Good afternoon, everybody, and welcome to the Raymond James Institutional Investor Conference, the 46th Iteration. Next up, we have Blackstone Secured Lending and the Blackstone private Credit Platform as a whole. Also, if anybody's got any questions about that, we have Justin Farshidi who's going to start off, and then Katie Rubenstein, who's the COO. Thank you.
Thank you, Robert, and thank you, everyone, for joining us today. I'm Justin Farshidi, principal on the team, alongside Kate Rubenstein, the COO of BXSL. We'll give a very quick introduction on how we're looking at the market as a whole, our macro views, and then we'll go into BXSL and specifics on performance and how we've performed relative to our peers. So with that, I'll hand it off to Kate Rubenstein.
Thank you, Justin. Hi, everyone. Thank you for coming. I'm never sure when I see a room with this many seats whether it's going to be five people sprinkled throughout, so at least it feels like it's while empty here, you guys are all around, so appreciate your time. So just high level with a market overview, very broad trends in private credit. I'm sure you guys have all heard these throughout the day and throughout the past number of quarters. Private credit, a very attractive space and an evolving space. So we've been getting private equity-like returns with debt-like instruments. That is an anomaly in the market. It's not meant to last forever, but there have been some supply-demand factors that have allowed that to be the case. But for the moment, we still have quite high all-in yield. There's been a secular shift towards private credit.
So really what happened as funds started growing their AUM and had the ability to compete with the broadly syndicated loan market, private credit became a more prominent tool for private equity firms who were increasing their ability to deploy in large size. Throughout the past maybe five, 10 years, those private equity firms have grown. They've been writing larger checks. Historically, they'd only been able to use the broadly syndicated loan market. Now private credit is an option, but even they have been writing larger and larger checks. So there's this sort of symbiotic relationship in the private markets as private equity grows and as private credit has been growing. They have been growing in tandem. There's a strategic nature of private credit as a tool because there are more flexible components that can be built into the structure than you can get in the public market.
There's just this long-term secular shift towards private credit. The definition of private credit has been expanding over the past six months or so. Historically, the definition was really focused on direct lending, but that aperture has been opening quite a bit to involve real assets and contractual income flows. That is not particularly relevant to BXSL, but it is a dynamic in the private credit market at large. We'd say that companies and consumers have actually continued to be quite healthy. Even as we hear a lot of noise in the market, we actually see that companies have been able to sort of sustain their health. As I mentioned before, we're at quite high levels of income on the private credit spectrum, and this has actually been throughout rate environments.
So when base rates were near zero or when they've been elevated, when they've gone back down, the average has been about 11%. What you've seen in the past couple of years is it's been higher. It's been elevating that. But consistently over time, that 11% average is real. So it's a great asset class when you think about current income and where people might put their dollars in order to make sure that they can have a sustainable coupon that they can clip. Now, rates are at an elevated rate still. They may come down, but they're coming off of a high mark in recent history anyway, and we expect them to stay elevated even if not at their peak. Now, that said, even if they were to come down more, there is a virtuous cycle that happens when rates do come down.
So for starters, the asset level yields come down, okay, but so does the cost of capital. And when the asset levels come down, the private equity firms that are buying companies feel that it's a healthier market environment, so they may deploy more money, and you can then grow into your leverage. So that is another return driver. And then also the companies themselves no longer have quite the same elevated total debt service, and so they become less stressed as well. So all of that comes together. Increasing deployment, improving credit fundamentals offset the lower rates, and then the portfolio continues to be resilient.
Here, what we would say is that even though M&A activity has gotten off to a slow start this year, it is coming into a time when there are a number of factors that are driving that we believe will drive a very robust M&A cycle. So first of all, you had a really successful and really prolific fundraising cycle with private equity firms in and around that very active 2021 M&A environment. They deployed quite a bit of money and then needed to start raising their next fund. They were very excited about the market, and they raised their next larger fund. So now all of a sudden, there's $5 trillion of dry powder across the private equity space that will need to be deployed. And people have been saying this for a while, but the reality is there is a finite investment period.
Private equity firms do need to put this money to work at some point. While you can kick the can down the road for some period of time, there is an end point to how far you can go with that. There will need to be deployment. We also have a regulatory environment that we understand will be more favorable to M&A activity. There is a moment right now where everyone is, I believe, in just a little bit of shock at the sheer volume of things that's happening. I think people are standing off on the sidelines for a little bit just to digest what's happening.
But if you have rates that are coming down, or even if they're elevated, they're no longer at the peak, you have a regulatorily favorable environment coming down the peak, coming down the pike, and you have these dynamics of private equity firms that absolutely must put their dollars to work, we anticipate a very healthy M&A environment in 2025. I mentioned before that the definition of private credit was expanding. I have nothing to add to that on this slide, so moving right along. Here are some examples of how that's playing out in the market. Really only two of these are relevant to BXSL. However, they're interesting. We're all here to learn something. So in the energy transition space, there's $100 trillion of capital needed through 2050. So there is no banking system. There is no current private market system that can fund that.
