With us today is Jonathan Bock, Co-CEO of Blackstone Secured Lending, that's ticker BXSL, and also Co-CEO of Blackstone Private Credit Fund, the non-traded BDC or BCRED. Thanks, Jonathan, for joining us.
It's a pleasure to be here, guys. Thank you so much. It's near the end of what was a very, very long day, and so our hope here is not only we could be able to answer your questions, but then also congratulate you on what was a very successful event. Thank you, Derek. It means a lot, and it means a lot to be here.
Okay, thank you. So Jon, you had outlined some growing origination opportunity earlier this year. So how do you see the macro backdrop evolving this year?
Well, look, if you just look at things high level by taking a step back, the broader economy itself is looking pretty good. I mean, it's not only fairly resilient, as you start to see through corporate earnings, that remains strong, consumer spending resilient, rates also coming down, so there's a bit of a tailwind there. But then also just Q3 GDP growth continued to accelerate. And then also, if you look across from some of us that are the more private credit or credit-centric, default rates actually declined in 2025, down roughly 30%. So you're looking across the board at a fairly healthy backdrop. And now what you see in Q4 data, which has come out particularly, is that volumes are starting to pick up. Direct lending activity was really up over 50% quarter-over-quarter.
Then we've mentioned that the deal environment, and this comes from our leadership at Blackstone overall, but the deal environment is achieving escape velocity right after a fairly tough period. There's certainly more to do, and you're going to expect that this year and, of course, the quarters to come.
Okay, thank you for that. Then looking at leverage, last quarter it was in the 11, 12 range, so kind of towards the upper end of the target leverage. But how do you fund new investment opportunities if the capital markets kind of remain challenging and the shares trade below NAV?
So it's a good point. I'd also say we've got a very strong just history of growth. We've got over nine consecutive quarters of $500 million or more just commitments that's continuing to drive. And so then the question really is, where's the money come from? Well, if you start to look, you mentioned our leverage profile. On average, we're about roughly 1.15 x average fund leverage, ending leverage about 1.2 x, with roughly $2.5 billion of liquidity. And so if you start to think of some of the measures of liquidity that we can pull, well, there's certainly a little bit more leverage, too. As the deal environment accelerates, so too does repayments. So you don't ever, one, consider a level of dilutive equity capital raise. That's certainly not in the cards for any strong manager.
But looking for the other pockets of liquidity, whether it's going to be what's coming back at us, additional leverage, or I've seen across the board industry folks consider joint venture solutions or others across the board that can, over time, provide diversification in new areas of investment. We look at all of them, but really it's going to be what's steady and what's remarkably boring. And in that case, it'll be additional leverage growth and then level of repayment activity that we know is coming our way.
Okay, great. And then before we get into the more exciting software discussion, just in general, earnings are kind of close to the dividend. We have the looming rate and spread headwinds. Again, it's early days for BDC reporting season, but we have seen one peer recently reset the dividend about 15% or so. So how should investors think about dividend resets during 2026?
Well, I think an approach to the dividend and the underlying cost of capital can highlight a manager's focus on long-term NAV preservation. Because if a manager is heavily exceeding the dividend is heavily exceeding the earnings power to produce it, either you're having NAV diminution from the fact that your earnings profile is not covering your dividend, so it's coming out of NAV, or worse, one is being forced to stretch to take risk in order to cover that cost of capital, which may in turn lead to a dividend reduction. And so look, we're mindful of all the factors across the board, but we certainly believe that it's important to always ensure that your cost of capital is heavily aligned with your ability to generate attractive investments that preserve NAV and generate an attractive return.
But look, as rates continue to fall, we're seeing look on the dividend, there's a couple items that are now coming back into account. We talked about the benefit of higher leverage, so we talked about that growth. We talked also certainly of normalized repayments as those increased. And so if you're looking at the future and we look across the space, it's always going to be part of the consideration. I think you folks have seen continued earnings stability, and that's important for us. And look, over time, to the extent that we feel the earnings power needs to the dividend needs to reflect the decline in earnings power, we'll always be mindful about a reduction. But right now, the goal is always to ensure that that cost of capital relative to what we're generating today is currently aligned.
