Strategically Speaking: BlackRock Credit
• BlackRock is adding to its global private debt capabilities
For James Keenan, co-head of credit for BlackRock, credit investing is a lens that offers a comprehensive all-round perspective on a business - from macro drivers to equity fundamentals “understanding the management team, the competitor landscape, the cash flows, the product and really what the value of any one business is, and where it’s derived from”. It is something that has enthused him for the last two decades.
BlackRock’s credit group encompasses leveraged finance – high yield, loans and CLOs; hedge fund and liquid alternatives; private credit, opportunistic, direct lending and speciality finance; and multi-strategy credit. Investment grade and iShares activities are separate.
The group sits within BlackRock Alternative Investors, which is chaired by active equities head Mark Wiseman, and which includes real assets; hedge funds of funds; private equity funds of funds; long-term private capital; and alternative solutions, which combines the previous four.
Overall $117bn (€103bn) were managed in alternatives, across retail and institutional businesses as of end-September this year, although only private credit is included in this figure. According to CEO Larry Fink, in BlackRock’s third-quarter earnings call, the focus is on “scaled asset-raising and sourcing”.
Keenan comments: “We believe that clients are going to continue to grow their allocation and alternative strategies, which will be no longer alternative, and will be more mainstream, but all the of the different strategies that exist in there.”
Changes in market structure, leading to greater private market opportunities overall, allow investors to lend and diversify across a greater range of credit exposures.
This year, Keenan’s group has raised nearly £2bn (€2.3bn) in a European middle market lending strategy, and around $700m in a senior middle market strategy focused on US senior loans and direct lending.
And as of August, BlackRock acquired Los Angeles-based value-orientated mid-market lending specialist Tennenbaum Capital, which had raised $2.2bn for a senior direct lending strategy that closed in February. Tennenbaum brings a deeper and broader underwriting process in US mid-market direct lending and special situations. Keenan comments: “What we’ve found is a team that is very complementary to the teams and focus that we’ve had within our own business.”
In Europe, Stephan Caron’s European middle-market private-debt strategy focuses on the UK and continental Europe, and represents BlackRock’s first foray in this area. Caron joined BlackRock in 2014 from GE Capital Bank, where he was chief commercial officer.
BlackRock has also recently had a second close for its Global Credit Opportunities strategy, focused on intermediate loans to companies “with a level of complexity” – perhaps late-stage development or missed earnings at a critical point – “where companies that are willing to pay a high rate of return in order to get a shorter duration type return”, as Keenan explains. This second raise totalled about $1.5bn.
And an Asian private credit vehicle has raised about $300m, focused on direct lending in countries including India, Indonesia, Malaysia and China, mainly offshore. Keenan’s group has 20 people based in Singapore, with a presence in Shanghai, Mumbai and Gurgaon, close to Delhi.
This local knowledge is also helpful when building client portfolios: “We’ve been able to leverage off of the resources that we’ve had at the local standpoint, to build out our own infrastructure, to build different relationships, and have a presence on the ground with a brand that is helpful as we go to market,” Keenan says.
Banks are still being disintermediated in lending, but Keenan sees a competitive market, with benefits for the lender. “If you look at direct lending today, certainly senior secured, there are some very good companies where you can lend and get an information edge by understanding them and being closer to them.
Few investment managers can boast truly global private credit capabilities, but BlackRock would say it is among them. As it builds out its global private credit platform it faces the challenge of marrying the very granular local knowledge needed to assess individual opportunities, with the global capabilities and perspectives needed to marry opportunities together in client portfolios.
Keenan compares private credit with private equity in terms of the risk premium that investors can achieve above public market investments, with spreads or earnings multiples fluctuating through time based on the economic climate and underlying corporate risk profiles and drivers.
For Keenan, from a risk perspective, a global view is essential when sourcing assets or underwriting credit and credit risk, “to understand what’s going on in the global economy, understand what’s going on in the global supply chain or demand chain”.
Understanding fundamentals by sector and by region leads to a more granular perspective on individual companies and deals, right down to the micro diligence of each one.
Keenan outlines: “There’s going to be a view that is going to go from a global, to a regional, to an industry picture, to a competitor landscape, to understanding the edge that any one company has. And their ability to sustain their business model, their cash flows and ultimately from a debt perspective, be able to pay that back.
“That goes into our thesis of, how would we lend to them? Would we do it in a private market? What are the terms of liquidity? Are we willing to take 7-10 year risk with that business model? Or would we prefer something that is going to incentivise that company to pay us back pretty quickly, because we have high conviction on the next 18-24 months, but that tails off.”
The long-term asset allocation case for credit continues to make itself felt for clients faced with a double squeeze between volatile equity markets and the need to shorten duration and manage interest rate risk. Clients, says Keenan, are seeking different alpha streams and diversification across markets.
Keenan presses his case: “Certainly we’re at a period of time where, I would say, risks are fairly balanced with regard to inflationary risks, certainly in the United States, coupled with a very mature economic cycle post the financial crisis where spreads, and multiples are generally at their highest.”