Private Credit Investing in Rising Rate Environments
The increase in prices is pervasive and persistent across a range of sectors of the global economy — and investors now face upward pressure on interest rates. Private credit, which generally consists of floating rate loans, may be resilient in a rising rate environment.
Several upward pressures on interest rates
- Persistent supply-chain issues, pent-up consumer demand, and price swings related to the war in Ukraine have each injected inflationary pressure into the global economy already experiencing pandemic-era inflation.
- Globally, most central banks appear committed to a hawkish posture in an effort to contain these trends, even as they acknowledge the risks of slowing growth.
- The 60/40 portfolio of equities and bonds turned in one of its worst starts to a year ever in 2022 — reflecting uncertainty associated with the war in Ukraine, commodity price shocks, more hawkish central banks around the world, and pressure on traditional fixed income that is unlikely to abate.
At this point, it may make sense to take a fresh look at assets with resilience in the face of rising rates and inflation, such as those with variable cash flows and/or floating-rate coupons.
Figure 1: Inflation-Adjusted Returns for Aggregate Bonds (2021-Q2 2022)1
Figure 2: Returns When 10-Year US Treasury Increases by 0.75%+ (2016-2022 YTD)2
Note: Past performance is not indicative of future results. 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 are subject to change.
- Source: Morningstar, as of 6/30/2022. Federal Reserve, as of 6/30/2022. Morningstar calculates nominal return using trailing yearly/quarterly returns Real Return is calculated by subtracting inflation from the Nominal Return. Inflation is represented by the US Bureau Labor of Statistics CPI All Urban Seasonally Adjusted Base Period 1982-1984 Index. Aggregate Bonds is represented by the Bloomberg US Aggregate Bond Index. City Average. Public Fixed Income is represented by the Bloomberg US Aggregate Bond Index.
- Source: Morningstar, as of 6/30/2022. Federal Reserve, as of 6/30/2022. Includes periods of rising rates over the past 5 years, beginning in 2016. Private Credit is represented by the Cliffwater Direct Lending Index.
What makes private credit an attractive consideration for investors in an inflationary and rising rate environment?
Floating Rate Loans may Benefit from Rising Rates. In a cycle of rising interest rates characterized by persistent inflation, fixed income investors may struggle to earn satisfactory yield on their long-duration investments. In a rising rate environment, we believe floating rate loans such as those in private credit are highly attractive, as income can increase with rising interest rates.
Privately Negotiated Terms and Structure. Private transactions are negotiated directly between the lender and the sponsor/borrower, with an extensive focus on due diligence and downside protection. Private lenders aim to negotiate stronger structural protections, including covenants and higher call premiums. Private credit deal flow remains robust as borrowers seek certainty of terms, flexibility in structuring, and a more efficient process than the public market.
Less Volatility, Duration, and Correlation. Private assets are valued based on the fundamentals of the underlying companies and are not subject to mark-to-market volatility. Floating rate loans are often benchmarked to 3-month reference rates and they are among the lowest-duration investments available to investors today. Less volatility and lower correlation are expected in private assets because these investments are not traded in public markets.
Scale and Sector Focus Matter. Blackstone’s scale and size allow the firm to commit to large-scale transactions in changing market environments. Blackstone seeks to offer protection from inflation by focusing on sectors the firm believes exhibit high growth trends and strong cash flow profiles, such as software and healthcare.
Access Private Credit Investing in Rising Rate Environments
Important Disclosure Information and Risk Factors
The views expressed in this commentary are the views of Private Wealth Solutions group of Blackstone Inc. (together with its affiliates, “Blackstone”) and do not necessarily reflect the views of Blackstone itself. 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.
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 should be reviewed carefully with one’s investment and tax advisors.
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, legal, tax or investment advice, or any investment recommendation. Past performance is not necessarily indicative of future performance.
Blackstone Securities Partners L.P. (“BSP”) is a broker-dealer whose purpose is to distribute Blackstone managed or affiliated products. BSP provides services to its Blackstone affiliates, not to investors in its funds, strategies or other products. BSP does not make any recommendation regarding, and will not monitor, any investment. As such, when BSP presents an investment strategy or product to an investor, BSP does not collect the information necessary to determine—and BSP does not engage in a determination regarding—whether an investment in the strategy or product is in the best interests of, or is suitable for, the investor. You should exercise your own judgment and/or consult with a professional advisor to determine whether it is advisable for you to invest in any Blackstone strategy or product. Please note that BSP may not provide the kinds of financial services that you might expect from another financial intermediary, such as overseeing any brokerage or similar account. For financial advice relating to an investment in any Blackstone strategy or product, contact your own professional advisor.
Issued by The Blackstone Group International Partners LLP (“BGIP”), which is authorised and regulated by the Financial Conduct Authority (firm reference number 520839) in the United Kingdom.
This communication is directed only at persons: (a) who are “Professional Clients” as defined in the Glossary to the UK Financial Conduct Authority Handbook; or (b) to whom it may otherwise lawfully be communicated. It is intended only for the person to whom it has been sent, is strictly confidential and must not be distributed onward.
