Interest in investing in private markets, private credit in particular, may have surged, but that growth is just the beginning. “We see a structural shift towards private credit,” says Joan Solotar, global head of Private Wealth Solutions at Blackstone.
Investments in private markets are finding their way to retail investors. Where are these ‘new’ investment opportunities coming from? Among others, from Blackstone, the world’s largest private equity house, which has assets of roughly $1,000 billion under management in virtually all types of private markets.
Speaking to Investment Officer - remotely and partly by email - Solotar discusses this trend, of which Blackstone sees itself as one of the drivers. “We started our Private Wealth Solutions business in 2011 and at that time we were managing $10 billion on behalf of individual investors. Now, 13 years later, that amount has grown to almost $240 billion, almost a quarter of total assets under management.”
And yet things are still in their infancy, Solotar believes. “The majority of private wealth clients may currently have an allocation of two to three per cent, but family offices, the richest families, have already grown to 20 per cent and more.”
So what makes private markets so suitable for individual investors at the moment?
“It is not that private markets are just now suitable for retail investors: in fact, they always have been. Adding private markets to your portfolio has always delivered attractive returns, coupled with less volatility. In return, you give up some liquidity. So it is essential, though, to determine which part of your investment portfolio you don’t need to tap into anytime soon.”
“What is changing recently, though, is that more and more obstacles are being removed that hinder access to private markets. For example, we can now also curb liquidity losses. Blackstone has led the way in marketing semi-liquid products, including in Europe in recent years. These are open-end structures that offer monthly or quarterly liquidity, allowing investors to access their capital at regular intervals, while still benefiting from private investment.”
Which categories lend themselves best to private investors?
“That depends entirely on the individual’s objectives. What returns do they want, are they aiming for income or capital appreciation, what is the risk tolerance level, what is the need for liquidity? So to begin with, all asset classes can be suitable for investors, but it is crucial to work with a financial adviser and understand how these investments fit into a portfolio.”
“Investors generally want both income in the form of yield and asset appreciation. Looking at the broadest asset classes, you can see that private credit can provide attractive yields, real estate can provide a mix of yield and capital appreciation, and private equity can benefit from the power of compound returns.”
“Private credit we find attractive at the moment because a lot of it is senior secured and floating rate, meaning it can offer attractive returns over a longer period, while also providing protection against downside risks. In the current environment, we could even generate double-digit returns in these strategies. So the interest in these was also high.”
Real estate doesn’t seem to be the best option right now?
“In private real estate, you have sectors that are challenging and sectors that continue to perform well. Recently, you’ve probably seen a lot of negative sentiment coming out about commercial real estate. This is a good example of why it matters which partner you choose to invest on your behalf. Blackstone has identified sectors within real estate that benefit from long-term megatrends and they continue to do well, even in the current environment.”
“Logistics and data centres are two examples: supply and demand dynamics are favourable in those segments and meanwhile they benefit from significant economies of scale. Logistics continues to benefit from the migration of human activities to online, which is driving demand for warehouse space, and data storage is benefiting from a growth in data creation by artificial intelligence, of a magnitude that occurs only once in a generation.”
Regulations in the US and Europe are different when it comes to unlocking private markets for retail investors. How does Blackstone deal with this?
“We started in the US, where having access to a large market under a single regulatory framework is an advantage. But we have always seen private markets as a global opportunity. In Europe, this means we have to structure what we do to fit the different requirements, languages and cultures of different countries. That in itself takes time and resources. That is also why we have expanded our team here, to around 40 employees, led from London but with local experts on the ground covering each market individually, including the Netherlands. So we structure our offering to fit each individual market.”
In this context, then, is Eltif a good option for Blackstone?
“We are watching the development of the Eltif with great interest. It is certainly a step in the right direction, but the details are important, which have to ensure that the structure is useful in bringing private markets towards individual investors. But it looks promising and if the final structure is good, we will definitely consider it.”
Banks often complain about distortion of competition in relation to private credit. Partly because they face tougher supervision. How do you see this?
“There are many important differences between bank lending and private credit, but I will mention two key differences. Bank lending depends on consumer deposits, so the two are fundamentally mismatched: short-term deposits finance long-term loans. That may work well in a ‘normal’ environment, but as we have seen, consumers can take their money out just like that and then that causes problems, especially if an institution works with leverage.”
“With private funds, assets and liabilities are tied together with committed long-term capital and those funds then also have liquidity constraints. So they do not use consumer deposits at all, but are funded by investors. Therefore, we do not believe at all that private funds increase risks in the system, on the contrary, we believe that private funds reduce systemic risks.“
“We therefore see a structural shift towards private credit. With more speed, with more flexibility and with the potential for higher returns, private credit brings investors closer to borrowers than before, and so the additional costs of traditional lending can be reduced.”
Further reading on Investment Officer:
- 45% of family offices want more private credit in portfolios
- Carlyle bites back in debate over risks in private credit
- ‘Private credit will eclipse equity in the next decade’