Okay, great, wonderful. And then just over the past year, software has been about 20% of direct lending volume, and it represents maybe about 20% or so percent of BDC portfolios, although it's somewhat hard to kind of fine-tune that number because there's no uniform software reporting structure. So in light of the kind of recent news and public commentary about AI disruption risk in software portfolios, what's your view on the sector? And also, does it remain an active place for investment at this point in time?
You know, I'd say that big picture, our consistent focus in the platform is large, well-entrenched businesses, significant sponsor equity. But let's take maybe a step deeper into just software overall. Right now, if you look inside the software exposure, it's approximately $4.5 billion of enterprise value. We also have a 37% loan-to-value at setup. So that's a $3 billion subordinate capital position. It's beneath that of our debt. And so you could see approximately 60 points of enterprise value cushioned beneath us, which means the business could decline materially. And certainly, if you were thinking of the software stocks in terms of their decline that's occurred in the public markets today, if that were applied to those positions, you'd still find us close to a 50% loan-to-value. So there's significant underlying subordination of capital beneath our investment that provides a significant buffer.
But then let's also go beyond that, because not all software is the same, and there's quite a bit of underlying diversification that exists inside that segment. And so with over 12 underlying subsegments, over 100 individual positions across the board, if you think about us more broadly, we aim to be very focused in on the potential disruption risks. But importantly, we invest in understanding what those disruption risks are. So we're very focused as it relates to AI in terms of our underwriting discussions. You also can see that in terms of how we lean into other areas of the firm that also are applying or purchasing or working with other software services providers, largely understanding what we believe is truly mission-critical and what is not.
And then, of course, if you start to see that there's a significant investment in understanding, well, there's significant investment that's also implementing. And so we see this across the board where we have AI integration efforts led by our colleague Rodney Zemmel, came from McKinsey. You have the ability, when you're at a large firm, to take the data insights that we have across our nearly $1.2 trillion cross-asset classes and alternatives, and could put those insights directly to work in both our underwriting and our operating capability. And so I tend to think lots of folks ask, is it overdone? Is it not? I tend to think that irrationality is done in herds. Rationality is done one person or one investment at a time.
If we look at the individual investments specifically, you can see that not only are they well-structured, but many of them, and the vast majority of them, have the potential to benefit, particularly with Blackstone's scale as that invisible hand behind them.
Okay, thank you for that. Just a follow-up on software. Software and AI disruption risk have been kind of in the news for the past two to three years. How should investors think about just earlier vintages of software exposure, just in general for the market? I assume you would always be looking at obsolescence risk kind of prior to AI becoming a thing, but just wanted to get your thoughts on that.
This is where it's hard and difficult to paint it all with one brush because you have effectively three categories. You have those businesses where large language models have the potential to lower industry profitability or have the ability to perhaps conduct an underlying process quicker or more efficiently, which could pressure industry margins. You're familiar with what those are. Then the second is you have an underlying category where if you're investing in agentic opportunities that can then be sold and prepackaged to an existing customer base, there could be a lot of opportunity. Then, of course, the third bucket really is underlying data moat, protection, the ability to, whether it's regulatory or HIPAA-related, protect your underlying data and also protect what we would believe to be effectively software that's designed to serve direct purposes that's very hard to take out and it's deeply embedded.
Many of those traits on that third moat, those were existing in 2021. Oftentimes, they were very part of our centralized theme. Two, even if you have some folks that maybe are in the middle category where an investment is required today, what we're also seeing is that they're taking those incumbent relationships and they're doing great things with them. And so I really would say it's hard to say that anything that was done pre a deeper understanding of where we're headed is going to be headed for an underlying level of difficulty. And really, it's going to be more of a matter of how much has really been invested to understand this problem and, more importantly, position yourself, not only mitigate risk but benefit from opportunity. And this is where Blackstone in specific really starts to shine.
So, just in our credit business alone, there's over 125 individuals in our Office of the CIO. That broader Blackstone operating team, led by Rodney Zemmel, specifically talking about AI at McKinsey, and also John Stecher, our CTO, substantial level of resource. And so again, I'd say it's early. Folks are understanding that disruption can occur, but an investment today, and clearly some firms are more than willing to make that investment, can mitigate risk in the future.
