Blackstone: "Private credit" yields are "150-200 basis points higher" than junk bonds, institutional clients such as pension funds, sovereign funds, and insurance capital will increase allocation

The world's largest alternative investment management company, Blackstone, stated that there is a significant yield advantage in the private credit market, which is driving global investors to shift their allocations from public markets to private markets.

On September 19, Michael Zawadzki, Chief Investment Officer of Blackstone Credit and Insurance Group, mentioned in the latest Bloomberg Intelligence podcast Credit Edge that the yield premium of private credit compared to high-yield bonds and investment-grade bonds reaches 150-200 basis points. The spread on corporate bonds has narrowed to its lowest level since the late 1990s, providing a clear relative value advantage for the private market.

Zawadzki pointed out that Asian insurance companies allocate only 5% of their balance sheets to private credit, while U.S. insurance companies can allocate as much as 35%-40%, indicating significant growth potential. Blackstone predicts that the private credit market will grow from its current size of approximately $2 trillion to $30 trillion.

The surge in demand for artificial intelligence infrastructure construction has become an important driver of growth in private credit. According to estimates from JP Morgan, the construction of data centers in the U.S. alone will require approximately $150 billion in permanent financing from 2026 to 2027, creating huge opportunities for private lending institutions.

Yield Advantage Drives Capital into Private Markets

As the Federal Reserve's interest rate cuts boost demand for yields, the additional yield of investment-grade corporate bonds relative to government bonds has fallen to its lowest level since the late 1990s, while insufficient supply of bonds and loans further exacerbates the trend of narrowing spreads.

In this context, the risk premiums of both high-yield bonds and investment-grade bonds have been significantly compressed, leading investors to worry about "insufficient returns." In contrast, private credit demonstrates a significant yield advantage.

Zawadzki stated that private credit yields are higher than those of high-yield bonds and investment-grade bonds by 150-200 basis points, providing global clients with highly attractive investment opportunities.

Despite lower liquidity, most private credit assets are held to maturity, and the assets are often backed by real collateral, making their risk-return profile more attractive in the current market environment.

Blackstone expects that the next round of incremental funding for private credit will mainly come from large institutional investors such as pension funds, sovereign wealth funds, and non-U.S. insurance companies. These long-term funds have stable liabilities and a natural demand for high-yield, low-volatility private credit assets.

Zawadzki noted that the allocation of private credit in the balance sheets of U.S. domestic insurance companies has reached 35%-40%, while Asian insurance companies currently allocate only about 5%, indicating significant growth potential. "These are two markets that have not yet been fully penetrated but should grow rapidly," Zawadzki said.

AI Infrastructure Demand Creates Financing Opportunities

Blackstone expects the private credit market to expand rapidly in the coming years, with the size expected to swell from the current $2 trillion to $30 trillion. This will be primarily driven by the enormous financing demand for hard assets (such as data centers, real estate, and power infrastructure) Zawadzki stated: “We are in the early stages, especially in the investment-grade private credit and asset-based financing sectors, which are growing rapidly and are the areas with the most concentrated demand for capital.”

He specifically mentioned that artificial intelligence infrastructure is a key factor driving this wave.

Meta Platforms recently chose Pacific Investment Management Company and Blue Owl Capital to lead a $29 billion data center expansion financing, highlighting the enormous capital demand in this field.

JP Morgan's estimates show that the construction of data centers in the U.S. alone will require about $150 billion in permanent financing from 2026 to 2027.

Zawadzki indicated that Blackstone plans to be "extremely active" in the data center financing sector, with its data center operators QTS Realty Trust and Australia's AirTrunk being global leaders in the field, providing a market-leading information advantage.

The recovery of merger and acquisition activity has also created opportunities for private lending institutions. "I believe you are at a real turning point," Zawadzki predicted that deal-making will be very active in the fourth quarter.

The report also noted that despite the booming private credit market, some market participants still question its sustainability. DoubleLine Capital CEO Jeffrey Gundlach previously warned that there are signs of "over-investment" in the sector, which could trigger passive selling risks if the economy weakens.

Zawadzki disagreed with this. He stated, Blackstone has a total of 2,000 non-investment-grade borrowers, but the overall default rate has been below 0.5% over the past 12 months. “When you delve into the fundamentals of the underlying companies, most are still performing strongly.”