What Leading Alternative Managers are Talking about Post Q424
Credit Spreads, Insurance & Bank Partnerships, Data Centres, M&A Outlook
👋 Hey, Nick here. Against all odds, the UK had a weekend of pure spring sunshine. A rare event, much like finding a 2021 portfolio with zero PIK income. Rather than soaking up the rays, I made the questionable decision to stay inside and write this post.
Every quarter, I summarise the earnings transcripts of the largest managers. I do this for two main reasons:
It helps me understand the consensus views. The bulk of these 400+ pages is generic fluff. Despite the effort, labouring through all the managers' transcriptions helps me understand the recurring narratives.
It brings to light unfiltered and occasionally provocative opinions. Every once in a while, I come across a sentence that makes me step back and reassess my thinking. That 0.1% makes the effort worth it, and with any luck, you’ll enjoy these too.
This is the 103rd edition of my weekly newsletter. Each week, I write about private credit insights and fundraising announcements. You can read my previous articles here and subscribe here
📚 Quotes of the Quarter
This is an unusually long post. Below is a breakdown of the key topics with links to the sections. Feel free to read as much or as little as you like.
Consensus
All the links to the transcripts can be found here
Credit Spreads
Apollo: “With spreads near multiyear tights across many segments of the credit market, our direct origination advantage remained durable, allowing us to capture 200 basis points to 250 basis points of excess spread relative to comparatively rated corporates... Over the course of last year.. we observed the market tightened approximately 25 basis points to 30 basis points. “
Blackstone: “Spreads have been tightening. We’ve seen base rates come down. [We] may not be able to produce mid-teens returns in private credit on a go-forward basis, but the relative returns and the spread premium to liquid fixed income, is continuing to endure. This farm-to-table model we have where we bring investors right up to borrowers and avoid those origination, distribution, securitization costs, that’s going to continue. And that’s why we think this private credit area has so much room to run, both non-investment grade and investment grade.”
Blue Owl: “We went to peak spreads [vs fixed income] in 2022. We came down in 2024 to 100 basis points probably on average across the portfolio, maybe 150 on a new originated loans. But we continue to hold on. This is what's interesting. When you look over time and you look at the spread to the broader marketplace, we continue to hold on to a pretty steady couple 100 basis points all in. So the product works. It's a durable all-market product. And some ebbs and flows along the way, but we view it as very banded. So we're perfectly happy.”
Portfolio Updates
ARCC: “Despite having what we believe is the highest level of deployment of any public BDC, the median EBITDA of our new investments during the year was approximately $70 million. About one-third of our new investments were to borrowers with EBITDA of less than $50 million. We believe Ares is the only direct lending platform of scale that actively focuses across the lower middle and upper middle markets. This broad and differentiated coverage supports our ability to find what we believe are the best risk-adjusted returns while remaining highly selective. We believe that the lower middle market yields can provide 25 to 50 basis points of enhanced spread despite lower leverage levels and stronger documents when compared to some of the upper middle market transactions being completed by our peers.”
Deployment
ARCC: “In 2024, over 70% of our new commitments were to existing borrowers, and importantly, we are increasingly being asked to provide a larger portion of our borrowers’ overall capital structures.. Our share of the overall financings for our top ten largest incumbent borrowers more than doubled each of the past three quarters.”
KKR: “In 2024, we invested $84 billion of capital. That's up meaningfully from $44 billion in 2023.”
Blackstone: We’re pleased to say that we deployed $134 billion in 2024 – up 81% year over year – planting the seeds of future value at what we believe is a favorable time.
Blue Owl: “We doubled net deployment year over year.”
Ares: “Despite a more subdued transaction environment in 2024, we were very active using our relationships, incumbency advantages, and breadth of strategies to invest a record $106.7 billion, up more than 50% over 2023.”
2025 Outlook
Blue Owl: The M&A advisors will often see the earliest views of pre-pipeline and obviously, the PE firms know what they're spending their time on the sell side. So I think what I can say is we continue to have a good, sound level of activity. We've not observed an uptick, yes, as I said, I think we're optimistic. But in terms of activity level, what I understand and hear from the M&A advisors, they objectively are seeing more activity in the pipeline.
Oaktree Specialty Lending: “We believe a more favorable regulatory environment and an expected increase in private equity activity will increase opportunities for M&A and IPOs over the years ahead. This increased deal flow should help fix the supply and demand imbalance we have seen between lenders and borrowers in the private credit space, easing the competitive pressure that has contributed to spread compression in recent years… Private equity firms are sitting on over $2 trillion of dry powder. Conditions for deal volume are recovering with declining rates, along with valuation gaps between buyers and sellers improving. We believe all of these factors combined suggest a positive outlook for the sector in 2025.”
Ares: “There's over $3 trillion of unrealized value across 28,000 unsold companies in global buyout portfolios, and more than 40% of these investments are four years or older… And then just what I would call the weight of money that is in the ground today in the private equity and institutional real assets market that needs to get resolved.”
