What Leading Alternative Managers are Talking about in Q125
Deployment, PIK, Defaults, Partnerships, DPI, Secondaries
👋 Hey, Nick here. This is the 114th edition of my weekly newsletter. You can read my previous articles here and subscribe here
Every quarter, I summarise the 400+ pages of earnings transcripts from the largest managers. I do this for two main reasons:
It helps me understand the consensus views.
It brings to light unfiltered and occasionally provocative opinions.
This post is longer than a direct lending term sheet. And just as thrilling. I know only 1% of you will read the whole thing, but if you want to feel insufferably smug at your next meeting, I suggest printing this out, blocking 15 minutes in your diary, and giving it a proper read.
For the rest of you attention-deficit debt enthusiasts, I’ve included a breakdown of key topics with links. Skim, skip, or dive in. Your capital, your choice.
📚 Quotes of the Quarter
Consensus
Why managers are partnering with Traditional asset managers?
How’s Deployment going?
What managers think about Tariffs?
What’s going on with Credit Spreads?
How’s Fundraising going?
Who’s announcing new Partnerships?
What’s going on with M&A?
What’s keeping Defaults in check?
All the links to the transcripts can be found here
Why managers are partnering with Traditional asset managers
Apollo: “Traditional asset managers are in the process of redefining what active management is. We always thought of active management as the active buying and selling of stocks and bonds. I now believe we will see active management as the public market beta, married with appropriate private market assets in structures that investors understand like mutual funds and ETFs and interval funds and otherwise. These traditional asset managers will be large consumers of private assets and will reach clients that our industry probably would not have reached on its own. Whether we see the interesting innovations in model portfolios or the interesting partnerships, or we just look at what we're doing on our own, whether it is access to private credit and a daily liquid wrapper through the State Street PRIV ETF or the Income Solutions we've launched with Lord Abbett through an interval fund or its introducing privates into retirement solutions through a target date fund partnered with State Street.
Blackstone: “We are particularly excited to collaborate with industry leaders, Wellington and Vanguard, on developing simplified access to public/private solutions. Overall, we see a huge opportunity ahead for us in the wealth market.”
Blue Owl: Let me give you just a live example as of yesterday. Take a firm, Edward Jones. Edward Jones manages $2.2 trillion. And do you know what share of that is in alts? 0. And they are now just launching alts, and we are one of their premier launches as part of that. So here is an example of, I mean, talk about white space, talk about greenfield, whatever you want to call it. So I think a couple of things I would observe. One, the addressable market is gigantic and penetration is very low. Penetration is rising. We see it. We have multiple new platforms that are rolling out our products. And an example like that, they're big. And they present really substantial opportunities, number one.
Number two, during times of volatility and uncertainty… people realize the benefits of the stability and predictability, particularly in Blue Owl products… When everything is rosy, everything looks rosy. When things are volatile, all of a sudden, there's a reason to pay attention. And guess what: Our products performed great during this last quarter. Our products continue to perform great. We continue to deliver great income every month to our investors, so I think we're actually quite optimistic. Just like in institutional markets, frankly, after a period of dislocation, we tend to come out ahead.”
KKR: “We're also watching private wealth flows, which have not been affected, to date. These markets are in adoption phase, and we have a long history of outperforming in down markets… We think our partnership with Capital Group will accelerate that adoption, as well.”
Deployment
Ares: “Capital deployment in our drawdown funds increased nearly 20% over the fourth quarter and was the highest first quarter on record.”
Blackstone: “Investment-grade private credit grew 35% to over $100 billion, that is a powerful sign of what’s happening.”
KKR: “If you look at overall asset-based finance deployment for us, it was a little over $4 billion in Q1. Over the trailing 12 months, we're at about $21. Just to give you a frame of reference, 2023, that number was at about $8 billion”
Blackstone: “Having $177 billion of dry powder and some real long-term conviction in the sectors we like: digital infrastructure, energy and power, life sciences, alternatives, the recovery in commercial real-estate, what’s happening in India and Japan, we’re going to see this as an opportunity to put out more capital.”
