A version of this article appeared in CNBC’s Inside Alts newsletter. This newsletter is your guide to the fast-growing world of alternative investments, from private equity and private credit to hedge funds and venture capital. Sign up to receive future editions directly to your inbox.
Blackstone’s head of private wealth said concerns about rising defaults and a systemic crisis from private credit do not reflect the underlying fundamentals of private lending portfolios and returns.
The wave of redemptions has raised new concerns about private credit risks, with companies including Ares Management and Apollo Global Management last month imposing caps on investors’ withdrawals from their funds. Joanne Solotar, global head of Blackstone Private Wealth, which manages more than $300 billion, said capital flight was not justified by the potential returns or losses of individual funds.
“My guess is that there were a lot of calls that the house was on fire, but all we saw was probably pieces of burnt toast,” she said.
Solotar said investors and clients have important questions about transparency, loan losses, portfolio software exposure and liquidity, among other issues. He said some funds could see lower returns. Still, he said the broader case for access to private credit and private capital remains stronger than ever.
He said some worst-case scenarios published by Wall Street analysts predict loan defaults of up to 15%. Spread over three years, the total annual revenue loss is approximately 300 basis points. He said if credit spreads widen, returns on private credit funds could fall to around 3-5% from the current 6-9% typical for many funds.
“Is a 3% to 5% return a disaster?” she said. “So what’s going on with the listed equivalent? Because if you look at the listed equivalent, it’s actually down. So we’re still outperforming and that’s the key. I think it’s important to stay calm and understand what you own and what the real downside is.”
Of course, many bank CEOs, analysts, and investors disagree, arguing that private equity firms are underestimating potential risks and exposures. Most at risk are software companies, which account for the bulk of private credit lending and are now seen as vulnerable to disruption by artificial intelligence. The Wall Street Journal recently discovered that large private funds managed by Blackstone, Apollo, Ares and Blue Owl had more exposure to software companies than filings suggested.
Soloter said less than 5% of Blackstone Funds’ assets are vulnerable to AI. While some investors and commentators have criticized private credit funds for their lack of transparency and disclosure, he said funds often disclose more loan information than banks.
“The word ‘private’ only refers to the fact that these are not publicly traded,” she said. “But that doesn’t mean it’s secret or dark. I was a financial analyst for many years, and banks don’t tell us the status of their loans at all. In fact, we show them at a single, individual loan level. We’re very transparent, and we report it quarterly.”
Solotar likens the current period for private credit to post-pandemic real estate funds. Blackstone limited withdrawals from its $60 billion flagship real estate fund in 2022 as investors worried about a decline in commercial real estate. Over time, withdrawals stabilized, all redemptions were fulfilled, and the real estate market recovered.
He said the current “stress test” in private credit will actually prove its value in portfolios in the long term. Institutional investors have long proven that private investments provide important portfolio balance, have lower volatility, longer time horizons, and often provide better long-term returns than publicly traded investments.
The private equity industry’s efforts to extend private credit and private assets into 401(k) plans have come under increasing criticism, especially in light of current redemptions. Former Goldman Sachs CEO Lloyd Blankfein recently told Bloomberg that incorporating alternative assets into everyday investors’ retirement portfolios is “insane.”
“Why would you go into this dangerous territory just to make your business a little bit bigger when it could become such a big problem in the future?” Blankfein told Bloomberg. “These securities are opaque and may be riskier than other securities.”
Soloter said Blankfein’s comments highlight the need for more education.
“I think everyone needs to be well-educated about what they’re putting in their portfolio, how the structure works, the liquidity limits, how it interacts with the rest of the portfolio,” she said. “And I think I would ask Lloyd if he has any personal investments in his portfolio. I think the answer is yes.”
Solotar said demand for private investments will only continue to grow as investors seek to emulate the returns and strategies of large institutions such as endowments, pension funds and sovereign wealth funds that have allocated money to alternative investments for decades. The alternative revolution is still in its early stages, given the much larger size of the private market compared to the public market.
Blackstone Private Wealth currently has assets of $300 billion, up from $58 billion in 2017. Solotar said Blackstone aims to grow assets under management to $1 trillion over the next few years.
“I’d like to say we’re not even in the first inning yet, but I think we’re still in spring training,” she said. “If you look at how pension funds are allocated, about a third of their investments are in the private sector. Top foundations and endowments are at similar levels, family offices as well. And if you look at retirement accounts, it’s less than 1% or close to zero. So this is a very long-term journey, and I see the same trends happening around the world, but it’s very fast.”
