Pattern Recognition

December 5, 2023

With Increasing Risks, Size & Scale Matter

By Joe Zidle and Jonathan Bock

Larger companies are often well-positioned for elevated rates and growth challenges.
Companies with EBITDA of under $50 million have historically defaulted at more than five times the rate of companies with EBITDA of over $100 million.¹
We believe lending to larger companies is one important way for private credit managers to protect capital today.

Average Quarterly Covenant Default Rate

As of September 30, 2023. The “Lincoln International Private Market Database,” also known as the Lincoln Valuations & Opinions Group (“VOG”) Database, is a quarterly compilation of over 4,750 portfolio companies from a wide assortment of private equity investors and non-bank lenders. Most of these companies are highly levered with debt financing provided via the direct lending market and in many instances, Lincoln estimates the fair value of at least one senior debt security in the portfolio companies’ capital structures. In assessing the data, VOG relies on commonly accepted valuation methodologies and each valuation analysis is unique and conforms to fair value accounting principles. The analyses are then vetted by auditors, fund managers and their board of directors, as well as other regulators. © 2023 Lincoln Partners Advisors LLC. All rights reserved. Third party use is at user’s own risk. Average Quarterly Covenant Default Rate represented as the average quarterly share of companies in the Lincoln International proprietary database that have breached at least one covenant for the period June 30, 2018 through September 30, 2023, which is the full sample for which data is currently available. Average quarterly covenant default rates for companies with fewer than $50 million in EBITDA and greater than $100 million in EBITDA were 12% and 2%, respectively, in the noted time period.

November 3, 2023

Last Round of the Inflation Fight

By Joe Zidle and the Portfolio Operations Procurement Team

If this is the final round of the inflation fight, it feels like the longest, with US producer prices up 2.2% year-on-year in September, the third consecutive monthly increase.¹
Yet survey data from a subset of Blackstone portfolio companies suggests a more encouraging shift.
Nearly Flat Input Costs: In Q3, companies responding to our survey of Chief Procurement Officers reported just a 0.2% year-on-year increase in the average cost of manufacturing products or delivering services, a significant deceleration from 4.9% in Q4 of 2022.²
Sector-Specific Relief: Industrial & Services sector companies reported a 2.3% decline in their input costs, the first indication of disinflationary forces at play within these companies.

Surveyed Companies’ Reported Input Costs (YoY%)

US Bureau of Labor Statistics, as of 9/30/2023.
The Blackstone 3Q’23 survey of a subset of portfolio company CPOs referred to herein reflects input from 100 Blackstone portfolio companies (138 individual responses), largely within Blackstone’s Private Equity and Real Estate businesses (the “CPO Survey”). The 2Q’23, 1Q’23 and 4Q’22 CPO surveys reflect input from 107 portfolio companies (148 individual responses), 102 portfolio companies (131 individual responses) and 67 portfolio companies (59 individual responses), respectively. Certain portfolio companies have multiple procurement representatives and accordingly provided multiple responses per company to survey questions. Procurement representative responses from a single company in a single region are averaged when results are aggregated. Quarter-over-quarter presentations may reflect responses from different companies. The responding portfolio companies are not necessarily a representative sample of companies across Blackstone’s portfolio. The views expressed by responding portfolio companies do not necessarily reflect the views of Blackstone. Input costs include direct and indirect cost of operations including components, goods, services, energy, and G&A, and excluding human capital, wages, and benefits.

September 27, 2023

Explosive Population Growth Bodes Well for Canada

By Joe Zidle with Real Estate Asset Management

Canada’s population is booming, with the fastest annual growth in over six decades.¹
Growth is driven by the country’s pro-immigration policy; ~60% of new immigrants hold a bachelor’s degree or higher.²
Rental housing and logistics supply has not kept up with increased demand, driving low vacancies of <2%.³

G7 annual population growth

Government sources and Macrobond, as of 1/31/2023 (US, as of 12/31/2022 and UK, as of 12/31/2021). Population growth rate calculated as percentage change from prior year.

Note: The EU average is based on population data for France, Germany and Italy, weighted by each country’s share of the combined total.