Oaktree Specialty: “We expect many lenders will be more cautious around capital deployment as they focus on the health of existing portfolio companies. In this environment, companies that were once supported by easy credit and low interest rates are now grappling with tightening liquidity, rising borrowing costs, and disrupted supply chains.”
Tariffs
Blackstone: “Uncertainty around tariffs, and their potential impact on economic growth and inflation, has dramatically impacted investor sentiment… It’s too early to assess the full implications of tariffs, which depend on the outcome of unprecedented multilateral negotiations, with perhaps over 100 countries around the world. The complexity of the situation means that patience and staying power are key. Importantly, the economy entered this period in a fundamentally strong position. Productivity has increased significantly over the past several years, and technological innovation is accelerating, which are powerful tailwinds. The most important questions are: How sustained will this period of uncertainty be? And what are the 2 second-order consequences, both domestically and for foreign countries? We believe a fast resolution is critical to mitigate risks and keep the economy on a growth path.”
KKR: “Based on our initial findings, we estimate that 90% of our AUM has limited-to-no first order impact from the announced tariffs.”
Oaktree Specialty Lending: “It will be a couple of quarters before tariffs roll through the supply chain and impact portfolio company performance, so it's too early to assess the real impact now.”
Credit Spreads
Apollo: “BBB corporate spreads tightened below a 100 basis points. The last time that happened was 27 years ago in 1998, CLOs [have] tightest spreads in a decade. Every asset manager was offered a choice. They could continue buying into this trend, adding risk, adding leverage, reducing credit quality to chase returns. Or they could reduce risk, reduce leverage, prepare for the fat or I should say fatter pitch and rely on proprietary origination to try to get them through while public markets and the corollary in private markets did not offer acceptable risk-adjusted returns.”
Blackstone: “The golden moment part was related to the fact that base rates were very elevated, spreads were quite elevated, you could earn equity-like returns, mid-teens returns, owning credit, senior credit. And some of that, of course, goes away as the Fed eased, 10-year has come down, spreads have tightened. And so the returns you can earn are not as high on an absolute basis.
But this really is more of a golden era when you think about the durable spread difference relative to liquid fixed income. And there, you continue to see a meaningful premium, and you can see it in our performance in the quarter. You can see it in our various BDCs that are out there that you’re still able, because of this farm-to-table model, basically bringing the investors right up to the borrowers, you capture that incremental spread. That’s not going away.
Fundraising
Ares” The first quarter also marked a significant milestone for Ares as we crossed over $0.5 trillion and reached $546 billion of total AUM.”
Blackstone: “We’ve established the world’s largest third-party focused credit business, with $465 billion across corporate and real estate credit – up more than two-and-a-half-fold in the past four years.
KKR: “The private credit component is growing at even a faster rate, so we've got $117 billion of AUM, up 26%. And within that private credit piece, $74 billion of that is an asset-based finance. And ABF, year-over-year, has grown at a number between 35% and 40%. So, the asset-based finance business, it's a big business for us.”
Blue Owl: “The past 5 years have presented a continuous series of challenges across COVID, persistent inflation, geopolitical tensions and now global tariffs. In contrast, Blue Owl has consistently demonstrated strong business performance through periods of upheaval, with management fees growing over a 35% annual growth rate since we listed as a public company.”
Blackstone: “One of the most exciting opportunities before us today is in investment-grade private credit, where our business grew 35% year over year to $107 billion.”
Partnerships
Blackstone: “One of our four strategic partners, Resolution Life, announced the acquisition of a nearly $10 billion block of life insurance and annuities from Protective Life. We expect to manage nearly half of these assets over time on Resolution’s behalf. This transaction is another illustration of Blackstone’s ability to scale our insurance platform with key partners on a capital-light basis.”
