Blackstone's Michael Zawadzki on How Private Credit Got so Big

24:34Okay, so you don't see lots of defaults coming up. But what about liability management exercises or just restructuring debt? Because this is something that comes up occasionally. If you look at the default rate for private credit, I think officially it's below 2%, something like that. But if you add back in the liability management exercises that we've seen at places like First Brands, it goes higher. I think it goes to like 5 % or something like that. Would you expect more companies to be restructuring debt as this dispersion effect maybe feeds through? Well, I think there's two pieces I want to unpack there.

25:10One, this whole notion of liability management. It really is a public market phenomenon and it exists in the public markets because public credit documents are really weak, right? They don't have the same covenant protections that you have in private credit. And so you can have debt layered in front of you. You can have collateral strip. That's what's happened in a lot of these situations in the public markets. Fortunately, in private credit, the documents are more protective. And so I think you will see less of that aggressive behavior in the private credit markets, certainly, versus the public credit markets.

25:40The second thing I would say, Tracy, is the default is just the beginning. What really matters to clients are losses, right? Because the strength of a private credit document allows you to get to a table and negotiate with the owner for maybe more equity. Sometimes we have to take control of the company and we can use all of the resources of Blackstone to improve that company and actually deliver a strong outcome for our clients. And so I think those are the two points I would focus on. Yes, you will see defaults. But the question is, over time, what is the loss experience for investors? And that's something I think we have a lot of conviction in.

26:17Okay. So the other thing besides the first brands and tricolor blobs - You just want to keep saying that. I'm going to say it like 10 more times, was this anxiety about, you know, the quality of some of these data centers. Like, oh, the chip's going to be as valuable as people think. And, you know, actually, I was just looking up like some of the credit default swaps on Oracle, actually basically continuing to hit new highs. CoreWeave, which is another one that people are watching a lot, that's actually come in a bit. So maybe, I don't know, people chilled out a little bit. But from the capital provider, the lenders, what is the appetite right now for AI or related infrastructure financing in the wave of some of these hiccups and what we see in the CDS market for what might be some proxies for this kind of stuff?

27:06Look, I think the nature of the risk matters, right? I don't want to paint it with a broad brush because you hit it. The type of collateral matters. Who's your counterparty matters. For us, whether we're financing chips, we're financing a data center, we don't want to take residual value risk, right? I don't view that as credit risk. So if I can invest in chips, if I can invest in a data center that has investment grade counterparty risk, and my debt will fully be repaid inside of that contractual agreement, whether it's triple net or whatever, and I don't have to take residual value risk. I don't care what that data center is worth in year 25.

27:44I don't care what those chips are worth in year seven. That's really good risk. I think when you confine it to that, which is what we are doing, I think that's quite attractive. Will folks take that next layer of risk? They might, but you need to make that. Do you see, though, any pullback like in some of the, you know, the less triple net, whatever, they like say, OK, January 2026 versus January 2025. Any anxiety? Because we know that there is still incredible demand for the build out, right? It's this multi-year, multi-trillion dollar thing. From your perspective right now, how strong is the capital base for that build out?

28:25Has it changed at all? I think when you have the contractual protections that I'm highlighting, I think the demand is there. Has there been some change since 2025? I would tell you that because the demand for capital is so significant and bigger than the supply of available capital, when you see that happen, you see spreads tend to widen. That's a healthy thing. That's a good thing for the markets. And I think some of those deals that don't have the protections that I highlighted, they have a harder time getting done in the credit markets and you see them get funded in the equity markets. I think both of those things are healthy.

28:56I think when I take a big step back, there is a lot of chatter about this market, but we are firm believers in the impact of AI. And I think the bigger risk is underestimating the impact of it on your broader portfolio like I was alluding to before. What was the fourth quarter actually like for you and what sort of questions were you getting from investors? Because we know some other private credit players like Blue Owl got a bunch of redemptions. Did you see similar pressures? Look, anytime you tend to see some of the press that you highlighted, it's natural to get questions. And we embrace those questions and we address them with the facts that I just highlighted.