Okay, great, thank you for that. Then maybe circling back to valuation, BDCs have traded off really since the back half of last year into this year, although at least it looks like the last couple of days, we're starting to see a little bit of rationality kind of seep back into the market. But with rates, rates are on decline. Capital deployment may or may not be around kind of depending on portfolio turnover. Is there a road to recovery and positive returns for BDCs in 2026 in your view?
Yes. You know what I would say is having been through so many cycles in the BDC space over a career, you can really understand that it is at a point when the price-to-book values remain depressed. Right now, the median price-to-book value at roughly 0.8, and Derek, you know this, means that in the future, you have an extremely high probability of an attractive positive return. Now, what does that really look like? As you start to get past kind of the headlines, folks recognize that some of the implied losses that might need to be achieved may be excessive to what they've seen historically. But the question really is now is one of catalyst. What causes the catalyst for the stocks to effectively trade back? And that, one, is a function of time and deployment.
But then, two, you also would expect to see a level of rate dynamic change or the market reaction to what some of the cost-to-capital resets that are coming to change as well. And so if you're looking at a deeply discounted space overall with an attractive double-digit yield profile, do I believe there's a certain road to recovery? Absolutely, because you don't see those types of returns relative to history hang around for very long.
Okay, great, thank you. And then just given recent headlines about elevated redemptions on the private BDC level, specifically with one of Blackstone's competitors, how should investors kind of view redemptions in the non-traded space? And do you think it's going to be an indicator for public BDC either selling pressure or just negative sentiment in general?
You know, if I were thinking about non-traded versus traded, you know I would say that they're not only different planets, they're different galaxies. What I've always noticed is that the public BDC space, they tend to trade the asset class incorrectly, meaning that they often overshoot that there's the potential for loss or overshoot when there's a premium. They might tend to get the asset class incorrect, but they often can get manager differentiation right. So what does that mean? Well, you can start to see across the board, there's a cross-section of BDCs that are trading at slightly higher p rice-to-books relative to peers. That's an important data signal. Now, to your question on non-tradeds, I think that if you look at kind of the flow information that was out there, taking the step back and looking the fourth quarter, there was net growth. There was net growth.
Across the space, while redemptions effectively went from approximately $3.5 billion-$8 billion or so, that was still relative to industry inflow as at over $12 billion. I'm talking about $3 billion BDCs or larger. That inflow is extremely important because it does show there is still a very, very high degree of interest in earning excess return relative to one's public benchmarking credit, which is what the non-traded model was designed to do. Now, really, what we're going to focus in on as an industry, it is very important to keep a high degree of liquidity. Across the board, relative to that $8 billion in redemptions, there's approximately $70 billion or so of available, we'll call it available liquidity across both cash, revolving credit lines and broadly syndicated loans.
So I tend to think that it's not only well-positioned, but if you're looking across the space, overall flows themselves, they continue. They might continue at a slightly slower clip, largely due to headlines. But then at the same time, redemptions and more importantly, liquidity are both intact and, in our view, going to be well-managed by the industry as a whole.
Okay. And then, Jon, the BDC market has definitely changed over the last decade plus as more institutional quality managers have entered the sector. And you're probably in a very unique position to answer this question since you were kind of a former sell-side analyst that's now running one of the largest BDC platforms. So are there too many managers chasing too few deals, effectively eroding margins in the space? And then just what's next overall for BDCs?
Well, what's wonderful about Blackstone is that scale. Not only is it representative in some of the topics we talk about, AI or software, but when you think of the team that operates the BDC, so our partners, whether it's our global CIO, Michael Zawadzki, or of course, everybody here knows our colleague and leader of the direct lending franchise, Brad Marshall, there's a substantial level of insight across all areas, whether it's origination, investment, and BDC structure. Yes, kind of a market structure question, Derek. So would it surprise you? So everyone understands that there's going to be newer managers that are effectively entering the space. And the question is, are there now too many chasing too few opportunity? But the vast majority of the capital, certainly that gets raised in this category, is done by a relatively small group of firms.
You can understand that their level of institutional presence, their level of institutional platform investment is significant. So as we look across at some of the closer competitors, I would say that not only is there plenty of deal opportunity for that subset of firms, I would say that the opportunities are right because there's so few underlying individuals and underlying managers that can go after the types of transactions that the market's going to present us that it creates a significant opportunity. So I try not to let the count fool folks. It's more about the AUM and where it sits and whether those folks can deem to be considered rational actors. If you look across the base of a small handful, they are.
