s view of the current market environment as of the date appearing in this material only, which is subject to change. 1) As of December 31, 2024. Public Investment Grade is represented by the Yield-to-Worst of the Bloomberg U.S. Aggregate Bond index. Private Investment Grade is represented by BXCI’s ABF spread premium to IG corporates. 2) As of December 31, 2024. Public Below-Investment Grade is represented by the Yield-to-Worst of the Bloomberg US Corporate High Yield Index and Spread-to-Maturity of the Morningstar LSTA US Leveraged Loan Index plus the 3Y SOFR swap rate. Private Below-Investment Grade is represented by the excess spread of Lincoln’s Senior Direct Lending index.