That is something that there is a supply-demand imbalance, and we anticipate a lot of fundraising in and around that over the coming decades to support that transition. In digital infrastructure, I'm sure many of you have heard that Blackstone were thematic investors, and digital infrastructure is a very important component of that. 17 times increase in demand for data centers since 2019. Blackstone is the largest owner of data centers in the world. And in addition to that, we are very big lenders into the data center space. Power and utility, 16 times increase in 2030 load forecasts. Well, that is very much tied to the digital infrastructure. And then very relevant to BXSL, we have that dry powder coming down the pike from the private equity firms. Interesting dynamics in private credit. We hear sometimes questions around, Is it a bubble? Should we be worried?
Are you raising too much money? How should we just think about this entire space? Well, a couple of things to note is that in general, private credit has become a healthier ecosystem over the past however many decades. The average loan-to-value is in the 40s, which means that you have 50 %- 60% equity cushion underneath you. And now, actually, because of the higher rates and the higher cost of capital overall, private equity firms don't want that much money to go out the door in debt service. So the loan-to-value has actually been coming down because it's just too expensive. So you have relatively healthier companies with lower loan-to-value. So the overall portfolio composition is even healthier.
If you think about what would indicate there's a bubble, you would see more dangerous underwriting standards, but we actually have seen that the underwriting standards have held and larger, healthier companies are making use of private credit. It is a strategically advantageous tool, and I think that the private credit managers have gotten really sophisticated about how to customize the structures in order to help people continue to enjoy using the strategic capital that it is rather than going to the public markets even as they open back up. Then if you just look at the spread premium to the liquid loan markets, private credit has been able to command a premium over the liquid loan markets, and that is largely, again, driven by the strategic nature of the tool.
It can't get too far apart or that strategic premium no longer makes sense to a borrower, and so they are sort of correlated together, but at the moment, there's actually a nice premium. Yep. Yeah, it's the debt relative to the entire enterprise value, so let's say it's a $2 billion loan. You'll have a billion dollar of equity, a billion plus of equity underneath you. Yep, well, for the most part, when we do our loans, we are the capital structure. Thank you for the question. Anyone else? Questions?
Okay, so we talked about the five times dry powder, but what we're also seeing is the secular shift that I mentioned over to Private Credit, and now just to put some numbers to that, truly people really do value the structure.
And with that, if there are no other questions on this section, I'll hand it over to Justin.
Thanks, Kate. So now that we've shared our market views and our private credit market outlook, how does this all translate to how we as Blackstone, among other managers, are operating in the space? Let's start with the value proposition. Private credit is what we like to call a farm-to-table model. So converse to public markets, where, as you can see on the page, it's a little more complex at times, like a food supply chain. In private markets, we take the individual investor and bring them directly to the borrower, allowing investors to potentially capture more direct value.
And on top of that, originating assets directly as opposed to buying them off a desk can, one, help improve returns, two, mitigate risk through stronger collateral protections and documentation, and three, potentially create a better structure for the buyer along with flexibility for the borrowers. So as private credit investors, we aim to focus our direct lending transactions with a few key characteristics: scale, sector, and seniority. We see in the data, if you start from the left of the page, that companies that do over $50 million in EBITDA tend to grow more quickly than those in the sub-$50 million EBITDA range. We focus our efforts in sectors that have fewer defaults historically. So for us, these include software, professional services, and parts of healthcare or what we view as defensive sectors for our investors.
Finally, on the right-hand side of the page, nearly all our direct lending exposure is in first-lien debt, where we're on top of the capital stack, as Kate described, and where we layer in additional key terms to our credit agreements. Whether it's protections against collateral release or EBITDA add-backs, we aim to prepare ourselves for any scenario through our docs. Now to focus on our publicly traded BDC, BXSL, which we've remained true to our disciplined investing strategy since inception. In fact, when we launched the fund in 2018, we wanted to make sure we had lower expenses and lower fees compared to those of our traded peers to ensure 100% of our economics would be passed down to shareholders. In other words, we don't want to reach for return through what we believe might be riskier investments.
And on top of that, we want to build a defensive and protective portfolio. So fast forward to present time, which you can see on the page, as of Q4 2024, 98% of BXSL investments are in first-lien senior secured loans, and 99% of those loans are to companies owned by financial sponsors who add an equity cushion, as you can see through the sub-50% LTV. We have over $13 billion in investments through 276 borrowers with non-accruals at 30 basis points, which highlights our credit quality. But how did we build this portfolio? Well, the average EBITDA of our borrowers is nearly $200 million. And as mentioned, we found that larger companies tend to grow more quickly. But we found that when you actually make the right investment decisions, various sized companies that we believe are better will in turn grow to be bigger.
