BlackRock Inc. aims to expand its private credit business by double digits every year, according to a senior executive, as the world’s largest fund manager joins a string of big-name investment firms in embracing the fast-growing sector.
(Bloomberg) — BlackRock Inc. aims to expand its private credit business by double digits every year, according to a senior executive, as the world’s largest fund manager joins a string of big-name investment firms in embracing the fast-growing sector.
Institutional investors such as pension funds have about 5.7% of their portfolios in private credit now, Stephan Caron, head of private debt for Europe, the Middle East and Africa at BlackRock, said in an interview. He reckons that number should be closer to 8% to 10% for a more balanced portfolio.
The $1.5 trillion private credit market is appealing to investors at a time when borrowing costs are rising because the loans that fund managers provide are floating rate. That means returns increase along with market rates. And because the asset class is private, investors don’t need to deal with the price volatility of public markets.
“In this environment where rates are rising, it’s really the low volatility of the asset class that appeals,” said Caron.
BlackRock started its European direct lending business from scratch, before it acquired Tennenbaum Capital Partners LLC in 2018 to secure a position in the already established US market. On Wednesday, it completed the acquisition of Kreos Capital, a growth and venture debt provider.
Private debt markets are likely to grow almost 11% annually through 2027, according to data provider Preqin. Among other asset managers looking to take advantage of that growth, US investment manager Nuveen this year bought a controlling stake in alternative debt firm Arcmont Asset Management Ltd., while Man Group Plc is buying a stake in private credit manager Varagon Capital Partners.
BlackRock’s global private debt business has $79 billion of assets under management. It sits within the BlackRock Alternatives platform, which had $320 billion in client assets as of June 30, the fund manager said at its investor day presentation.
“We’re operating with the view that interest rates will remain higher for a longer period of time, with less growth,” said Caron. “From a debt perspective, that doesn’t matter. We’re not dependent on growth in the economy, we’re more focused on downside protection.”
The growth of the industry comes when investors are spooked by fears of an economic slowdown. Persistently high rates are forcing borrowers to stomach much higher interest burdens — and some may not be able to handle it.
Read more: Private Credit’s Quiet, Unstoppable Rise Comes With Unknown Risk
In a separate interview with Bloomberg Television’s Dani Burger, Caron said defaults are likely to rise in private credit but he sees them as more centered around cyclical sectors.
“The trick when it comes to portfolio construction is to focus around the more defensive sectors,” he said. “We see health care, software and tech as areas that are generally insulated against economic cycles.”
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.