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June 20, 2024 

Blackstone credit and insurance CIO says pension plans in ‘beginning stages’ of multiasset private credit

Pension plans are in the early stages of undertaking a multiasset approach to private credit, something insurers have been at for much longer, said Michael Zawadzki, global CIO for Blackstone credit and insurance.

 

Insurers with long-dated liabilities can match assets accordingly and have moved some of their liquid portfolios into illiquid investments to capture a premium, he said in a recent interview with Pensions & Investments. And pension plans are beginning to gravitate to a similar approach.

 

“I think we are in the very beginning stages of pensions capitalizing on the opportunity set that we’ve been working on with insurance for several years,” he said.

Mike Zawadzki

And that multiasset framework can span areas including asset-backed finance, infrastructure credit and real estate credit.

 

“But all of that will be within the same framework of, we’re going to try to deliver a couple hundred basis points of excess return in investment-grade quality collateral, but it’s diversified. It complements an existing portfolio,” Zawadzki said.

 

For some investors, a multiasset approach includes subinvestment grade for a broader opportunistic mandate, he added.

 

“I’d say the overarching theme we see is clients are gravitating to a multiasset approach, where you can capitalize on opportunities across the broad spectrum,” he said. In the asset-backed segment that could mean “consumer credit, that could be mortgages, that could be equipment finance, like aviation. It could be royalty portfolios. The beauty of asset-backed finance is that it really spans the entire gamut of the real economy,” he said. “So, there’s lots of places you can deploy and build a resilient, diversified portfolio.”

 

Asset-backed finance is attractive to pension plan CIOs who are fully funded on their liabilities and looking for returns that meet or exceed liabilities with as little risk and as little volatility as possible, Zawadzki said.

 

Blackstone’s credit and insurance division saw its assets under management increase 13% during the first quarter of the year to $329.6 billion with inflows of $17.2 billion in the quarter, according to its earnings statement. Of the inflows, infrastructure and asset-based credit strategies accounted for $5.3 billion. Blackstone also deployed $12 billion during the first quarter, driven by direct lending, infrastructure and asset-based credit strategies.

 

The first quarter was the most active deployment quarter for asset-based finance, Zawadzki said.

 

Zawadzki sees a $25 trillion to $50 trillion market in private investment-grade credit, which he defines as bilateral, non-traded originations in investment grade-rated collateral that could span real estate, infrastructure credit, asset-backed finance and corporate issuances.

 

“The addressable market is massive,” he said, adding “when you look at pensions, they’re basically unallocated to this market that has incredible scale to it, where historically, the banks have been the largest providers of capital.”

 

The Basel III Endgame regulations are accelerating a move to private solutions vs. banks, Zawadzki said, but he added that it this has also led to partnerships with banks that hold many client relationships.

 

“They have fantastic originators who work for the banks, but if Basel III is limiting their balance sheet capacity, that then gives us the ability to partner with that bank and say, ‘OK, you keep the client relationship, you keep the origination, maybe you keep the servicing, and we’re happy to take the asset because that’s what our insurance and pension fund clients want,’” he said.

 

Two recent examples during the first quarter include Barclays and Blackstone's credit and insurance unit agreeing to a sale of credit card receivables, and KeyCorp and Blackstone credit and insurance announcing a forward-flow origination partnership focused on Key’s specialty finance lending group.

 

Zawadzki said Blackstone tends to focus on scale businesses. In the current economic environment, smaller companies are facing stiffer challenges from inflation, including not being able to cut costs as easily. Sector selection and dispersion will be other important themes with legacy companies in sectors including media, broadcasting and cable, and more cyclically inclined industries like chemicals facing challenges, he said.

 

Blackstone favors sectors including software and professional services, and areas including energy transition and data centers, he added.

 

“The underlying credit quality continues to be strong, and ultimately that’s what we’re investing behind. Obviously, we’ve got big themes that we care about, but choosing the exact next rate cut is a lot less important to us than finding the right borrower and the right credit and investing behind our process and themes,” Zawadzki said.

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