Brookfield: “We are increasingly seeing the most sophisticated governments, corporates and institutions turning to private capital to pursue strategic initiatives. They are choosing Brookfield because we can deliver not only capital at scale but operating experience, speed, certainty and a proven ability to execute complex transactions. This quarter, we announced a €20 billion AI infrastructure commitment alongside the French government and a strategic partnership with Barclays to help it scale its payments platform.”
BlackRock: “BlackRock already manages approximately $700 billion for the insurance industry, primarily in index public credit strategies and our Aladdin Technology powers over 100 different insurance companies. As Mark mentioned, our investment in Viridium is the latest example of our commitment to supporting partners through broad solution sets, including investments, capital and insurance expertise. BlackRock has a meaningful role in helping manage Viridium’s private market investments going forward, including in infrastructure investments and private credit. The upcoming addition of HPS represents even more opportunities to extend our insurance relationships across all private credit markets. We also expect HPS to advance our positioning in the quickly growing alts to wealth space, including through their approximately $20 billion of wealth focused BDC offerings.”
M&A
Blackstone: “We have been operating for the last three years well below historic levels, in terms of M&A and IPOs. And I don’t think that is the permanent state of affairs. I think when we get back to better conditions, those things will improve.
And as to your question about the current conditions, I’d say they’ve slowed, but this is not completely shut. The IPO is the one area where the conditions are probably the toughest.”
Oaktree Specialty Lending: “Despite an optimistic outlook for a pickup in M&A activity earlier this year, activity has been slow and is likely to remain that way until we have more clarity around the economic outlook.”
Defaults / Non-accruals
Blackstone: “The reason you’re not seeing credit stresses as you have in the past is because the overall system is much less leveraged. If you look at the typical direct lending loan we’ve made in our BDCs, they’ve been in the low 40% to 45% range of LTV, compared to going back ‘06, ‘07 when it was 70%-plus. So the overall amounts of leverage are much lower. And I also think, you know, today, people are much more focused on capital intensity of businesses. They’re looking at EBITDA-minus capex, more cyclical businesses are less leveraged. You look in commercial real estate again, even though we’ve been through a cycle, other than office buildings, there’s been very little in the way of problems, again because there wasn’t a lot of leverage going in. So the lessons from the financial crisis have really carried over and that’s why, even when we get a shock, there may be individual industries that are impacted, but you tend to have much less systemic risk. And I would not expect, based on looking at our portfolio, that you’re going to see major issues just because, you know, we’re starting off a low-base.
Oaktree Specialty Lending: “Investments on non-accrual status increased to 4.6% and 7.6% of fair market value and costs, respectively. This compares to 3.9% and 5.1% in the first quarter…. This fund has a median portfolio EBITDA of portfolio companies of $158 million.”
Ares: “About 96% of our exposure in our global credit business is senior loans… In the US private credit book, we're sitting at about a loan-to-value of 42%, in the European direct lending business, we're about 48%, which means that we just have a significant amount of equity subordination and support from our institutional equity partners, which I'm going to come back to. The non-accruals at 1.5%, that's at cost... So we are sitting at close to half of the historical average since the GFC on a cost basis. And so, even to the extent that we see continued earnings regression, I just don't think that there's a setup here where we're going to see a spike in non-accruals and defaults. One thing that we have the benefit of given the size of our platform and the fact that we're the agent on most of these loans is typically when you are dealing with companies that are either leading into distress or worried about the future, we start to see irregular borrowings under revolving credit facilities. We saw that spike, for example, in March and April of 2020. We are not seeing any irregular behavior within the portfolio in terms of CEOs and CFOs drawing on their lines, which I think is a real-time data point in terms of how people are feeling within the portfolio. And I want to come back to the loan-to-value because I think this is probably the most misunderstood piece of identifying risk and opportunity within the private credit market. If you were to look at that 42% to 48% LTV, what that basically says is you have private equity firms, institutional real-estate equity owners, institutional infrastructure owners that have put cash dollars below our loan. So if we begin to talk about widespread losses in the private credit market, it follows significant losses within the private and likely public equity markets. And so to isolate private credit, I think is a little bit of a mistake and maybe a misunderstanding of how these businesses work. What's unique about the market setup today, unlike past cycles, like if you look at the GFC, for example, that LTV was probably 60% to 70%. So there was less incentive for the private equity community to support the portfolio companies. If you look at the private equity business today, there's about $3 trillion plus of invested equity in the market versus about $1 trillion plus of dry powder able to be invested. In prior cycles, that ratio is more one-to-one. So again in prior cycles at a higher LTV, there was more incentive for the private equity firms and the institutional equity not to support their existing exposures. We have kind of the exact opposite now. And so the behavior that we saw through COVID with a very similar setup and the behavior we're seeing now is that we would expect that the equity owners, just given the amount of cash invested below us will do everything they can to protect the portfolio in any pocket of distress. So again, there is uncertainty going forward. We may see a quarter or two of negative growth, but I don't think that that's going to roll through the non-accrual and default numbers.”