29:36I think for us, we continue to see very strong demand for credit. I was around the world, I think twice in the fourth quarter meeting with our clients around the world. And I would tell you in aggregate, they want more private credit, right? Our institutional clients, I think year to date through 930, inflows were up over 50 % versus where they were a year prior. We held a forum with many of our big clients late last year to discuss relative value and risks in the credit market. And actually, it was great for me because it was a way I could actually survey our clients on their views. And I would tell you they continue to be very bullish on private credit.

30:15If anything, they feel under allocated to private credit as an asset class. And so I think the momentum will continue.

30:35this sort of touches on one of my favorite um things to talk about like sort of portfolio construction but for these mega clients yeah they say okay we're under allocated we want more of this. What is it that in their broad portfolio allocation, the characteristics of private credit are solving for them right now? Yeah. Well, look, yield, especially in uncertainty. Everyone loves yield. Right. Everybody loves yield. And I think even with spreads tighter and with rates coming off a little bit, even with that, the yield in credit relative to the earnings yield of the S &P is as attractive as it's been over a very long period of time.

31:11So credit remains attractive. I think when valuations are expensive, like they are across the world today, in most asset classes, being defensive at the top of the capital structure really matters. Diversification, right? Most of our clients have a lot of credit risk, corporate credit risk, excuse me, corporate risk in their portfolios, whether it's private equity or on the credit side. What about real assets? That's why asset-backed finance, that's why investment grade have been so convincing, so high conviction for our clients because it offers that diversification. It offers that access to real hard assets that are downside protected versus corporate risk.

31:51And then I would say the other big theme for our clients around the world is something we call multi-asset credit. It is this notion that credit as a whole is a place I want to be deployed into. However, I'm also recognizing the fact that markets ebb and flow, where one market within credit is attractive, one might be less attractive. How do I partner with someone like Blackstone across everything we do over a dozen different asset classes within credit to build a diversified, resilient, higher yielding portfolio that allows me to pivot to the best opportunities in the market, wherever they may be.

32:28Hmm. Setting aside some of the cockroach phenomenon of late 2025, there was another thing that happened that was pretty big for the credit market, and that was the withdrawal of the leveraged lending guidelines for banks, basically making it easier for them to do broadly syndicated loans. Would you expect that to increase competition between the banks and the, you know, BDCs, so to speak? Look, that one's gotten a lot of attention. I've spoken to a lot of my friends at the banks recently. I think the reality is on new direct lending deals, the market, and by the market, I mean the private equity sponsors, they've largely spoken, right?

33:07Like speed, certainty, flexibility, customization, all the stuff I hit on. That's a really good thing for them, especially when they're buying a company and they're in a competitive auction process. Even deals that met the leveraged loan lending guidelines that were in place, over the last two years, 85 % of them were financed privately. So even when you had complying deals, borrowers were still choosing private credit. I'd say today, our partnership opportunities with the banks, particularly on the investment grade side of what we do, it is bigger than anything, I would say, that we've seen over the last several years.

33:47The banks desire to partner with us where they keep the client arrangement, they keep the servicing, we keep the asset, we are seeing that as a global dynamic, especially around some of these longer duration asset classes, these hard asset asset classes. And those are the exact things that our investors want. And so I think that partnership opportunity will continue to grow. This is the frenemy dynamic that we've spoken about before, right? So private lenders are in competition with the public lenders, the banks, but at the same time, we're seeing more partnerships. No, and there's a lot of something intuitive there about wanting to keep that relationship, but also this element of like, okay, the speed and customization, the financing.

34:28I have a question actually about internal management and the art of growing a business. You mentioned being proactive. So you're going to have people on the phone and they're like, we did this thing. Would you be interested in this solution and so forth? You're this big company. You're building it over time. I'm curious, like, how do you design a system such that you have lots of people working the phones, but wanting to grow their own books, but not lower standards and let garbage into it? And how do you think, like, how do you build those systems into it so that the person on the phone isn't, you know, yeah, bringing in a bunch of garbage just to grow volume?

