Overview of Blackstone's Michael Zawadzki on How Private Credit Got so Big
This Odd Lots episode features Michael Zawadski (Z), Global Chief Investment Officer for Blackstone Credit & Insurance. Z explains why private credit has grown into a dominant part of credit markets, how it differs from public credit, where the biggest opportunities now sit (including AI-related infrastructure), how Blackstone sources and manages risk at scale, and what investors — especially insurers — are getting from private credit today.
Key takeaways
- Private credit’s growth is structural, not just cyclical: it removes intermediaries (a “farm-to-table” model), delivering faster, more customized financing to borrowers and higher net returns to investors.
- Scale is the enabler: large pools of capital allow billion‑plus financings that were rare historically; this enabled private credit to expand into new, bigger markets (investment‑grade private credit, asset-backed finance, digital infrastructure).
- Private credit typically offers durable excess spread vs. comparable liquid markets (Z cites ~150–250 bps in many areas), making it attractive to long-duration investors such as insurers.
- Documentation and covenant protections in private credit are typically stronger than in public credit, reducing certain public‑market behaviors (e.g., collateral stripping via liability management).
- The fastest growing opportunity Z sees at Blackstone is private investment‑grade credit — long-duration, contractual cash flows tied to real assets (digital infra, power, transport/logistics, mortgages, equipment finance).
- AI-related financing (data centers, chips, power) is a major demand driver. Lenders prefer contractual, “taker-pay” or triple‑net structures with high-quality counterparties (hyperscalers) and avoid residual‑value risk.
- Expect more dispersion across managers going forward: top-quartile managers should outperform, weaker managers may see higher losses. Default/loss experience (not just headline defaults) matters.
- Blackstone organizes credit horizontally (CIO office ~120+ people) to centralize standards, portfolio monitoring and origination themes across dozens of credit strategies.
- Insurers are a major and natural source of private credit capital because the asset profile fits long, contractual liabilities; Blackstone acts as third‑party manager (open architecture), not a captive insurer.
Topics discussed
- Why private credit has grown (scale, removal of intermediaries, customization)
- Expansion beyond middle‑market direct lending into private investment grade and real assets
- AI/data center financing: taker‑pay contracts, energy/power needs, and underwriting guardrails
- Spreads and relative value vs. public credit
- Competition vs. banks (and partnership dynamics), effects of leveraged lending guideline changes
- Documentation strength in private vs. public credit; liability management as a public-market phenomenon
- Portfolio construction for large investors (insurers, institutions): yield, diversification, multi‑asset credit
- Internal operations at scale: centralized CIO office, unified investment committee, data systems
- Use of generative AI internally (efficiency tools, memos, models) and hiring priorities for the future
Notable quotes and analogies
- Private credit = “farm to table” (cuts out the middlemen; direct lender–borrower relationship).
- Amazon analogy: “You brought the consumer directly to the manufacturer” — private credit brought investor capital directly to borrowers.
- On underwriting AI infra: “I don't want to take residual value risk … I don’t care what that data center is worth in year 25” — preference for contractual cash flows and creditworthy counterparties.
- On industry performance: private credit has outperformed liquid credit over long horizons and realized losses industry‑wide have been low historically (Z cites ~1% over 20 years).
Data & figures mentioned (approximate / context)
- Blackstone Credit assets: “over $500 billion” (Z reference).
- Large private deals: historically few billion‑plus private credit financings before 2021; since 2021 there have been 100+ large deals (billion‑plus) — Blackstone has executed many of them.
- Excess spread examples: Z cites 150–200 bps (and in some IG cases ~250 bps) versus comparable rated public credit; public IG spreads referenced near ~80 bps in one example.
- Morgan Stanley estimate referenced: ~$800 billion of private credit potentially needed for digital infrastructure build-out over 5 years.
- Historical realized losses for private credit industry: Z references ~1% over 20 years (industry figure cited by guest).
- Default / workout notes: private credit default rates reported low (guest says below ~2%), but hosts noted higher numbers when adding liability‑management events (up to ~5% in some tallies).
What to watch / investor implications
- Spread differential vs. liquid markets: if liquid spreads tighten materially, private spreads may compress; but long-term excess spread is a core thesis.
- Documentation quality and covenant protection: continued investor focus on contract strength to avoid public‑market style collateral stripping/liability management.
- AI and digital infra financing pipeline: scale of capital needs, structure (taker‑pay / triple‑net), and who assumes residual value risk.
- Manager dispersion: be selective — track underwriting standards, workout capability, and cross‑platform resources (operating teams).
- Insurer allocations: growth of insurer capital into private credit globally (US → Europe/Asia) will affect supply-demand dynamics.
- Regulatory / bank dynamics: withdrawal/changes to leveraged lending guidance may alter bank/private credit interactions, but Z expects more bank‑private lender partnerships, not pure displacement.
- Use of AI in investment operations: adoption of generative tools for efficiency, analysis and portfolio monitoring — but humans remain central to decisions.
Guest background (concise)
Michael Zawadski (Z) — Global CIO, Blackstone Credit & Insurance. Longtime head of Blackstone’s credit franchise; led the firm’s scaling of private credit into its largest business by assets. Oversees centralized investment governance for a wide range of credit strategies and client relationships, including many insurer partnerships.
Bottom line
Z argues private credit’s growth is structural — driven by scale, customization and durable relative value — not merely a cyclical push. He sees large secular opportunities (investment‑grade private credit, digital infrastructure, asset‑backed finance) powered by insurer demand and long-term contracts anchored to high‑quality counterparties. That said, investors should expect more dispersion across managers, keep an eye on documentation quality, and favor lenders that combine origination scale with rigorous underwriting and active portfolio management.