Alternative Credit Goes Mainstream; BlackRock and Blackstone Compete

Chidem Kurdas

A long-time investment consultant to pensions and more recently sovereign wealth funds, Hamilton Lane chief executive Mario Giannini, recalls that private debt hardly existed in institutional portfolios at the turn of this century. Investing in debt was confined to buying bonds with public ratings.

Now, private debt accounts for around 5% of institutional assets and is trending up, he said at a conference.

Private debt can be seen as part of a larger category, alternative credit, sometimes given the alarming moniker of shadow banking. In fact it covers a wide range of credit strategies practiced by established asset managers, with the capital coming from institutions and, increasingly, the mass affluent.

Loosely defined, alternative credit ranges from negotiating loans to troubled businesses to hedge fund-type tactics such as short selling bonds. The expanding niche appeals not only to pensions but also individual investors, all desperate for higher yield.

Asset management leader BlackRock is one of the players. In 2011 BlackRock seeded a global long/short credit fund with $40 million and redeemed the next year—the fund’s assets have grown to $6 billion. BlackRock’s top competitor is Blackstone Group

In alternatives, including alternative credit, BlackRock’s top competitor is Blackstone Group——-whereas as a bond manager BlackRock competes with PIMCO and as the owner of exchange-traded fund giant iBlackRock’s top competitor is Blackstone GroupShares with State Street and Vanguard. https://hedgefundsmarts.wordpress.com/2014/04/25/blackrock-vs-blackstone-who-did-better/

BlackRock and Blackstone are rivals in several aspects of the credit universe—from getting private debt deals to offering long/short credit retail funds. So far, this appears to work well for both investors and borrowers.

GSO, Blackstone’s debt specialist, for the first time has more assets in alternative credit than in long-only credit. In the alternative category is a “rescue lending” flagship fund with $8.6 billion in assets. The fact that this strategy returned 24.3% last year helps explain why investors, large or small, go for it.

The capital-hungry energy sector is a major driver of returns. GSO co-founder Bennett Goodman says energy and power are their most successful industry cluster, with $15 billion in assets.

Long an institutional manager, Blackstone is making inroads in the mass market, creating retail products based on various investment strategies that only institutions used to have access to. In credit, it has tapped GSO private funds for retail distribution. Among the strategies are reserve lending, mezzanine loans and credit hedge funds.

As for Blackstone’s energy lending bonanza, that is available to small investors in the form of the publicly traded shares of a business development company—GSO floated an energy-focused BDC, which has grown to $3 billion. This is the only BDC of its kind, Mr. Goodman told a conference audience.

The business has grown a lot. When Blackstone acquired GSO in 2008, its total assets in all strategies was $22.4 billion. March 31st this year, total assets were at $66 billion.

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