35:06I love this question. So as I think back at the history of our business at Blaston and Credit, obviously, we've seen tremendous growth. we've seen tremendous success. A big turning point for me personally was COVID because up until that point in time, we ran each of our businesses almost as verticals, right? Whether it was direct lending or asset-backed finance or liquid credit, we had PMs in each of those businesses and they ran each of their businesses from raising the capital to investing the capital to manage the team almost as a vertical entity. We had no horizontal layer, but what COVID taught us when we were all at home in our pajamas and the markets were going wonky that we needed that connectivity.

35:46It would be really valuable if one piece of our business was really connected with the other piece of our business. And so we started building out our CIO office, which I lead, as a horizontal layer to connect all of the dots and bring tremendous consistency across our teams. And five years on, that team is now 120 plus people. And what that team does day in, day out is unifying the fabric of every single one of our investment businesses. And so we have a single investment committee that whether you are a direct lending deal or an asset-backed deal or a liquid deal, you go to that same investment committee, same underwriting standards, same memo, but most probably the same people hearing the deals from all the different parts of the Blackstone credit ecosystem to know where are the best opportunities.

36:34By the way, that investment committee also includes senior representatives of Blackstone outside of credit. What are we learning in private equity? What are we learning in infrastructure that might influence this decision? The way we aggregate and monitor data, we now have one centralized portfolio company reporting system. And so anytime we see weaknesses in an area instantly, the entire team knows that and say, okay, let's pull back origination in this sector and let's lean into origination in this other sector. And so systemizing our data, centralizing our processes, being even more plugged into the themes we see more broadly at Blackstone, that has been a critical part of our journey and I think a huge competitive advantage for us going forward.

37:17I just want to go back to where we started the conversation. And I mean, really the beginning of the conversation, your job title. So CIO for Blackstone Credit and insurance. I think this is really important and underappreciated in many ways, but the partnership between insurers and private credit has been phenomenal. A lot of the private credit growth that we are seeing is coming directly from insurers. How important is it to, I guess, be an insurance company if you're in the private credit space or have access to that pool of capital? Sure. Well, a couple of points I want to really hit here.

37:55One is our business model in insurance, because it is different than some others, right? We don't have a captive insurance balance sheet. We don't originate insurance liabilities directly at Blackstone. All we do is act as a third-party asset manager on behalf of insurance clients. That's what we do best. That's all we want to do. Brick by brick, we built our client base. It's a fully open architecture model. All of our clients sit shoulder to shoulder. And so I think that business model is critical, right? We don't want to compete with our clients and we want to make sure that every single one of them gets a great experience with us.

38:30I think that's a business model question. And I think that's an important part of how we set up that franchise. The second piece is the why. Why are insurance companies seeking private credit capital? Well, in the case of a life insurer, you're writing a 40-year life insurance policy in case of writing an annuity, you're writing a set contract, the best way to manage assets against those liabilities are safe cash-paying contractual assets. Those assets are exactly what we originate in private credit. And that excess spread that we've been talking about throughout this discussion, 150 to 200 basis points for investment-grade like for light credit.

39:13That is extraordinarily valuable for insurance companies versus just buying traditional liquids on the screen. And we've seen US insurance companies adopt that in scale with a ton of success. And one of the big themes I see going forward is that same idea expanding to Europe, expanding to Asia, because it is such a strong fit for insurance company balance sheets, high quality, safe, contractual, long duration investment grade assets. So I've never worked in insurance or private credit, but I've worked in the media industry and the digital media industry. And one of the phenomenons that you see is company starts and they buy various third party solutions off the shelf.

39:56Like, oh, I'm going to buy a piece of software to run my content management system for the website. And then you grow and then you grow and you're like, you know what? This third party solution doesn't work. I need to build my own software for managing my content, et cetera. What happens, do insurance companies hit a point where it's like, you know what, we've enjoyed doing business with you, but we actually want to launch our own private credit arm. And we know that there are some, of course, I mean, there are insurers who are joined at the end. Is there a point where it just makes sense for them to have their own private credit shop, or is it sort of case by case whether that makes sense for them?

