Blackstone: "Private credit" yields are 150-200 basis points higher than junk bonds and others; institutional clients such as pension funds, sovereign funds, and insurers will increase allocations.
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The world’s largest alternative investment manager, Blackstone Group, said that the private credit market offers a significant yield advantage, driving global investors to shift allocations from public to private markets.
On September 19, Michael Zawadzki, Chief Investment Officer of Blackstone Credit and Insurance Group, stated in the latest Bloomberg Intelligence Credit Edge podcast that private credit provides a yield premium of 150-200 basis points over high-yield and investment-grade bonds. Corporate bond spreads have narrowed to their lowest levels since the late 1990s, offering a distinct relative value advantage for private markets.
Zawadzki pointed out that Asian insurance companies allocate only 5% of their balance sheets to private credit, whereas U.S. insurance companies allocate 35%-40%, indicating huge growth potential. Blackstone predicts that the private credit market will grow from its current size of about $2 trillion to $30 trillion.
Surging demand for artificial intelligence infrastructure has become an important driver for the growth of private credit. According to JPMorgan estimates, the construction of U.S. data centers alone will require about $150 billion in permanent financing in 2026-2027, creating huge opportunities for private lenders.
Yield advantages drive capital inflows into private markets
As the Federal Reserve’s rate cuts spur growing demand for yield, the extra yield of investment-grade corporate bonds over government bonds has fallen to the lowest level since the late 1990s, while insufficient supply of bonds and loans further exacerbates the narrowing of spreads.
In this context, the risk premium for both high-yield and investment-grade debt has sharply compressed, causing investors to worry about “insufficient returns.” By contrast, private credit demonstrates a significant yield advantage.
Zawadzki said that private credit yields are 150-200 basis points higher than those of high-yield and investment-grade bonds, providing global clients with very attractive investment opportunities.
Despite lower liquidity, most private credit assets are hold-to-maturity and backed by real collateral. In the current market environment, their risk-reward profile is considered more attractive.
Blackstone expects that the next wave of incremental capital 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 investors have stable liabilities and a natural demand for high-yield, low-volatility private credit assets.
Zawadzki pointed out that U.S. insurance companies have allocated 35%-40% of their balance sheets to private credit, while Asian insurers are currently only at about 5%, showing substantial room for growth. “These are two markets that are not yet 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 market size likely to swell from the current $2 trillion to $30 trillion. This will mainly be driven by huge financing needs for hard assets such as data centers, real estate, and power infrastructure.
Zawadzki said: “We are at an early stage, especially in the fields of investment-grade private credit and asset-based financing, which are growing rapidly and have the greatest concentration of capital demand.”
He specifically mentioned that AI infrastructure is a key factor driving this wave.
Meta Platforms recently selected Pacific Investment Management Company and Blue Owl Capital to lead a $29 billion data center expansion financing, demonstrating the immense funding needs in this field.
According to JPMorgan estimates, U.S. data center construction alone will require about $150 billion in permanent financing in 2026-2027.
Zawadzki said Blackstone plans to be “extremely active” in data center financing. Its portfolio companies QTS Realty Trust and Australia’s AirTrunk are both leading global data center operators, providing market-leading informational advantages.
The revival of M&A activity also creates opportunities for private lenders. “I think you are at a real inflection point,” Zawadzki predicts that deal flow in the fourth quarter will be very active.
The report also pointed out that although the private credit market is booming, some market participants still question its sustainability. DoubleLine Capital CEO Jeffrey Gundlach has previously warned that there are signs of “over-investment” in the field, and a weakening economy could trigger passive selling risks.
Zawadzki does not agree. He said that among Blackstone’s 2,000 non-investment-grade borrowers, the overall default rate over the past 12 months was below 0.5%. “When you look deeply at the fundamentals of the underlying businesses, most companies are still performing strongly.”
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