Blackstone's biggest business in Q3 — credit and insurance — could hit speed bump as rates drop

Blackstone executives are looking to 2025 as a lower cost of capital from declining interest rates to touch off a real estate recovery, more realizations, easier fundraising, higher secondary market returns but potentially lower absolute returns in private credit.

However, even lower private credit returns could still outperform relative to liquid fixed income, they said.

“In anticipation of improving markets, we substantially increased our investment pace starting in the Q4 of 2023,” investing $123 billion in the past 12 months, "one of the most active periods in our history and double the prior year comparable period," said Stephen A. Schwarzman, Blackstone chairman, CEO and co-founder, during the firm’s Oct. 17 earnings call.

“We've been planting the seeds of future value at what we believe is a favorable time,” Schwarzman said. “In terms of future harvesting, the third quarter marked the highest amount of overall fund appreciation in three years.”

With the cost of capital moving lower, Blackstone executives expect a new commercial real estate investment cycle of increasing values and improving investor sentiment toward the sector, Schwarzman said.There’s been an increased interest in the sector from Blackstone’s investors, with redemptions down in September about 90% from their January 2023 peak, he said.

Blackstone reported $1.1 trillion in assets under management as of Sept. 30, a 3% increase from three months earlier and up 10% from a year earlier.

The firm’s AUM was pushed up by gross inflows of $41 billion in the third quarter and $167 billion over the past 12 months. Blackstone's net flows were $29.2 billion in the third quarter and $119.5 billion in the 12 months ended Sept. 30.

Fundraising has not been easy over the past 2½ years, said Jonathan Gray, Blackstone president and chief operating officer.

“Remarkably, as a firm, the last 12 months, we raised $167 billion in a tougher period of time,” Gray said. “It feels like it's going to be a better environment, but certainly more realizations working their way through the system will free up capacity from our big (institutional) customers."

The key will be distributions back to investors “picking up as we move into next year as the IPO (initial public offering) market gets better, as we have more sales,” he said.

It’s a virtuous cycle in that as more capital moves back to them, institutional investors can commit more capital, Gray said.

In real estate, Blackstone has been a net buyer over the past nine months, Gray said. “We do think that the sentiment is improving, but it's still negative.”

Gray said he expects to see more exits in real estate into next year as debt becomes more available at a lower cost.

Blackstone’s largest business is now private credit and insurance, which surpassed private equity AUM in the third quarter. Blackstone’s credit and insurance business had $354.7 billion in AUM as of Sept. 30, up 7% from June 30 and up 22% from Sept. 30, 2023. Private equity had $344.7 billion at the end of the third quarter, up 4% from the end of the prior quarter and a 12% from the end of the year-earlier quarter.

“We have one of the largest, if not the largest, businesses in direct lending, CLOs (collateralized loan obligations), real estate debt and private investment-grade credit,” Gray said. “Total inflows across the combined platform were over $100 billion in the last 12 months.”

Blackstone’s noninvestment-grade private credit strategies could still generate excess returns relative for clients relative to liquid markets even with lower interest rates, he said.

“And when you look in the investment-grade space ... the idea that we can deliver 185 basis points over comparable single-A-rated credit is also very encouraging,” Gray said.

But he added, “There will be some pressure on absolute returns as spreads and base rates come down, but relative returns, that durable premium (over liquid fixed income), I think, will continue."