Blackstone Inc. president Jon Gray told analysts last month that private credit is having a “golden moment” as fund managers take advantage of tighter credit after recent banking turmoil. Left unsaid was that a big push in Europe is proving an exception.
Almost six months after starting a fund targeting the region’s wealthy, the firm’s figures show it’s amassed €240 million ($261 million) for the product — through investor commitments and fund leverage — which is designed to provide alternative financing for private equity buyout deals. It’s a paltry amount compared with the $12 billion raised for an equivalent U.S. fund, dubbed BCRED, at the half-year point.
Blackstone is attempting to unlock an estimated $50 trillion cash pile held by Europe’s affluent, a huge potential source of fees and growth for the private lending industry.
Competitors with plans for similar funds are watching to see if the firm can crack a patchwork of European investors that typically prefer conservative investments such as insurance products and real estate.
It’s been a sluggish start for the world’s biggest alternative asset manager, which was one of the main beneficiaries of the cheap-money era when investors desperate for yield allocated more capital to everything from credit to real estate.
In recent years, the investment giant has found wealthy mom and pop investors a lucrative source of growth, but volatile capital markets have fueled concerns that these clients are more likely to jump ship when markets are roiled.
Blackstone last year limited redemptions in one of those funds, which invests in real estate, after Asian investors moved to pull money, a decision that shocked financial markets. Withdrawal applications hit the 5 percent limit for BCRED in the fourth quarter. The firm paid out on those requests and net inflows remained positive.
BCRED, which now manages $48 billion, is up 6.2 percent in the past year. BREIT, Blackstone’s real estate trust, has $124 billion and returned 1.7 percent.
The lackluster reception to the European fund, known as ECRED, hasn’t been for lack of trying. Blackstone hired people in key locations such as Paris, Frankfurt and Zurich to help with its rollout targeting the likes of doctors and engineers, according to people with knowledge of the matter.
“We always expected Europe to take time,” Dwight Scott, head of credit at the firm, said in an interview. “Europe is a more complex market than the US, with many countries, jurisdictions, and languages.”
So far, ECRED is only available in Luxembourg, U.K. and Switzerland, as well as to Asia-based investors. Blackstone is preparing to fully launch in France and Italy shortly, according to people with knowledge of the matter. Investor commitments to date, excluding leverage, have only reached €115 million (about $124 million).
Blackstone initially marketed the fund with Julius Baer Group Ltd., the people said. An exclusivity period recently ended and it’s now setting up new partnerships with local distributors as well as global banks, a separate group of people said. Julius Baer declined to comment.
Risk Averse
One of the challenges is that European investors tend to be more risk-averse than those in the U.S. Many prefer to keep most of their money in cash, according to a study by Morningstar Inc. The gloomy economic picture last year could have compounded that conservative mindset. And with inflation, cash is finally providing some returns.
“The investing environment has fundamentally changed,” said David Horsburgh, head of client solutions at RBC BlueBay Asset Management. “The initial push for some of these private markets strategies was providing people with investment options, but that requirement is less strong now” that bond yields have risen, he said.
Others question whether an investment vehicle with limited liquidity is appropriate for non-professional, albeit wealthy, investors. Redemptions at ECRED are allowed only quarterly and to a maximum of 5 percent of net asset value. Most of the money is invested in illiquid private offerings of leveraged loans.
“I get very nervous when these illiquid, high-risk funds begin to target unsophisticated investors,” said Claire Madden, managing partner at Connection Capital in London. “Individuals can’t be viewed as institutions. Things happen. Life is not always fine and they may need access to their cash.”
Retail and wealthy investors have long been able to get access to various credit markets in the U.S., and Blackstone helped transform the direct lending market with BCRED. In Europe, it hopes that teaching how they operate will help interest to pick up there, and understands the need to build infrastructure over the long term.
“We’re seeing solid demand for private credit in Europe given its defensive, floating-rate, senior secured nature — but it’s a much longer process to roll out,” said Paulo Eapen, head of European credit at Blackstone. “We launched in an initial smaller set of countries and are about to take our next expansion step soon.”
The minimum investment is between €25,000 (approximately $27,000) and €250,000 (about $270,000), depending on the country. Investors pay a management fee of 1.25 percent per annum of the net asset value as well as performance fees. Blackstone already has a base of knowledgeable investors, given 10 percent of BCRED was raised from accounts in the U.K. and Switzerland, people with knowledge of the matter said.
Blackstone hopes to gain an advantage by being the first global manager to push into this strategy. Other private equity firms are paying close attention to see where the fund succeeds and fails, according to people with knowledge of the matter who aren’t authorized to speak publicly. Apollo Global Management, Ares Management Corp. and Goldman Sachs Group are among firms prepping to launch a similar fund. Spokespeople for the three companies declined to comment.
“It’s yet to be established how much Europe’s wealthy will be drawn into private markets,” said Dean Frankle, who’s responsible for Boston Consulting Group’s asset and wealth management divisions in western Europe. “But it’s likely that the biggest and best brand names will be most successful.”
