Private debt
Why invest in private debt?
There is increasing demand from borrowers for financing from alternatives sources, as banks pull back from lending and syndicated markets see ever larger deal sizes. At the same time, borrowers are increasingly choosing private debt for the benefits it can provide, even when financing is available from traditional sources.
BRENT PATRY: Which areas of the credit market do you think provide the most attractive opportunities?
JAMES KEENAN: I actually think 2024 is going to be another really good year to deploy. I mean, first off, you have an economy that is softening, but you're still talking about a growth environment. You have a generally tight banking system. So, as you start to see more activity come in, I think you'll get really nice spreads per unit of risk. So, corporate direct lending remains attractive. Some of the bank deleveraging trades, risk transfers, real estate dispositions.
BRENT PATRY: When you think about the overall size of the private debt markets and the trajectory of growth, how do you think that is growing relative to other asset classes and other strategies within credit?
JAMES KEENAN: We see the market growing significantly over the next several years, but let's define that, right? You have a market right now that, because of the volatility and disruption in the banking system, you're going to see a shift in policy and even risk management around deposit flight. And what does that really mean? You're talking about trillions of assets coming out of the banking system, right, as you start to see more equity being needed in that. And if you think about the US banking system alone, that might be $2-3 trillion. And broadly speaking, globally, that's even going to increase. So, when we think about the market share shift to private debt, they're going to play a huge role in that opportunity. On top of that, because of the growth of the market, we see it as a good funding source relative to public markets. And then, third, just general GDP growth and earnings growth. We think that it will continue to grow the market. So, for those three reasons, we think we're fairly conservative when you think about the size of private debt and the opportunity for clients to continue to invest in that.
BRENT PATRY: Are there one or two key messages you'd like to give our clients about how we're positioning our portfolio or addressing the opportunity set?
JAMES KEENAN: Yeah, I think the last 12 to 18 months, some of the attractiveness about private debt for investors has been avoiding the risk of duration, right? And we certainly have seen that move and a little bit more of a stabilization of rates and where policy is going. I think, as you think about the next 12 months, it's still going to provide a really attractive opportunity. Because as you continue to see this mega shift, when the reduction of risk and assets off of the banking system, it's providing a huge pool of assets and even at a flat or inverted curve. You're talking about assets that are coming with really nice yields associated to in comparison to either the equity or the fixed income market in a growing market. So, I think that is really the risk or the return profile still looks really attractive in 2024.
Private debt viewpoints with James Keenan
Watch for the latest timely insights from the Global Head and Chief Investment Officer of our Private Debt business.
Awards and recognition
BlackRock has received three awards from Private Debt Investor in 2023.
Investment strategies
Direct lending
Private loans to performing middle market companies
Why now?
- Rapid deployment: Strong and growing borrower demand for non-bank financing allows for rapid and highly selective deployment
- Income: Floating rate loans can deliver potentially higher income relative to similar public market debt in a rising interest rate environment
- Structural protections: Senior secured loans with bilaterally-agreed terms can provide downside protection rarely offered in public markets
Opportunistic
Capital solutions with complexity and illiquidity premiums
Why now?
- Dynamic flexibility: All-weather strategies designed to capture the best risk-adjusted opportunities regardless of the market environment
- Premium returns: Potential for equity-like returns with credit-level risk driven by predominantly income and some capital appreciation
- Downside mitigation: Bilateral negotiation affords structure and pricing influence and robust credit documentation, including comprehensive covenants and other protections
What role can private debt play within a client’s broader portfolio?
So we think investors are increasingly focusing on the private debt market for a number of reasons. The first is diversification. It gives them exposure to underlying corporate credit exposures. And they can create customized portfolios based on the diversification that they seek. The second is yield premium. One of the benefits of private debt market is premiums relative to what you can achieve in broadly syndicated or traded markets, both across corporate credit and across the fixed income alternatives.
