(Bloomberg) - A couple of years ago Clive Cowdery had a problem. The large life insurer that he’d founded was amassing customer cash faster than it could find ways to put that hoard to work.
As payments piled up at Resolution Life, two of every three dollars sat idle. The company decided it couldn’t hang around for its in-house crew to scour the globe for the bonds, mortgages and other assets in which insurers typically invest people’s money. So it turned to Blackstone Inc.
Like fellow “alternative” investment titans Apollo Global Management Inc. and KKR & Co., Blackstone has been eagerly driving the expansion of the booming multi-trillion dollar private-debt markets lately as old money-spinners such as company buyouts and property have been whacked by higher interest rates. Tapping the vast coffers of insurers is becoming crucial to that push.
After sealing a partnership with Resolution — similar to deals with arms of the giant insurers American International Group and Allstate — Blackstone is now a key asset manager for the firm, in charge of a cash pot that could hit $60 billion. A big part of its pitch went like this: Let us tie up your money in rarely traded private debt and you’ll nab better returns than plain-vanilla bonds. In exchange Blackstone gets a ready buyer of the company loans and more complex investments that emerge from its credit division; and steady fees.
“If you’re going to put all your eggs in one basket, it should be a good one,” Cowdery says, when recalling the 2022 partnership deal in an interview with Bloomberg. He expects Blackstone to help bring Resolution’s private-debt exposure to as much as a quarter of its assets.
Life insurer tie-ups aren’t the sole reason Blackstone is among the world’s biggest credit managers, nor why it’s bullish enough to aim to more than double its credit assets to $1 trillion in a decade. And yet they’re fast emerging as a vital engine of growth. Blackstone recently merged its credit and insurance arms and promoted insurance boss Gilles Dellaert, 45, to head the combined unit after he’d knitted together the partnerships with Resolution and others.
The credit division he now runs snagged $94 billion of net new cash in two years, trumping Blackstone’s private equity arm. That’s more than Luxembourg’s GDP — further proof of how a small band of private firms is usurping Wall Street as the real power in global capital markets, and why financial regulators are increasingly anxious about how best to police them.
“We think this can be much, much, much larger,” Blackstone president Jon Gray tells Bloomberg.
Insurance tie-ups are central to this ambition, as they are at his biggest rivals. While Apollo and KKR have opted for full ownership of insurers, Blackstone has sought out minority stakes and asset-management deals, as it did with Resolution. It has bespoke accounts with others in the industry. Its insurance assets alone passed $200 billion in the first quarter of 2024.
Much of this money is fueling the boom times in private credit. Wall Street banks used to be the chief providers of company loans, but post-crisis capital rules have made this harder, letting “nonbanks” like Blackstone muscle in. Defenders of the private markets say it’s safer to fund lengthy loans by using long-term cash from insurers and pension schemes, rather than from institutions such as regional banks who rely on customer deposits, “which in today’s technological world, can go ‘poof,’” according to Gray.
“The growth in private credit is super helpful to enhancing the resilience of the financial system,” he adds.
Nevertheless, the market’s untested in a crisis. Regulators fret about how investors could sell private loans in an emergency, and whether they’re being valued correctly. The International Monetary Fund has warned of stability risks from “entities with particularly high exposure to private credit markets, such as insurers influenced by private equity firms.” Stung by the loss of lucrative lending work, Wall Street bosses such as JPMorgan Chase & Co.’s Jamie Dimon want tougher oversight of what they’ve called their shadow bank rivals.
Goldman Years
Like other senior figures in private credit, Dellaert cut his teeth at Goldman Sachs Group Inc., rising from the trading desk to become co-president of Global Atlantic, an insurance group spun out from the bank. And like other banking emigres, he says he found in private markets the “entrepreneurial, driven” approach once common on Wall Street. “The culture I found when I joined Blackstone was very, very similar to what I grew up in in the early days in the 2000s and late 1990s,” he says in an interview.
As with its peers, a chunk of Blackstone’s credit work involves lending to businesses such as cybersecurity specialist Mimecast and drugmaker for pets Dechra Pharmaceuticals. These loans are often sliced up into smaller bits and slotted into different investor portfolios.
The firm manages more than a dozen accounts with blue-chip insurers, who set the rules on where Blackstone can invest. Many opt for “multi-asset” pools, which can be made up of a mix of loans and more complex securities such as infrastructure debt and structured finance. Blackstone wants to do similar work for pensions and sovereign wealth funds.