Statistics Canada, as of 3/22/2023
StatCan, as of November 2022. Represents percentage of total immigrants aged 25 to 64 with a bachelor’s degree or higher from 2016-2021.
Canada Mortgage and Housing Corporation, as of December 31, 2022 and CBRE, as of June 30, 2023. Housing figures reflect average vacancy for two-bedroom apartment units. Logistics figures reflect stock-weighted averages across Toronto, Montreal and Vancouver.

September 14, 2023

India’s Many Tailwinds

By Joe Zidle

India’s GDP has grown 75% over the last decade and its equity market has returned more than 2.5x, outperforming most major global indices.
Shifting supply chains have also led to surging foreign direct investment in Indian manufacturing—up 76% year-on-year through 2022.
With the world’s largest population, a fast-growing middle class and an expanding manufacturing base, India is poised to continue outperforming.

10-year total return by equity market

(USD; indexed to 100 as of October 2013)

Macro indicators from United Nations and World Bank. FDI growth from S&P Global. Equity performance from Bloomberg, Macrobond, MSCI Inc., Standard & Poor’s and Stoxx as of September 12, 2023.

August 14, 2023

Encouraging Signs in Fed’s Inflation Fight

US inflation is cooling rapidly.
In fact, 90% of July CPI is attributed to the 7.7% yoy increase in reported shelter costs.
But what Blackstone recognizes through its extensive real estate holdings is that the government data lags the market.
Strip out that lagging shelter data and the extent of headline and core CPI inflation deceleration becomes much clearer…

US headline and core CPI, ex-shelter (% yoy)

US Bureau of Labor Statistics, and Macrobond, as of July 31, 2023.

July 31, 2023

Explosive Growth in Data

Cloud computing, content creation and the AI revolution are driving rapid growth in data.
Between 2010 and 2022, data created, consumed and stored increased 49x.¹
This is fueling demand for US data centers, with more leasing in the last 18 months than in the previous six years combined.²

Global data created, consumed and stored (zettabytes)

IDC, as of December 31, 2021. 2021 and 2022 represent year-end estimates.
datacenterHawk, as of December 31, 2022. Demand based on total gross absorption in megawatts (electricity consumption).

July 24, 2023

Not All Real Estate Is Created Equal

Concerns about commercial real estate overlook dramatic dispersion across subsectors.
US public data center REITs are up 19.4% year-to-date, given accelerated fundamentals, with apartments and logistics also up strongly.¹
Conversely, US office is seeing all-time high national availability of 26%,² reflected in office REITs down 16.2% year-to-date.

US Public REIT performance year-to-date

FTSE NAREIT, as of June 30, 2023. Reflects total return of publicly traded REITs by NAREIT subsector from December 30, 2022, to June 30, 2023.
CoStar, as of March 31, 2023. Based on Class A buildings greater than 100,000 sf, excluding owner-occupied buildings.

July 17, 2023

An Attractive Environment for Private Credit

Higher base rates and wider spreads have been generating higher yields in non-investment grade private credit.
Returns have increased from 7.2% to 12.5% since 2021.

Yields for non-investment grade direct loans

Blackstone Credit Private Credit data as of June 2023. Includes upfront fees/OID and assumes average hold of 3 years. Assumptions based on market terms.

Opinions expressed reflect the current opinions of Blackstone as of the date of publishing only and are based on Blackstone’s opinions of the then-current market environment, which is subject to change. Certain information contained in the content discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice.

Certain information and data provided in this content are based on Blackstone proprietary knowledge and data. Portfolio companies may provide proprietary market data to Blackstone, including about local market supply and demand conditions, current market rents and operating expenses, capital expenditures, and valuations for multiple assets. Such proprietary market data is used by Blackstone to evaluate market trends as well as to underwrite potential and existing investments. Additionally, certain information contained in this content has been obtained from portfolio companies and/or sources outside Blackstone, such as press releases, reports, websites, and/or articles, which in certain cases have not been updated through the date hereof. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of Blackstone, its funds, nor any of their affiliates takes any responsibility for, and has not independently verified, any such information. There can be no assurances that any of the trends described herein will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results.

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 is not necessarily indicative of future performance.