So it's important to note, we look for attractive risk-adjusted returns across the size spectrum, broadly reaching across middle market to large-cap space. But to put some numbers to it, for our new funded portfolio companies, in Q2, the weighted average EBITDA was $119 million. In Q3, half of those funded portfolio companies were to sub-$100 million EBITDA companies. And in Q4, the median of that same subset was $138 million. So again, regardless of size, we're simply looking for attractive risk-adjusted returns, which plays into our credit performance, where we focus on interest coverage. In Q4, the average LTM ICR for BXSL portfolio companies was 1.7 x, and that's compared to 1.5 x to the private credit market. The share of the portfolio below one times ICR, excluding ARR loans, was 9% versus 15% for the market.
And then finally, on the right-hand side of the page, for our nonaccruals, we're at 30 basis points at cost, which is well below our traded BDC peers at 260 basis points from the third quarter. And all of these are related. So away from our assets, we've worked to build an attractive and diverse liability profile, which includes 39% of unsecured bonds with a fixed coupon of under 3%, something we view as a key advantage, especially in an elevated rate environment. We have no maturities till 2026, and our 5.2% cost of debt, that compares to our 10.4% yield on investments. And to conclude on this, we have three IG ratings. We earned a full notch upgrade from both Moody's and Fitch in 2024, just another testament to our disciplined approach, but this time related to our conservative liability structure.
Finally, if you're raising capital in any form, we believe it's important to be able to deploy those funds. Just in Q4, we saw the most active quarter since 2021 on a deployment basis, funding approximately $1.4 billion and committing another $1.2 billion. To give you another sense of our activity, the $1.16 billion of net funded activity on the right-hand side of the page, that was up 230% year- over- year. A lot of this is because of our involvement in the private credit space. In 2024, BXSL led several of the largest and most consequential private credit deals, including Park Place, Squarespace, Fidelis, JSSI, and Dropbox. Again, reflecting our focus on higher quality businesses. With potential competition and optionality for borrowers, we've also found ways to earn our role as a lender of choice through our value creation program.
So with that, I'll turn it back over to Kate.
So the value creation program, it's gone through many names, but the first name it ever had was GSO Advantage back in the day, and then it became Blackstone Credit Value Creation, and now it's Blackstone Credit and Insurance Value Creation. And all of the things are just to describe the fact that we bring the scale and resources of Blackstone collectively across the entire ecosystem of Blackstone portfolio companies and private equity, real estate, and credit, and every other pocket and sub-pocket of the business to the credit portfolio companies. We do not benefit from this personally. From a margin standpoint, all of the value accretes to the private equity firms. So we do this, and I'll get into some details of what this is in a moment.
We do this because we are in an LBO kind of a space, and that is a repeat business model, and so if you're a private equity firm and you've done business with us and we have driven quite a bit of value to your companies, on balance, all else equal, we are a great partner to partner with, and that partnership actually extends to the structuring. It extends to the entire capital experience with us, but it also is part of the portfolio company, so I will give you a couple of examples here, so $5 billion in illustrative value creation here, so we're talking about real scale here. Let's start with optimized costs, so we are, through Blackstone, through our partners, the largest customer of FedEx.
So if you are a middle market company, or even if you're an upper middle market company, and you were dealing with FedEx and your rates were whatever they were, the next day, you're part of the Blackstone program. Your account number doesn't change, but when you type in your thing, all of a sudden, your shipping cost has changed. And so if you are a company that ships quite a bit of stuff, that matters a lot to you. If you are a company that is working with Microsoft on the cloud, well, Microsoft isn't going to cut a deal with you because Microsoft doesn't really cut deals with people. But if you are one of the largest partners, cloud partners to Microsoft, to Azure, then you will be able to make use of a deal.
So we have companies who come in who have really large cloud expenses, and all of a sudden, they come into the Blackstone program, which is really a directly negotiated contract or a direct contract between Microsoft and the company. But because it's part of the Blackstone umbrella, all of a sudden, your cloud costs come down. So these are things that don't require any sort of time on the part of the company and instantly create value that drops to the bottom line. Now, if you think about a cybersecurity event, so Blackstone, we have a pretty big target on our backs for cybersecurity. We have our own cybersecurity team of people who could have gone another way in their lives and made a lot of money for themselves, but chose the higher and better path to be good people and work with Blackstone and protect Blackstone.