Provocative Opinions
Why Blue Owl thinks PIK as a share of Portfolio is a meaningless KPI.
Blue Owl: “There's 2 kinds of PIK. We've said this before.
There's the PIK by design because it's an extremely durable, low-LTV cap structure with a huge equity check and a really great business. And it's about giving the company, by design, the ability to invest in its own growth, i.e., software companies…
PIK by design is, actually from our point of view, usually an extremely good sign. We do that in our strongest credits. Those tend to be our "lowest loan-to-value" and biggest businesses. So PIK by design in our software product is a good thing…
And then there's PIK not by design. PIK because you had to go from cash pay to PIK is a bad thing. There's no other way to describe that. That's not a healthy development, so watch people's portfolios. Watch migration -- from non-PIK to PIK, not helpful. We have some of those. We always will. That's part of it with 400 companies.
Don't use the blunt instrument of PIK as a share of a portfolio. That's meaningless. And point of fact, PIK as a share of a portfolio is higher in our software business. And saying this the right way: Isn't everyone who's invested in software credits today, thrilled that that's where they are? Take a look at what's happening. Supply chain, don't have one. Exposure to China, don't have any. I mean, think about the things that are now a risk for most companies in the world, not a risk for our software businesses. Our tech portfolio is exactly where you want to be, and yet it does have a higher-percentage PIK by design.
Why Brookfield is Talking about Distributions.
Brookfield: “These inflows were partially offset by $21 billion of capital return to clients through distributions from our private funds and permanent capital vehicles.
In a market where many sponsors are struggling to generate distribution to paid and capital or DPI. This level of distribution reinforces the strength of our business. Returning capital is fundamental to the investment cycle, and our ability to do so consistently supports our track record of delivering value through both dividends and monetization.”
What limits Apollo’s growth?
Apollo: “We are in the business of excess return per unit of risk. Therefore, we are able to grow only as fast as we are able to originate good assets that offer those risk/reward characteristics. Thus, our relentless focus on origination as much as we possibly can across the board and in most of the asset classes
It's about how many assets I can originate that are worthy of inclusion because they offer good risk/rewards. It's a really weird dynamic over 40 years because for 40 years we've gone from a small group of firms doing alternatives to now a fewer number of sizable firms doing private markets. We've always been measured by or limited by our capital base. We're now, in my opinion, limited by our capacity to find good assets
Real Estate
Brookfield: “The world needs more great real estate, but there is a very significant lack of new supply in major markets and high-quality assets around the world… [This is] creating a very robust supply-demand dynamic for those who can bring capital to the market.”
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This newsletter is for education or entertainment purposes only. It should not be taken as investment advice.
These are the firms leveraging up the economy with unproductive debt while not marking their assets to market. Their comments do not reflect an honest appraisal of credit conditions. In a word they are full of shit.