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Fears of rising defaults and a systemic crisis from private credit don’t reflect the underlying fundamentals of private loan portfolios and returns, according to Blackstone’s head of private wealth.
A wave of redemptions is causing fresh concerns about the risks of private credit, with Ares Management, Apollo Global Management and others capping investor withdrawals from their funds last month. Joan Solotar, global head of Blackstone Private Wealth, which manages over $300 billion, said the capital flight isn’t justified by the likely returns and potential losses in individual funds.
“In my view, you’ve had all these calls that the house is on fire, when what we see is maybe a piece of burnt toast,” she said.
Solotar said investors and clients are asking important questions about transparency, loan losses, portfolio exposure to software and liquidity. She said some funds may see lower returns. Yet she said the broader case for private credit and access to private capital remains stronger than ever.
Some of worst-case scenarios published by Wall Street analysts, she said, call for loan defaults of up to 15%. Spread over three years, the loss of total annual return would be about 300 basis points. If credit spreads widen, she said the returns for private credit funds could fall to around 3% to 5%, down from the current 6% to 9% that is common for many funds.
“Is 3% to 5% return a disaster?” she said. “And what’s happening in the public equivalents? Because when I look at the public equivalents, they’re actually down. So we’re still outperforming, and that’s the key. I think it’s a matter of staying calm, understanding what you own, what the real downside is.”
Of course, many bank CEOs, analysts and investors disagree, saying private equity firms are understating the potential risks and exposure. The most cited risk is software firms, which make up a large share of private credit lending and are now seen as vulnerable to disruption from artificial intelligence. The Wall Street Journal recently found that large private credit funds managed by Blackstone, Apollo, Ares and Blue Owl had more exposure to the software firms than their filings suggest.
Solotar said less than 5% of the assets in Blackstone funds are vulnerable to AI. While some investors and commentators have criticized the lack of transparency and disclosure in private credit funds, she said the funds often disclose more loan information than banks.
“The word ‘private’ only relates to the fact that these aren’t publicly traded,” she said. “But it doesn’t mean secret or shadowy. I was a financial institutions analyst for many years, and I will tell you the banks do not let you know how…
Read More: Separate private credit ‘signal from the noise’