40:34Well, I think the direction of travel broadly is the other way, right? The reason why our business has grown so much is because insurance companies have said, hey, Blackstone, you're really good at this. You've got a huge dedicated team. You've got tons of expertise. We can't replicate it. But that is company by company. And some continue to do some things in-house. Some have certain strategies where they have that expertise and they'll continue to do that in-house. And we're happy to complement in the areas where we can be additive. But I would say the overall direction of travel is a realization that we have built out this infrastructure, this origination team, this CIO portfolio management franchise, this asset allocation framework, and clients want to benefit from that.

41:16You've mentioned excess spreads throughout this conversation, and I take the point that everything is relative. I think I mentioned that in the intro, but it is also true that spreads on direct lending have fallen over the past year. I think we went below 10 % for like the first time in three years, something like that. They used to be in the mid to low teens. What do you see happening to spreads next year or this year, I should say? Because it seems kind of concerning to me if we're getting more supply, but spreads are grinding tighter. Yeah. Well, look, I think there's a couple of things there.

41:52First, you mentioned it, right? Borrowers do have choice, right? And so there is going to be some connection to where the liquid markets are. And over time, that 200 basis point spread for privates versus liquids has held and it holds today. And so I think that's one thing to watch. And I think that relative value point you made is the critical point. I think the second thing is, yes, you are starting to see more M &A supply, but we're still well off where we were five years ago. And so I think there's still a lot more room to run. And when I kind of step back and I look at the simple math of private equity dry powder versus private credit dry powder, private equity dry powder outstrips it five to one.

42:32Okay. And so I think there's still a lot more room to run in the supply equation. I think spreads today are pretty stable. And I think our clients earning that excess spread versus liquids, earning that absolute return, which still feels quite good, even though it's not the same as it was three years ago, still feels quite good relative to where equities are valued today and other things in their portfolio. In private assets in general, one of the popular critiques is that people call volatility laundering. It's like, oh, look, I had a rough quarter in my stock portfolio and my whatever, but my credit portfolio was flat this quarter.

43:10And there were no trades. There were no marks. And that makes me feel sleep easier at night. And the accusation is an industry you build to some extent on this notion of like here is this asset class that just like helps me sleep better at night. It doesn't move, et cetera. What's the response to the volatility laundering claim in private assets generally? Yeah, a couple of things there. First, I look to a 20-year loss ratio, right? Like, you can't hide that over 20 years. And I think those stats speak for themselves. Second, you're right. Like, this question around valuations have been out there in private assets.

43:46And Blaston's been around for 40 years. We use a best-in-class process with third-party valuation providers. We mark our book every single quarter. And those third parties are the ones that are doing it. And we mark that to market. Company fundamentals, market moves. that all shows up. What's funny to me is, you know, when we do see underperformance in an asset and we mark it down, which we do on our watch list assets, we get questions about that. People are paying attention to that, yet they are also asking us out of the same breath, are you actually marking your assets? And so I think if you actually look at our portfolio, you will see a small subset of the book that isn't doing what we expected to do when we mark those accordingly.

44:25I think that's healthy. I think that's good. I think that provides some buffer for our clients and we'll continue to use our third party well-established process to continue to do so. You mentioned dry powder earlier, and this is a truism of markets, which is dry powder always seems to be waiting in the wings. Like no matter where we are in the credit cycle, someone's talking about dry powder. I'm sort of surprised to hear that much, the number you cited in the private credit space, because again, like we have seen phenomenal growth and there's still cash lying around that needs to be deployed?

44:58Look, we continue to see strong flows into the market, right? The product is doing what it's supposed to do, which is generate strong, consistent outperformance for clients relative to liquids. I think as long as you see that continue, you're going to continue to see strong flows across all of our client types, whether it's insurance, institutions, individuals. A question I ask a lot of people, today in January 2026, within your organization, are you finding productive applications of generative AI tools that make your life easier and reduce, free up working hours from people who, to do other things?

