Essentials of Private Credit

Private Credit: What You Need to Know

Growing Demand

Privately held companies focused on growth and transformation have increasingly turned to private credit as a source of capital. Working with non-bank lenders, these companies are seeking to meet their capital needs more efficiently through direct loans.

Defensive Income

Private loans are typically senior secured with meaningful cushion below in the form of junior debt and equity. Also, they typically offer floating rate coupons. These features aim to provide investors with principal protection and high income potential.¹

Core Allocation

When added to a traditional balanced portfolio of stocks and bonds, private credit can offer meaningful diversification and improve risk-return potential.²

Dwight Scott, Global Head of Blackstone Credit, discusses how private credit is different from public markets, the potential risk and rewards in private credit, how private credit investors can drive performance, and Blackstone’s approach.

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The Basics of Private Credit

Publicly Syndicated Loans

Every business needs capital—to expand, operate, acquire a competitor, or pursue new market opportunities. Traditionally, companies borrow money from commercial banks. These banks typically sell (or “syndicate”) these loans or bonds to a large group of lenders who will own or trade these securities.

Private Credit

Private credit can offer companies a more direct and efficient way to access capital. Private credit managers raise funds directly from investors and lend to corporate borrowers in transactions that often involve a private equity firm. This direct approach—with no bank in the middle—can result in greater efficiency, confidentiality, certainty in execution, and flexibility in terms of structure for the borrower. For the investor, it can lead to stronger documentation, protection, and ultimately more attractive returns.

Private Credit at the Core

Historically, private credit has helped to enhance returns, reduce volatility, and improve the income potential of traditional investment portfolios. For investors seeking defensive positioning with return potential in the face of interest rate volatility, inflation, and continued uncertainty in public markets, these characteristics may be attractive.

60/40 Portfolio

Annualized Return	8.3%
Annualized Volatility	11.0%
Current Yield	2.9%

Portfolio with a 20% Private Credit Allocation

Annualized Return	9.2%
Annualized Volatility	10.2%
Current Yield	4.3%

The above information is provided for illustrative purposes only and should not be considered as research or investment advice. Source: Bloomberg, Morningstar, as of 3/31/2023. As commonly used in the industry, the 60/40 portfolio is 60% allocated to the S&P 500 Index and 40% is allocated to the Bloomberg US Aggregate Bond index.

Private Credit is represented by the Cliffwater Direct Lending Index. There can be no assurance that any Blackstone fund or investment will achieve its objectives or avoid substantial losses, or that alternative investments will generate higher returns than other investments. Annualized returns and volatility are calculated based on the quarterly returns over the period from October 2015 to March 2023. The yield on the portfolio with 20% private credit allocation was calculated using the annualized S&P 500 Dividend Yield, the annualized Bloomberg US Aggregate Bond Yield, and annualized Cliffwater Direct Lending Index quarterly income. The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions expressed reflect the current opinions of Blackstone as of the date hereof and are based on Blackstone’s opinions of the current market environment, which is subject to change. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results.

Private Credit Landscape Today

Private credit has expanded rapidly for years, in part due to bank consolidation and regulatory change in the aftermath of the Global Financial Crisis. Today, private credit represents more than 20% of the US market for below-investment-grade credit, up from 5% in the mid-2000s, and plays an important role in financing large transactions.³

This trend has been largely driven by private equity activity and companies that are seeking more flexible capital solutions.

Private Credit’s Outperformance Over Time

Historically, private credit has outperformed traditional credit segments like high yield bonds and leveraged loans, in part reflecting the premium borrowers pay for the efficiency, confidentiality, and flexibility of private capital.

Annual Returns of Fixed Income Key Indices Ranked in Order of Performance (2016-2022)

2016

2017

2018

2019

2020

2021

2022

Total Return

17.1%

11.2%

10.2%

2.6%

1.1%

0.3%

8.6%

7.5%

4.1%

3.5%

1.1%

0.8%

8.1%

1.8%

1.4%

0.4%

0.0%

-2.1%

14.3%

9.0%

8.7%

8.6%

5.2%

2.2%

7.5%

7.1%

5.8%

5.5%

3.1%

0.5%

12.8%

5.3%

5.2%

0.0%

-1.5%

-1.7%

6.3%

1.5%

-0.8%

-7.8%

-11.2%

-13.0%

8.8%

5.0%

4.4%

1.0%

0.9%

0.6%

Private Credit
1‑3 Month T‑Bill
Treasuries
Investment Grade Bonds
Leveraged Loans
High Yield

Total Return

8.8%

5.0%

4.4%

1.0%

0.9%

0.6%

Source: Morningstar, Cliffwater. Represents the annual returns for the respective calendar year, ranked in order of performance. The asset classes presented are based on the following indices: Clifffwater Direct Lending Index for Private Credit, Bloomberg U.S. Corporate High Yield Index for High Yield , Bloomberg U.S. Aggregate Bond Index for Investment Grade Bonds, Morningstar LSTA US Leveraged Loan Index for Leveraged Loans, Bloomberg U.S. Intermediate Treasury Index for Treasuries, and Bloomberg U.S. Treasury Bill 1-3 Month Index for 1-3 Month T-Bill. Past performance is not necessarily indicative of future results.

There can be no assurance any alternative asset classes will achieve their objectives or avoid significant losses. The volatility and risk profile of the indices is likely materially different from that of a fund. The indices employ different investment guidelines / criteria than a fund and do not employ leverage; a fund’s holdings and the liquidity of such holdings may differ significantly from securities comprising the indices. The indices aren’t subject to fees / expenses and it may not be possible to invest in the indices. The indices’ performance has not been selected to represent an appropriate benchmark to compare to a fund’s performance, but rather is disclosed to allow for comparison to that of well-known and widely recognized indices. A summary of the investment guidelines for the indices is available upon request. In the case of equity indices, performance of the indices reflects the reinvestment of dividends. The indices are not necessarily the top performing indices in the given asset class and recipients should consider this when comparing the performance of any fund or investment to that of the indices. See “Important Disclaimer Information,” including “Index Comparison.”

Key Reasons Borrowers Select Private Lending⁴

Efficiency of execution
Flexible structuring
Maintenance of confidentiality
Greater certainty of terms
Fewer public disclosure requirements

A CASE STUDY

Building Partnerships: Custom Ink

In May 2019, Blackstone Credit provided a $280 million direct loan to Custom Ink, an innovative customized apparel brand in the US. Key benefits of private lending, in addition to speed and greater certainty, included the value-add of partnership. By partnering with Blackstone, Custom Ink gained access to the Blackstone Value Creation Program and a breadth of opportunities to cross-sell to other portfolio companies. The goal: accelerate Custom Ink’s growth and take its business to the next level.

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Essentials of Private Markets

Learn how assets such as private real estate, credit, and equity can fit into investment portfolios.

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Capital is at risk and investors may not get back the amount originally invested.
Diversification does not ensure a profit or protect against losses.
Source: Prequin, Credit Suisse as of September 30, 2022. Past performance is not necessarily indicative of future performance. The total US Sub-investment grade credit market is defined as the aggregate of the US high yield bonds, US leveraged loans and North American private credit markets. Leveraged loans refer to broadly syndicated loans. The above reflects Blackstone Credit’s views and beliefs unless otherwise indicated.
Any investment involves a high degree of risk and should only be made if an investor can afford the loss of the entire investment. There are no guarantees or assurances regarding the achievement of investment objectives or performance and you could lose some or all of your investment.

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