Okay, great. And then moving on to a different topic, spreads have materially tightened the last 24+ months. And combined with lower rates, we're going to see top and bottom line growth pressure on the sector in general. What is your outlook for spreads to potentially increase in 2026?
More supply helps. I'd say spreads still remain tight, although when you see an element of fear, either fear tied to economic slowdown or sector-specific fear where you could imagine if folks are going back and reconsidering to the extent that enterprise value multiples are compressing on software companies, that that can also then be reflected in new spread. You could see some potential pockets of widening. I'd say across the board, they're going to be generally stable until one sees a high degree of fear into the market. Private credit spreads typically range between a 500 and a 600 point at the 1L level. We're at the tighter end of that. But interestingly, it has been able, in our view, to maintain what was nearly 150-250 basis point premium to broadly syndicated loans.
So where credit risk is measured overall, I still believe we might be closer to the tighter end. It can expand a bit, but right now, not seeing widespread or wholesale widening across the board, which is why keeping a focus on managers that not only maintain a high degree of discipline and credit selectivity, but then also the underlying cost, the fee structure, the ability to keep your debt costs low, the ability to run very low levels of G&A, every basis point matters today. That's why we're very focused on not just on the left side of the balance sheet, but the right side as well.
Okay, great. And then index inclusion is an opportunity just to expand the general liquidity for BDCs. Kind of any kind of high-level thoughts on the AFFE issue?
Oh, that's, you know, I will say that that is a bill that is working its way through Congress. And I'll just let folks that are smarter than I outline what they believe the prospects are. I would say this, having additional institutional investment in the space is a good thing because the transparency that's offered by the model is significant. If you look at BCRED's financials overall, BCRED or even BXSL, I'll pick on BCRED because it's certainly a large entity, there's nearly 30,000 individual data points that exist. That level of detail and, more importantly, the higher degree of both capital in public or private capital, because public BDCs produce the same financials, that can create even greater amounts of transparency and market policing, which I believe is important. And so for us, do I believe that the long-term prospects for something like that are bright? I do.
I can't give you an exact time, but I would say this: BDC legislation and underlying items that ILC, they're measured in decades. I think the last time that you and I were familiar with a change in legislation was nearly 10 years ago.
Yeah, okay, excellent. Good point on the decades. So excluding credit risk, what are some of the other risks investors need to pay more attention to at this point in the cycle?
Excluding credit risks, well, we outlined liquidity. Then I would also say this, there is a high degree of correlation between book value degradation and time spent, in this case, in years below book value. So for us, growth and how one grows and introduces new capital into the underlying public entity or even private entity is very important. So keeping that in mind, not only a focus in on both new capital for growth, but then also the costs, because credit risk is always paramount. It will determine whether or not one is going to be generating an attractive return. But even good credit can be overrun by high expense.
And so to the extent that one is operating with higher than average underlying debt costs or greater than average underlying G&A or high underlying fee structures that may or may not be aligned with experience, that's an important item investors take notice of. And interestingly, the market at times will choose publicly to price that in based on one's premium or discount to the market.
Okay. And interestingly, you had mentioned kind of the market pays very close attention to fees. We've seen some BDCs over the past couple of years reduce their fee structure. A lot of it had to do with performance-related. Some was just due to it was the portfolio had scaled and it was the right thing to do for investors. Do you think we're going to see more of that over the next year, or do you think that's kind of largely played out and.
I think this is the benefit of the transparency of the model. The market is a very efficient mechanism. Again, if folks don't choose to adjust, the market can, again, on a market price basis or on a capital basis, adjust it for them. I tend to think this, that strong managers that can generate very sustainable premium over time and deliver what is effectively a boring as beautiful level of return experience, those managers, and more importantly, over time, can tend to not only generate attractive returns, but have a win-win situation for all parties involved.
Okay, absolutely. So that's all of my prepared questions. What questions do we have from the audience? No questions?
That is perfect. We understand. We thank you so much because we know it's near the end of the day. It means a lot to spend time with us here. We look forward to talking to you again.
Okay. Thank you, Jon.
Thank you, Derek.