Insurers are no longer the staid bodies that stick to safer bonds and mortgages to preserve the cash of retirees and annuity holders. As well as Blackstone’s pools, they’re keen on collateralized loan obligations, where loans are sliced up and bundled into tranches of various risk. And they’re investing in pools of instruments secured against credit-card debt and infrastructure projects.
These sophisticated “structured” products, often involving bundles of assets, carry some echoes of the elaborate securities devised by investment bankers.
With banks under intense capital pressure, Dellaert says private credit firms do a useful thing by matching borrowers with institutions such as insurers and pension funds that won’t need cash returned for years. In return for putting their money into private loans, which often have a five or six-year term and are much harder to sell than publicly traded debt, investors are promised higher interest payments — what’s known as the “illiquidity premium.”
The top tier of asset managers have “certainly been opportunists,” says Joshua Zwick, a partner at Oliver Wyman who consults for investment firms and insurers. “This is a natural evolution of the financing markets that could put risk on balance sheets and investment portfolios best suited for such risk.” Firms such as Ares Management Corp. and Carlyle Group Inc. have also made inroads with the insurance industry.
Regulators, however, are trying to keep up with insurers’ mushrooming exposure to private securities. Private-market firms have many loans “shadow rated” by agencies that don’t have to publish the result. In the US, officials are discussing giving extra discretion to an office of a standard-setting body to decide whether some fixed-income investments are more dicey than their ratings let on, among other moves to help states police insurers more closely.
“There will be a lot of dialogue” with insurance industry regulators, Gray told analysts in April. “But the activities we’re focused on, we think, will be well received over time.”
Banking Buddies
The private giants’ campaign of conquest in corporate finance may have left some bruises on Wall Street, but areas of mutual interest remain. After last year’s collapse of Silicon Valley Bank and Credit Suisse, alarmed watchdogs quickly floated the need for new rules requiring banks to boost cash cushions.
When Barclays Plc moved to trim its balance sheet, Blackstone stepped in to buy a $1.1 billion pool of its loans backed by credit-card payments. When KeyCorp wanted to offload loans taken out by smaller asset managers, Blackstone was also there. It has done at least $7 billion of similar trades. Resolution and others picked up slices of the Barclays and KeyCorp assets.
Dellaert describes Blackstone’s bank ties as having many facets. “We need them for a lot and they now need us for more, incrementally,” he says. “We see things become very symbiotic very quickly.”
While Belgium-raised Dellaert won his spurs at Blackstone by turning the insurance unit from a backwater into a $200 billion leviathan, his responsibilities running the credit arm range far wider. He oversees a division that includes a $50 billion CLO operation and a group that does financing backed by everything from equipment to property assets.
His ascendancy and the credit-insurance merger has brought change to Blackstone’s corridors of power. Dwight Scott gave up his credit boss position for a chairman role, moving to London to help build the European credit arm, including a new platform that lets rich Europeans invest in direct lending. The firm already has the world’s largest private credit fund for the affluent.
Blackstone has tightened control over various credit teams, packing investment committees with the same executives who sit on others to standardize decision making. Some have complained to acquaintances of having less autonomy.
It’s all very different to Blackstone’s early days as a credit player after it snapped up GSO Capital Partners in 2008, a deal that captured Wall Street’s shifting zeitgeist. While banks were being told to abandon their wilder ways after Lehman Brothers’ demise, lightly policed money managers picked up the baton on the sharp-elbowed tactics and financial wizardry exemplified by GSO.
When Gray rose the ranks, he pushed GSO — rebranded as Blackstone Credit in 2020 — beyond high-octane bets and distressed lending. The hope was that building its leveraged-loan unit and so-called “performing” credit, even if less interesting, offered steady fees, fat volumes and less attention in Washington.
As Blackstone nudges more insurers into assets that are harder to value and sell, it says they are ultimately safe. The $30 billion in credit it invested for insurers in 2023 had an average rating of single-A, it says.
The true test will come from how well the companies financed by Blackstone and its insurance clients manage to cope with the US Federal Reserve’s stubbornly higher base rates.
Gray appears untroubled, summing up the credit market as a pyramid. The apex represents lending to junk-rated companies where there are high risks and high rewards. Blackstone aims to compete at each level. “As you move down to lower yielding areas, there’s a larger TAM,” jargon for the total addressable market. “And as you move down, you can scale up.”
By Dawn Lim and Silas Brown
