The Blackstone Actual Property Revenue Belief made headlines for the improper causes final week. However Blackstone additionally has an identical funding belief centered on company debt that has but to return below comparable scrutiny. We suspect that can change.
Whereas BREIT buys actual property, the Blackstone Personal Credit score Fund (BCRED) lends cash to corporations. Regardless of solely celebrating its first birthday in February, BCRED had amassed a $50bn portfolio of company loans as of Oct. 31, in line with its web site.
That makes it practically as massive as Pimco’s Whole Return Fund, the bond fund that Invoice Gross at one level changed into the world’s greatest funding automobile (although in case you take out leverage, BCRED’s web asset worth is about $22bn).
And it’s nonetheless just a few months away from coming into the horrible twos. Some tidbits from its newest truth sheet (information as of end-September):
Since final week, a lot of the speedy focus has been on BREIT, its significance to Blackstone, and whether or not its delicate gating might set off contagion elsewhere within the property trade. The $14.6bn Starwood Actual Property Revenue Belief has already introduced comparable investor withdrawal limits.
However how susceptible is the smaller however nonetheless chunky BCRED to BREIT-style constraints on investor withdrawals?
As you may see from above truth sheet, practically all of its publicity is to floating-rate debt, which is helpful in a rising fee atmosphere. And the overwhelming majority of BCRED’s loans are first lien and senior secured, which is considerably encouraging given rising fears over a recession and the turning credit score cycle.
Much less nice is its 29-per-cent allocation to software program and IT, provided that trade’s present issues. BCRED additionally has an identical payment construction and withdrawal course of as BREIT — structured as repurchasing shares on the web asset worth — however solely guarantees quarterly withdrawals, in comparison with BREIT’s month-to-month liquidity. And each have comparable redemption limits, which might toggle right into a full gating at Blackstone’s discretion:
Quarterly tender provides are anticipated however not assured. Quarterly repurchases are restricted to five.0% of combination shares excellent (both by variety of shares or combination NAV) as of the shut of the earlier calendar quarter. Shares not held for one yr might be repurchased at 98% of NAV. The Board of Trustees could amend, droop or terminate these share repurchases in its discretion if it deems such motion to be in one of the best curiosity of shareholders.
That might be helpful, as most of BCRED’s portfolio is made up of illiquid, bespoke ‘unitranche’ loans which are laborious to promote rapidly if it wants to lift money for outflows.
Blackstone advised FTAV that had web inflows within the quarterly tender window that ended on November 30, and though it anticipates 5 per cent of its shares being redeemed, it intends to fulfill these in full. Right here is the corporate’s assertion:
BCRED is properly positioned with 100% floating fee and 94% senior secured loans and nil cost defaults. We noticed web constructive flows this quarter as buyers sought compelling yields in top quality property with little volatility. Share repurchase requests are anticipated to be roughly 5% of BCRED’s excellent shares as of September 30, 2022 and we plan to honor all repurchase requests this quarter.
Even setting apart the specificity of “plan to honor” and “this quarter”, there are different areas of concern. For instance, the efficiency discrepancy between the personal untraded BCRED and comparable(ish) “enterprise improvement corporations” is nearly as stark because the divergence between BREIT and listed actual property funding trusts.
Whereas BCRED’s complete returns are mainly flat this yr (relying barely on the payment class), all public BDC shares have fallen this yr, in some circumstances sharply. Even shares of Blackstone’s personal listed BDC — the Blackstone Secured Lending Fund — have dropped greater than 28 per cent in 2022
(Blackstone stated the poor efficiency of its listed BXSL is partly as a result of it trades now at a 7 per cent low cost to its NAV after a rise in its free float, however that also begs the query why the listed and public NAVs differ a lot.)
The extra muted redemptions from BCRED may change now that Blackstone has restricted withdrawals from its actual property belief, as JPMorgan analyst Kenneth Worthington wrote final week:
We additionally word that points in BREIT might additionally weigh on BCRED considerably. Whereas gatekeepers see BCRED as a separate product, we nonetheless have seen BCRED web gross sales gradual as properly. Given the pipeline of redemptions for BREIT in November, we see BREIT and BCRED gross sales possible below strain into 1H23.
FT Alphaville was due to this fact intrigued to see that Blackstone as we speak introduced one other improve in BCRED’s month-to-month distribution once more, by about 10 per cent to $0.21 a share.
That leaves its payout equal to a roughly 10 per cent annual yield, relying on share class. Blackstone attributed this to rising earnings from its floating-rate debt portfolio, and the truth that BDCs are required to pay out 90 per cent of their revenue.
However given the latest newsflow, it additionally seems like a well timed enticement for buyers to remain, fairly please.