Private credit explained: what matters beyond the noise?

Private credit has rapidly evolved from a niche institutional strategy into one of the fastest-growing areas of global finance. As the asset class has expanded, so too has the volume of commentary surrounding it, with the latest headlines questioning everything from liquidity and defaults through to valuations and systemic risk.

In a recent webinar, Jon Gray - President & COO of Blackstone, and Michael Zawadzki - Global CIO of Blackstone Credit & Insurance, addressed many of the most common misconceptions about private credit and outline why they believe the long-term fundamentals of the asset class remain compelling.

The discussion explored the role of private credit within portfolios, the importance of manager selection, the impact of AI and economic uncertainty on borrowers, and why they believe institutional investors continue increasing allocations despite ongoing market volatility.

The economic backdrop may be stronger than it appears

While geopolitical tensions and market volatility continue to dominate headlines, Gray argued that the underlying economy remains more resilient than many investors appreciate.

“We probably feel a little bit better, maybe materially better than the headlines,” Gray said.

“If you went back over the last six years, this is the fifth time where we’ve had a pretty significant crisis in the first four months of the year. In retrospect, you were best off being patient and being long term in nature, which is what we try to do.”

According to Gray, Blackstone’s own portfolio data across hundreds of companies and thousands of real estate assets continues to paint a constructive picture. “Revenue growth at our companies continues to be strong,” he said.

“There’s a little bit of weakness in middle and lower-end consumers. But when we look at the overall picture, that feels good,” said Gray.

At the same time, he highlighted the scale of investment currently flowing into AI infrastructure, including data centres, semiconductors, and energy systems, as a potentially powerful driver of future economic growth.

“When you think about data centres and chips and energy, which is providing an enormous catalyst for the economy in the near term and over the next few years, that should lead to this long-term productivity boom,” Gray said.

Understanding the role of private credit

The growth of the asset class is really about simple innovation, he argued, connecting investors directly with borrowers while reducing layers of intermediation traditionally embedded within public lending markets.

“What we’re doing is taking either institutional capital or individual investor capital and we’re bringing it right up to the borrowers,” Gray said.

“In that process, we’re lowering a bunch of costs, origination, securitisation, financing costs, and allowing the investor to get a higher return.”

The trade-off is less liquidity – relative to traditional public fixed income markets – for potentially higher returns.

Zawadzki argued that this additional spread, often referred to as the “illiquidity premium”, has historically been a meaningful contributor to performance.

“It’s consistently generated about 200 basis points of excess income above public credit over time,” he said.

“Over the last decade, what that means is investors earned one and a half times the income investing in private credit versus liquid credit.”

Myth vs fact: Separating perception from reality

Myth: The market is structurally fragile

Gray pushed back strongly against comparisons between today’s private credit market and the conditions that preceded the Global Financial Crisis, arguing the two environments are materially different.

“When you think about the financial crisis, the investment banks were 25 to 40 times levered. Business development companies (BDCs) - the structure through which most individual investors access private credit - typically operate with less than 1x leverage.” he said.

Gray also noted that many private credit vehicles are funded with longer-duration liabilities, eliminating the asset-liability mismatches that destabilised banks during the GFC.

Myth: Rising defaults will overwhelm portfolios

Both Gray and Zawadzki acknowledged defaults are likely to increase from historically low levels, but argued that defaults are a normal part of non-investment grade lending, and where there are stressed assets, they are marked accordingly.

“If you look in the leveraged loan and high yield markets, the average default rate is 3%. That’s part of what’s priced into these products, is that there will be some level of defaults,” Gray said.

Zawadzki added that even under severe downside scenarios, income generated by private credit portfolios combined with senior secured positioning and low leverage has historically served as a substantial buffer against losses.

Myth: The market lacks transparency

Valuation transparency remains another frequent criticism of the asset class, though Gray argued private credit portfolios can in some respects offer greater visibility than traditional financial institutions.

“Every quarter we put every loan out there publicly,” Gray said.

“You can look at it, how much we invested, where we carry that loan. That’s more transparent. There’s no financial institution that does that.”

Gray also emphasised the importance of third-party oversight and rigorous valuation processes.

Institutional demand remains

While semi-liquid products have faced heightened scrutiny and redemption headlines, Zawadzki argued institutional investors continue increasing allocations. “What people might not fully appreciate is that private credit is still overwhelmingly institutionally owned,” he said.

According to Zawadzki, about 80% of the investor base in private credit today is backed by institutions, with many large investors continuing to view private credit as an increasingly important source of income, diversification, and downside protection within portfolios.

Income, diversification, and downside protection

According to Zawadzki, private credit’s role within portfolios should be viewed through the lens of what traditional fixed income allocations are designed to achieve.

“If you think about the standard 60/40 model portfolio, the 40% allocated to fixed income or credit, it’s really designed to deliver four important attributes,” he said.

“Income, consistency, diversification, and downside protection.”

He argued that private credit has historically compared favourably against public credit markets across each of those dimensions, adding that “Private credit has actually outperformed liquid credit on each of these metrics,” Zawadzki said.

“It’s why we sometimes call it the better 40.”

Diversification has also become increasingly important as the opportunity set within private credit expands beyond traditional sponsor-backed lending into areas tied to the broader real economy.

“Think about the rising capital needs in hard asset areas like digital infrastructure to fund AI growth,” Zawadzki said. “Energy and power. All of these are high conviction themes for us here at Blackstone.”

Importantly, both executives stressed the defensive characteristics of senior secured lending structures.

“Senior secured positioning with low leverage combined with current income, that’s historically been a great source of downside protection,” Zawadzki said.

He noted that during periods of market stress, including 2008, 2018, and 2022, private credit historically demonstrated more resilience than broader equity markets.

Why manager selection matters more than ever

For Zawadzki, one of the most important themes moving forward is dispersion within the private credit market itself.

“Not all managers in this space are created equal,” he said, adding that “How you underwrite, where you sit in the capital structure, how you actively manage assets. Those things ultimately drive outcomes.”

He argued that manager capabilities, portfolio construction discipline, and active asset management become increasingly important during periods of uncertainty.

“We’ve built over time a 125-person office of the CIO that I oversee,” Zawadzki said. “It explicitly is focused on portfolio management, risk mitigation.”

For Zawadzki, the next phase of the market is likely to be defined less by broad asset class tailwinds and more by manager execution, underwriting discipline, and portfolio construction.

For Blackstone, the long-term focus remains centred on consistency, risk management, and delivering outcomes through cycles.

Zawadzki concluded with Blackstone’s number one priority—delivering for investors. “Focus on the fundamentals, be resilient through volatility, manage bumps along the way and ultimately achieve outperformance through cycles.”

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The information in this material is general information only and is intended solely for licensed financial advisers or authorised representatives of licensed financial advisers and wholesale client investors. It is not intended to constitute financial product advice or an offer, invitation, solicitation or recommendation to invest. This information must not be distributed, delivered, disclosed or otherwise disseminated to any investor. It has been prepared without taking into account any person’s investment objectives, financial situation or needs. Investors should consider whether the information is suitable to their circumstances.