So far as relevant, the only clients of BGIP are its affiliates. No investor or prospective investor is a client of BGIP and BGIP is not responsible for providing them with the protections afforded to clients. Investors and prospective investors should take their own independent investment, tax and legal advice as they think fit. No person representing BGIP is entitled to lead investors to believe otherwise.
In the UK, Belgium, Denmark, Finland, The Republic Of Ireland, Italy, Lichtenstein and Norway, this communication issued by The Blackstone Group International Partners LLP (“BGIP”) of 40 Berkeley Square, London, W1J 5AL (registration number OC352581), which is authorised and regulated by the Financial Conduct Authority (the “FCA”) (firm reference number 520839) in the United Kingdom and which maintains appropriate licenses in other relevant jurisdictions.
In the EEA, other than in Belgium, Denmark, Finland, the Republic of Ireland, Italy, Lichtenstein or Norway, this communication is made by Blackstone Europe Fund Management S.à r.l. (“BEFM”) of 2-4 Rue Eugène Ruppert, L-2453, Luxembourg (registration number B212124), which is authorized by the Luxembourg Commission de Surveillance du Secteur Financier (reference number A00001974)
This communication is exclusively for use by persons identified above and must not be distributed to retail clients. It is intended only for the person to whom it has been sent, is strictly confidential and must not be distributed onward.
This communication does not constitute a solicitation to buy any security or instrument, or a solicitation of interest in any Blackstone fund, account or strategy. The content of this communication should not be construed as legal, tax or investment advice.
If communicated in any other state of the European Economic Area or to elective Professional Clients for the purposes of the European Union Markets in Financial Instruments Directive (Directive 2014/65/EU), this communication is made by Blackstone Europe Fund Management S.à r.l. (“BEFM”) of 2-4 Rue Eugène Ruppert, L-2453, Luxembourg (registration number B212124), which is authorized by the Luxembourg Commission de Surveillance du Secteur Financier (reference number A00001974).
This communication is exclusively for use by persons identified above and must not be distributed to retail clients. It is intended only for the person to whom it has been sent, is strictly confidential and must not be distributed onward.
This communication does not constitute a solicitation to buy any security or instrument, or a solicitation of interest in any Blackstone fund, account or strategy. The content of this communication should not be construed as legal, tax or investment advice.
In Switzerland, this material is for the exclusive use of qualified investors as defined in article 10(3) Swiss Collective Investment Schemes Act (“CISA”).
This document is not intended to constitute an offer, sale or delivery of shares or other securities under the laws of the United Arab Emirates (“UAE”). The Fund has not been and will not be registered under Federal Law No. 4 of 2000 Concerning the Emirates Securities and Commodities Authority and the Emirates Security and Commodity Exchange, or with the UAE Central Bank, the Dubai Financial Market, the Abu Dhabi Securities Market or with any other UAE exchange. The promotion of the Fund and units and interests therein have not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities in the UAE, and does not constitute a public offer of securities in the UAE in accordance with the Commercial Companies Law, Federal Law No. 8 of 1984 (as amended) or otherwise. In relation to its use in the UAE, this document is strictly private and confidential and is being distributed to a limited number of investors and must not be provided to any person other than the original recipient, and may not be reproduced or used for any other purpose. The Fund may not be offered or sold directly to the public in the UAE. The information is not directed at and should not be read by persons in any of the free zones in the UAE (including the DIFC). Further, the information contained in this presentation is not intended to lead to the conclusion of any contract of any nature within the territory of the UAE. Nothing contained in this presentation is intended to constitute investment, legal, tax, accounting or other professional advice in, or in respect of, the UAE. This presentation is confidential and for your information only and nothing in this presentation is intended to endorse or recommend a particular course of action. You should consult with an appropriate professional for specific advice rendered on the basis of your situation.
Recipients should bear in mind that past or estimated performance is not necessarily indicative of future results and there can be no assurance that a fund will achieve comparable results, implement its investment strategy, achieve its objectives or avoid substantial losses or that any expected returns will be met.
The activity of identifying, completing and realizing attractive investments is highly competitive, and involves a high degree of uncertainty. There can be no assurance that a fund will be able to locate, consummate and exit investments that satisfy its objectives or realize upon their values or that a fund will be able to fully invest its committed capital. There is no guarantee that investment opportunities will be allocated to a fund and/or that the activities of a sponsor’s other funds will not adversely affect the interests of such fund.
Recipients should be aware that an investment in a fund is speculative and involves a high degree of risk. There can be no assurance that a fund will achieve comparable results, implement its investment strategy, achieve its objectives or avoid substantial losses or that any expected returns will be met. A fund’s performance may be volatile. An investment in a private equity fund or other alternative investment should only be considered by sophisticated investors who can afford to lose all or a substantial amount of their investment. A fund’s fees and expenses may offset or exceed its profits.
PWS202209115S