45:39Yeah, look, this is a huge focus for us. And I think I would be lying if I say we have the golden ticket today, but we have a lot of focus on this area. How do we make our business more efficient? How do we make it easier on our teams, whether it's building models, knowing what questions to ask in their due diligence process, data aggregation and analysis, all of this stuff is in motion. It's at various stages of development. And I think you will continue to see us lean into that significantly. It can never replace the investment decision, right? That's still going to be central to our process.

46:16But I think anytime we can use AI to drive efficiency, and like I said, We have tools that allow that to create the start of an investment committee memo, the start of a model, aggregate data so we can help our team see trends earlier. All of these things are in process, and I think more and more you'll see higher adoption. Could you imagine a future where valuation is done more by AI? Because I think about the third-party valuation services, they're doing matrix pricing, which is basically inferring the market value from other clues they can get. Inference is like, that's AI, basically. I think using AI to support that process, where have market spreads moved?

47:03Okay, this company's performance was X. How does that translate into a mark? I think you will see, just like I highlighted on the investment process, I think you will see adoption of support tools, driving efficiency, driving accuracy, driving scale. At the end of the day, you still need a human at the end of that to make the decision. But I do think you'll see it incorporated more and more into our workflows. What skills are you looking for when you think about recruiting in 2026 and 2027? A lot of people anxious about what they should know, what they should be studying, et cetera. What are the skills that today are still clearly valuable and will be valuable that you would want to see in a new recruit?

47:41Well, look, first and foremost, the people we look to hire at Blackstone, incredibly hardworking, genuinely good people, motivated by taking on more, growing. Some of these like fundamental traits, like that is universal. And I think that will never change. I think in an environment where you're using more and more productivity tools, how do you interact with people? People want to do deals with folks that they feel like they can trust. They develop good relationships. How do you think forward around corners? These are the types of critical thinking and communication skills that I think are going to be even more valuable to layer on to all the basic stuff we have always looked for in the people we bring into the firm.

48:26All right, Z, we're going to have to leave it there. But thank you so much for coming on All Thoughts. Really appreciate it. It was my absolute pleasure. Thank you, guys. Thank you so much. That was a lot of fun. I learned a lot. Thank you.

48:49Joe, I'm a journalist or a podcast host. Maybe there's a difference. No, we're journalists. People always make parties. What do you do? I say I'm a journalist. All right. All right. The natural tendencies of journalists is to be a little bit more pessimistic than an investor. I mean, if you're an investor, almost by definition, you have to be optimistic. I agree. A paranoid optimist. That's right. But I do see some signs of worry in the private credit market. So beyond the cockroaches that we talked about, we have more companies doing liability managements. The documentation point I found kind of surprising because in our previous conversations, and certainly in some of the research that I see, people say that documentation is declining.

49:35So investor protections are basically going down and there's more convergence with the public market and things like that. So I take the point that every private credit investor that we have on the show is going to say that they're different and they're more selective and things like that. And it may be true, but overall, if you're seeing documentation go down and leverage go up and supply increasing. That seems kind of bad. Yeah. No, I mean, look, I think the thing that I guess, I mean, all of that sounds very intuitive to me in these tensions. The other thing that, and it's sort of related to this is like, how do you maintain, like, okay, you think about the fundamental service, right?

50:18You think about the fundamental service of like speed and customizability and so forth. And then the tension that exists is like, okay, you want to like turn this around right away, et cetera. And the tension between that and like robust documentations and I mean, again, 20 year business to some extent speaks for itself. But on the other hand, like you can see how these things over time would come into, especially come into tension, such a competitive environment. Exactly. I want to you know what you you place a phone call to me because you need money. I want to be able to give you an answer right away.

50:57I'm going to say yes very quickly. I want to be able to say yes to you to maintain your business, to maintain that line and the tensions that could potentially emerge between like our relationship as the lender to the borrower versus, you know, my relationship to my people who want protections, et cetera. You could see how those would emerge for sure. Yeah. All right. Shall we leave it there? Let's leave it there. All right. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Jill Weisenthal. You can follow me at The Stalwart.

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52:01Thanks for listening.

52:16Thank you.