This team of people, they are constantly scouring the market for the best products and services for a new technology for Blackstone to make use of. This team also works with the portfolio companies. And one of the things that every portfolio company does as they come into our community is fill out a survey of 32 questions that helps to sort of see where they are in their cybersecurity journey. Two of those questions are, who are your third-party partners? What is your cybersecurity stack? And how happy are you with that? And coming out of that, two things happen. One, we have a sense of the low-cost, no-cost improvements that we can recommend to them. And two, it actually helps inform our underwriting for other cybersecurity deals. So there is interesting information that comes out of that.
Now, if you think about a company who's experiencing a cybersecurity event and minute one, minute two, hour one makes all the difference in how protected their business is and their ability to get back up and running. If you don't have your own robust cybersecurity team, even if you do, you can make use of Blackstone's ecosystem around cybersecurity. So if you're a private equity firm that does not have the robust cybersecurity capabilities that Blackstone has, and one of your portfolio companies has just experienced an incident, and we help to resolve it immediately as painlessly as possible, that bond that comes out of that experience, that partnership, that is something that is incredibly differentiating for Blackstone in the market, and then there's an entire economy. I mentioned the word economy. I used to use the word ecosystem, but ecosystem doesn't do it justice.
There are so many companies in our portfolio, and we don't make anyone do business with anybody else. That's not great. Everyone would check out. No one wants to be forced to do anything. But if you can accelerate the opportunity to earn the right to do business with someone, connect the CEOs together, and then sort of create the opportunity from there, you've just shortened that sales cycle. And if you think about some of the companies we have in our ecosystem and the fact that we're thematic investors, you may have people all the way up and down a value chain in a certain sector, and we can connect all of those dots.
And then people have the opportunity to earn business, but they also have the opportunity to see around the corners and set up an executive advisory panel all within the Blackstone ecosystem to understand how they might improve their business. The power of all of this and making it available to the credit portfolio companies, it just doesn't exist anywhere else. So there are stats on here. It's pretty impressive. And I'd say the one sort of mark of validation is that when we meet with portfolio companies and they've been owned by other private equity firms, and I can't say this about borrowers because we're the only lenders who offer this. So it's not that they've had other lenders in the mix before.
But there is something different about the Blackstone program and the support to help people get the help that they wouldn't necessarily know how to make use of. It is very differentiating. And therefore, the referenceability from the portfolio company management teams when we're looking to make our next loan is also really healthy because that feedback loop to the sponsors is there. So I've spent quite a bit of time on that, but I feel very passionate about it since I spent my first six years at Blackstone working and building this out. So any questions on that? Thank you for indulging me.
No, it's a very important point. And again, to reiterate Kate's point, all of this is free of charge just for being part of the Blackstone portfolio.
So to conclude, here's a quick summary of how BXSL sizes up against our traded BDC peers from the third quarter. And as you can see, we're fairly competitive in very important stats that we pay attention to, including earnings quality, non-accruals, expenses, and fees. So with that, thank you, and we'll open it up for questions, Robert.
Thank you. Do we have any questions?
Yeah, thank you. I'm just trying to figure out what happens in a default scenario. So let's say you make a direct loan to a private equity-owned company, and that company gets in trouble. How do you resolve that? And what happens if that company ultimately defaults on your loan? Just curious what happens then.
That's a really important question because I think the ultimate ability to work through that situation is heavily dependent upon the workout resources and asset management teams that the lender has invested in. And we have a 90-person Chief Investment Office team, a very large portion of which is dedicated to monitoring the portfolio, seeing early indicators, being proactive in conversations with the private equity firms to potentially preempt a bankruptcy filing, and also then to work things out should we end up owning those companies. And that team has been around for quite some time, and they're actually built out really to support some of our other fund strategies that might have higher proclivities to have defaults. But BXSL companies are, of course, if we end up in a situation, those are those same resources that would work on those companies.
Any other questions? I have a quick one.
There's also a breakout session in quarter over five downstairs right after this. BXSL is the little sibling now within the Blackstone BDC complex. The other Blackstone private credit is more than two X the size of any other BDC, public or private. Can you tell us how the existence of the total ecosystem plays into the impact on BXSL?
That is a great question. Thank you. You're looking at a team of people here. It's not just Justin and me, but we also have our colleague Brandon here. The three of us work on both BXSL and BCRED. That's the other fund that Robert was mentioning there. Across the private credit lending ecosystem within our business, there's about $100 billion or so globally.
And the good news is that that supports our origination capability because we can do much larger deals, and those deals get allocated across available pockets of capital, whether it's institutional or retail. And so the scale of BCRED allows BXSL to get an allocation of a large, healthy deal that it itself would not be able to win on its own. So right now, we can write a $4 billion check comfortably without risking any issuer concentration in the various pockets of capital. And BXSL, the size it is, of course, could not do that itself. So it is part of a much larger platform that we make use of.
Okay, thank you. And again, quarter over five downstairs. Thank you.