Blackstone: “The environment is clearly here getting better… The strength of the economy, the health of the equity market, the S&P being up 60%. The IPO market, the pipeline for IPOs now is double where it was a year ago. Those are very constructive facts. We think large profitable companies can go public. The debt markets improving certainly helpful. Both investment grade and high yield spreads are basically at record tights. Base rates are still a bit elevated, but the debt market is very constructive. We’ve got a regulatory climate for M&A that is far better for us. Strategics can now start to buy again.”
Brookfield: “We very much expect 2025 to be the largest year for fundraising ever for Brookfield in terms of complementary strategies. And that's a function of one, both bigger sizes and two new additional products in the markets.”
Carlyle: “Look, base rates are up… relative to three years ago, no doubt. But spreads remain tight. Your all-in financing cost is still very attractive. Debt markets are pretty much wide open. So, I think that's another positive. And I think the other real positive is strategic buyers have become active again. And that is another positive catalyst. So, when you look at what you need to have a conducive market to buy and sell assets, it's largely in place with what we're seeing. So, we're very optimistic that 2025 will be a busy year on the realization front.”
Bank Partnerships
Ares: “The banks are more important partners of ours than they are competitors… The narrative of fierce competition between direct lending and banks is overblown. If you look at how we fund ourselves and how banks access these markets, there is a great symbiotic relationship between their lending operations and their client franchises and our capital base and our origination and portfolio management capabilities.
Where we are meaningfully differentiated in our Private Credit platform, and I don't know that we talk about this enough, is that we cover the entire spectrum of sizes, sponsors, non-sponsors, direct-to industry coverage, corporates, real assets, asset-backed, et cetera.”
Apollo: “[Bank Partnerships] are now north of 12.
We can work with a bank from a capital alleviation point of view,
We can work with them from a duration alleviation point of view
Or simply complementing each other's origination.”
Data Centers
Blackstone: “We have $80 billion of leased data centers. The good news in that business is these are long-term leased data centers with some of the biggest companies in the world. And we do not build data centers speculatively anywhere in the world. So, we have a very prudent approach when we think about data center.”
Brookfield: “We only build against long-term contracts with large hyperscalers, some of the greatest credit counterparties around the world. And therefore, the DeepSeek headlines are not changing our approach.”
Ares: “We are not speculatively building data centers. And I think most people that are similarly situated will tell you that if you are building high-quality data centers in the right places with the right customers, there is still a very significant opportunity to generate meaningful return.”
Blue Owl: “We've seen Meta come out and move their number to $65 billion. Microsoft.. talked about with $80 billion. We're hearing $80 billion as a number around Amazon, I think, Google, $75 billion they announced yesterday. So the people that are spending the actual money have made their position clear, and that's our client base, and then they pay us for 15 years with their near sovereign like credit ratings.”
Blue Owl: “If you look at the demand for compute and the multitrillion-dollar opportunity that we're excited about and others, too, 75% of that was already anticipated to be for inference and to be for just cloud compute. So even when we get into does DeepSeek change, the fundamental need for raw compute power for training models, we're really talking about modulation around that last 25%.:
Ares: “The move has always been to lower cost and increase efficiency in the data center business and the cost of compute. And what we have seen with technological advancement and greater efficiency, we will typically see increased demand… The demand for compute will continue, which will not change the opportunity to build data centers with good counterparties in good locations. And maybe to that point, if you look at the market today, a significant preponderance of data centers are still going to just support cloud computing with the large cloud companies.”
Brookfield: Our landmark transaction with Microsoft, the largest of its kind, will supply over 10 gigawatts of renewable power over the next 5 years. And earlier this week, in partnership with the French government, we announced a EUR 20 billion infrastructure investment program to support the deployment of artificial intelligence in France.”
Insurance
Apollo: “What you need to be successful in this [insurance] business:
You need capital.
You need an efficient origination platform at scale.
You need a source of assets that produces investment-grade assets primarily, but with spread.
You need low-cost liabilities.
With the exception of maybe one player, no one else in the industry has these four alternatives.”
Blackstone: “If you can get comparably rated A-minus credit and get 200 basis points higher spread [than fixed income], that makes you more competitive with your sales organization…What we’re seeing across the landscape is an embracing of this model, where they move a greater percentage of their assets into private investment grade credit… The reason we’re up nearly 20%, we’re at $230 billion in insurance, is because of this dynamic. The number of conversations, the scale of the conversations, it seems to be accelerating.
We are not an insurance company ourselves with hundreds of billions of liabilities. We are not out there selling these products. We’re just the third-party manager. The way the liquid managers used to manage liquid credit, and still do on behalf of insurers, they see us as an attractive place to allocate capital. We’re trusted. And the scale is really important because no insurer wants too much concentration; given their important risk aversion, they need diversification. So, what we’re finding is there’s desire to talk to us on a larger strategic basis.
We now have 23 SMA clients. This feels like it’s going to continue to grow.
It’s obviously started in the US. We’re seeing Asian insurers who are also open to this idea. There’s select opportunity in Europe as well.
The key again is: do we deliver performance? Can we deliver them higher returns at the same or lower risk? We believe we can.