Third is, at the end of the day, based on some changes structurally in the traded credit markets, there's opportunity in private markets. That's largely a function of the ability to continue to negotiate for covenant protections, negotiate credit documentation for purposes and the private market that have largely disappeared in the public market.
So, in situations where you're concerned about cyclicality or potential capital impairment, you can get to the table. And for the last, I think that benefit with the higher yield is allowing investors to increasingly focus on private debt.
What trends are driving investors to allocate to private debt as a distinct asset class?
There's a number of factors that are driving what I would say is an expansion of the opportunity set, you know, the broadest level of supply, demand imbalances are being created as banks have pulled back as capital formation in the private market has grown. and I would say has increased competition has picked up a lot of the opportunity set to deploy capital in the private debt markets has increased.
It's gone from just corporate lending. It's expanded into asset-based finance. It's moved into other areas, which is effectively capital replacement within the financial institution market. A lot of what is captured in what was called SRTs or significant risk transfers. I think the other an opportunity that's creating a driver of demand for investment opportunity is concerns over inflationary pressures.
We're concerned about companies that are negatively impacted by inflation. you can structure around that. If you're looking to get yourself exposed to companies that benefit from an inflationary environment. you can get long those assets. So I think there's ways to capitalize uncertainties, in private markets that you can't in public markets.
What should clients be asking their private debt investment partners?
The starting question has to be, are you buying into other people's transactions or you're leading in structuring and providing exposures that can't be found elsewhere?
The market is competitive, and you have to basically be able to discern whether or not you have a competitive advantage from either a sourcing or underwriting perspective, relative to the alternatives in the market. I think the second is, if you're truly being opportunistic, what does that mean? Sometimes the public markets present more compelling opportunities in the private market and vice versa.
So having a strategy that can pivot across both and that can have the conversation directed towards why did you deploy capital into a secondary market exposure versus focusing on a primary financing - I think that's very important.
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Drivers of growth in private debt
David Trucano, Head of BlackRock Opportunistic Credit, delves into the role we think private debt can play in a client’s portfolio. He emphasizes what clients need to know about opportunistic credit and the questions they should be asking their private debt investment partners.
Venture and growth debt
Operationally flexible loans to innovative, high-growth companies
Why now?
- Favourable market dynamics: Dynamics of venture & growth markets highly favourable towards a structured debt strategy
- Enhanced returns: Potential for equity-like returns with credit-level risk driven by predominantly income and some capital appreciation
- Downside mitigation: Target transactions only alongside top-tier equity sponsors. Focus on well-funded companies with long cash runways, experienced management teams, underlying profitability, and where senior-security available.
Infrastructure debt
Global platform investing in energy, power, renewables, transport, social and digital assets
Why now?
- Income: Potentially higher income relative to similarly rated corporate credit.
- Diversification: Historically, 2-2.5x lower loss rates and low default correlation3 to corporate credit; complements OECD core equity infrastructure.
- Liability matching: Longer maturity debt providing for 10-25 year+ liability matching.
- Inflation risk mitigation: Floating rate infrastructure debt may provide inflation management in a rising rate environment.
Real estate debt
Our platform combines global reach, industry expertise, and trusted deal execution capabilities
Why now?
- Market depth: Retrenchment of traditional lenders (banks) creates a large opportunity set for private lenders like BlackRock to meet borrower needs for refinancing and new capital.
- Risk-adjusted returns: Private market spreads widen as bank activity recedes; Combined with increased base rates, this has potential to boost returns across the capital stack and at all risk (LTV) levels.
- Diversification & Income: Significant diversification opportunities across regions, properties, sectors and loan types. Ability to adjust exposures to capitalize on prevailing market environment.
Multi-strategy debt solutions
Flexible single entry point global solutions across credit universe
Why now?
- Simplicity: Access to dedicated multi-credit teams improves efficiency and reduces governance complexity as clients seek to do more with fewer managers
- Flexibility: Active allocation across opportunities in global credit as the market evolves
- Transparency: Holistic view of credit exposures improves risk oversight while delivering integrated reporting