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 Return4.7%
Annualized Volatility12.6%
Current Yield2.9%

Portfolio with a 20% Private Credit Allocation

Annualized Return6.1%
Annualized Volatility11.6%
Current Yield4.4%

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 MSCI ACWI and 40% is allocated to the Bloomberg Global Aggregate Bond index. Private Credit is represented by the Cliffwater Direct Lending Index. Annualized returns and volatility are calculated based on the quarterly returns over the period from April 2008 to March 2023. The yield on the portfolio with 20% private credit allocation was calculated using the annualized MSCI ACWI Dividend Yield, the annualized Bloomberg Global Aggregate Bond Yield, and the annualized Cliffwater Direct Lending Index quarterly income. Past performance is not indicative of future results. There can be no assurance any alternative asset classes will achieve their objectives, avoid significant losses or generate higher returns than other investments.

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%
14.3%
11.2%
10.2%
2.6%
2.1%
10.4%
8.6%
7.5%
7.4%
4.1%
3.5%
8.1%
0.4%
0.0%
-1.2%
-2.1%
-4.1%
14.3%
12.6%
9.0%
8.7%
8.6%
6.8%
9.2%
7.5%
7.1%
7.0%
5.5%
3.1%
12.8%
5.3%
5.2%
1.0%
-1.5%
-4.7%
6.3%
-0.8%
-11.2%
-12.7%
-13.0%
-16.2%
8.8%
5.0%
4.4%
3.7%
0.9%
0.1%
  • Private Credit
  • Global Investment Grade Bonds
  • US Investment Grade Bonds
  • US Leveraged Loans
  • Global High Yield
  • US High Yield
Total Return
8.8%
5.0%
4.4%
3.7%
0.9%
0.1%

Source: Morningstar, Cliffwater. As of December 31, 2022. Represents the annual returns for the respective calendar year, ranked in order of performance. The asset classes presented are based on the following indices: Cliffwater Direct Lending Index for Private Credit. Bloomberg US Corporate High Yield for US High Yield. Bloomberg US Aggregate Bond Index for US Investment Grade Bonds. Morningstar LSTA US Leveraged Loan Index for US Leveraged Loans. Bloomberg Global Aggregate Bond Index for Global Investment Grade Bonds. Bloomberg Global High Yield Index for Global High Yield. Past performance is not necessarily indicative of future results. There can be no assurance than any alternative asset classes will achieve their objectives or avoid significant losses. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results. 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. 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.” Total return is calculated over the period January 1, 2016 to December 31, 2022.

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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  1. Capital is at risk and investors may not get back the amount originally invested. Risk management seeks to mitigate risk but does not reduce or eliminate risk and does not protect against losses.
  2. Diversification does not ensure a profit or protect against losses.
  3. 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.
  4. 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.