We’re also seeing interest in investment grade private credit now from some of our pension and sovereign wealth funds. It’s very early days, but it feels like that’s going to grow in momentum.”
Provocative Opinions
The Instability of Banks and Why Partnerships Will Grow
Ares: “The nature of a bank is to borrow short and lend long. There is an inherent instability to taking long-dated risk inside a short-funded institution. Think about what the world is building. Next-generation energy, next-generation power and data, next-generation infrastructure, energy transition. All of these things are long-dated and complex. They are not normally in any market funded on bank balance sheets.
I think what people don't really understand is a lot of "competition or substitution" is replacement of the normal, regular way, 10-year IG market. IG wants simple, not complex. They don't want structure. Every time we have landed a large fixed income replacement mandate, it is because we are offering the borrower something that is credit neutral or credit better to us, but more flexibility in some way that is not available to the public market.
And so, again, I come back to this notion of bank partnership. Some banks will simply say, thanks, we'll do it ourselves.
Some banks will actually realize what I think most have, that we are symbiotic with them and that we do not want their clients. All we want is the asset.
The bank typically does not want the asset. And if they want a piece of the asset, it's available to them. So they can grow without capital. That's ROE enhancing. Some banks will actually fund an asset with us, and they will take the short end of the asset, and we will take the long end of the asset. Some banks will fund with us, and they will take the AAA tranche back, and we will take the AAs and everything else. The variety of partnerships with the banking industry is limited only by the problem that the banks are trying to solve.
If you're a regional bank today, you are paying more for your capital, your inventory, your money, than a money center bank. Your financial, regulatory and technology costs are being spread over a much smaller base. You don't have the capital markets revenue to give you the fee streams that the big banks have. And you don't really know whether deposits are sticky because like every crisis where SVB and FRB were taken out, we don't really know whether that was bad management or bad management coupled with 70% online banking. And I think we're going to see in this administration, in particular, a tremendous consolidation of regional banking. We, Apollo, just speaking for Apollo, we're a small asset manager. Our goal is not to be one of the four money center banks. We don't even think that way. Our job is to deliver our business plan, which is roughly a doubling the size of the business. Five years from now, when we double the size of our business, we will be a small asset manager. There is plenty for us to do in the context of our business and win.
Playing to Win
Apollo: “So, what does playing to win look like? Well, for us, it is to recognize where we think the industry is going and how we think the industry is developing. As we've said, our business is going to be driven by four really large fundamental changes taking place in the marketplace.
The first is this notion of a global industrial renaissance. We're seeing it literally every day in the US, in particular. And this is not just about AI and DeepSeek. This is about fundamental investments in energy, in infrastructure, in power, in data, in next-generation manufacturing, and a host of other things that are going to be needed, financed, and borrowed.
The second big driver of our business is retirement. Retirement is not just in the traditional sense through Athene of providing guaranteed lifetime income, but in the nontraditional sense of helping retirees retire better.
The third, recall that our entire industry was built out of the alternatives bucket of institutional clients. As all of you know from the past few years, individuals have the potential to be as large as institutions in the same sorts of products, and they will not take anywhere near 40 years to get to that size.
And finally, and I think personally the most important driver of our business, is an entire rethink of public and private. And what I mean by that is our industry grew up where I think people thought private was risky and public was safe. And when something is risky, you put it in a small bucket and you call it an alternative, and you want very high rates of return from it. And 40 years later, after our industry start, I think that professionals in our industry now understand that private is safe and risky, and public is safe and risky. And if people are not watching closely, the largest asset manager, the traditional asset manager in our industry, has delivered a wakeup call to their entire peer set that private is going to be an important part of client solutions going forward.”
Blackrock: “There is a great opportunity to continue to scale in the channels where HPS is but also bring that to the RIA market where BlackRock has a particularly large footprint.
Our non-traded BDC has about $600 million plus in growing. Our credit interval fund CREDX, same deal has had a lot of growing… The biggest opportunity ahead of us is to integrate semi-liquid products and to integrate private markets into our over $300 billion managed models and SMA franchise.
It's our competitive advantage.”
Why Direct Lenders Stay Away from Junior Debt
Oaktree Specialty Lending: “First lien sponsored lending is sort of high single digit and into the low double digits.. We don't think that picking up the extra return by going junior is usually worth it.
Now why is that? It's because when rates did go was above 5% and spreads were 6% to 6.5%, that implied first lien lending was returning something like 11% or 12% or the cost of borrowing for borrowers was 11% or 12%. To go junior would mean we would have to charge 14% or 15% to those same borrowers.
And private equity sponsors, and frankly, other borrowers that are non-sponsor owned, when they looked at that pricing, they said, you know what, that's the cost of my equity anyway. I'd rather over-equitize than pay you 14%, 15%, 16%.
And so if you did want to kind of hold firm to junior positioning, it usually meant some sort of inadequacy either in the sponsor or in the company that caused them to borrow at that cost of borrowing. So we really pushed heavily into first lien because we thought that it was lower risk, attractive return. So on a relative basis, the best risk-adjusted return we saw in the market.”
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This newsletter is for education or entertainment purposes only. It should not be taken as investment advice.