Remembering the golden age of private credit returns
Ah, the glory days of private credit.
It was only two years ago that Stephen Schwarzman could hardly hide his excitement about the mouthwatering returns Blackstone was earning by simply clipping coupons on its private credit investments.
“If you can earn 12 per cent, maybe 13 per cent on a really good day in senior secured bank debt, what else do you want to do in life?,” he mused in a Parisian ballroom in September 2023.
Well, those days are over. On Thursday, the DD’s Antoine Gara reported that even mighty Blackstone concedes that private credit returns are falling.
In an interview, Jonathan Gray, president of the $1.2tn in assets giant, said Blackstone was no longer earning mid-teens returns on its private debt portfolio, as short-term interest rates fall and the return of banks to the leveraged loan market causes spreads to contract.
“Base rates and spreads have come down, so the absolute returns reflect that,” said Gray. “Some of that excess return, when you were getting mid-teens returns as a lender in senior credit two-and-a-half years ago, has gone away. So, yes, there has been some loss of absolute return.”
Blackstone and its peers in private credit like Apollo and KKR still believe strongly that they can originate loans that carry large premiums to liquid high-yield and investment grade bonds.
Nonetheless, the basic arithmetic of falling overall returns for private credit has big ramifications for Wall Street.
DD will be watching so-called business development companies, many of which now have dividend payout ratios well in excess of their projected interest income. Private BDCs could also face pressure.
But it’s not all doom and gloom.
The swift increase in interest rates between 2022 and 2024 was meant to pummel private equity, pressuring the finances of levered companies and making new deals hard to pull off. A reduction in borrowing costs could be the relief valve many PE investors have been praying for.
“It is helpful for your borrowers when they have to pay less debt service. So I think it is supportive on the credit side, and it’s very supportive on the transaction side,” said Gray, who noted that “the dealmaking dam is breaking” after a series of megadeals this year.