By Amey Stone

To many investors, it might seem like private credit burst onto the investment landscape just in the past year or two. But for Blackstone's Brad Marshall, growth of the asset class maps his 24-year career.

In his first job out of business school in Canada in 2001, working at CIBC, Marshall was tasked with figuring out how to bring institutional-class alternative investments to a broader group of investors. Today, as the global head of private-credit strategies at Blackstone, and chairman and co-CEO of both the Blackstone Private Credit fund, known as BCRED, and Blackstone Secured Lending fund (ticker: BXSL), Marshall oversees $184 billion in assets, much of it in funds that individuals can access.

"Given my early involvement, it's fascinating to see how the democratization of alternatives is accelerating," he told Barron's in a July 28 interview. "Individuals have not had access to this pool of assets, and they have been at a disadvantage. It took a while, but I'm glad that's changing."

Private credit funds typically hold loans made to highly indebted companies with below-investment-grade credit ratings. Democratizing the asset class, or marketing these funds to individual investors, is problematic, critics say, due to default risk and illiquidity concerns. Marshall addressed these concerns in the interview, and discussed opportunities in the sector.

The interview took place earlier on the day a mass shooting at Blackstone's corporate headquarters in New York City claimed the life of a colleague, to whom he paid tribute in a follow-up phone call. An edited version of both conversations follows.

Barron's: What makes private credit attractive as an asset class?

Brad Marshall: All private credit is doing is delivering financing solutions directly to companies. It's a farm-to-table model: Instead of going to a bank that underwrites the loans and sells them to the public market, investors like Blackstone work directly with companies to deliver more-customized solutions. We are underwriting credits that we own and that we take a long-term view on.

Plus, funds structured as business development companies [a type of fund that makes loans to companies] are hyper-transparent. [BCRED is a private BDC; individuals can access it through financial advisors. BXSL is publicly traded.] Every security is listed with its mark, or fair value; maturity; and yield. It's a model that is conducive to individual ownership, and I expect we'll see more growth because of transparency and the desire for diversification.

Private credit yields about 10% long term. That is one reason for the growth of the sector. Why are yields so much higher than those of regular bond funds?

Business development companies hold private leveraged loans; 95% are first lien senior secured assets. The average loan-to-value ratio is less than 50%, which means companies need to lose half their value before investor capital is at risk. The loans yield about 9%, and we get a little benefit from the use of leverage. Given our large capital base and low cost of capital, we have low operating expenses. Plus, companies don't have to pay a bank three percentage points in fees. That is how we have generated a 10% to 11% net return to investors.

In 20 years, our annualized loss rate has been less than 10 basis points [one-tenth of a percentage point]. That highlights how resilient the asset class is. We shrug our shoulders when people talk about "peak" private credit and "the next shoe to drop."

One reason investors worry about the risks is because of concerns that the economy is slowing, which could make it harder for businesses to pay back their loans. Where are we in the credit cycle?

We feel like we're at a pretty good moment in the credit cycle. In the past 12 months, the default rate in the liquid loan market was 1.4%, compared with the 25-year average of about 3%. The credit and insurance group at Blackstone, which my team is part of, has a default rate of 0.5% across 2,000 companies. Companies' revenue growth is in the high single digits. It's hard to imagine we're entering a recession when revenue growth is accelerating.

The consumer feels pretty healthy; unemployment is low. We see a good runway for this cycle. We might see some soft spots where defaults may happen. Those will likely be industries impacted by artificial intelligence, or by where we land on tariffs. Potential weak spots are in sectors that are a little more capital intensive and cyclical.

What happens when a company can't pay back its loan?

We invest in about 300 companies. Some assets perform well and some less well. Medallia, a software company, has had some problems, and we recently marked down the value of its loans to 87 cents on the dollar. Typically, we can leverage our scale to help a company improve its performance, and we are working with its sponsor [private-equity firm Thoma Bravo] to do that.

What private-credit sectors look most attractive now?

We are spending a lot of time in historically low-default sectors, such as software, which tend to have stickier clients, higher growth, and a history of performing well through economic cycles. Professional services is another promising sector. Businesses must have accounting and insurance. These are low-capital-intensive businesses and generate a lot of free cash flow.

Healthcare -- healthcare information technology, in particular -- driven in part by AI, is extremely attractive. It is our best-performing sector. Also, the life-sciences industry has huge capital needs for drug development. We also like energy and power, since the AI ecosystem needs power to serve data centers. That is a big area for us.

Do you ever make loans to publicly traded companies?

That is the next frontier of growth in private credit. More public corporations are using private solutions rather than going to the public markets to issue debt. Rogers Communications, CoreWeave, and Alnylam Pharmaceuticals are examples of public companies in our portfolios. And, we just lent money to Dropbox.

President Donald Trump recently signed an executive order that will clear the way for 401(k)s to invest in private credit and other alternative assets. Do alternatives belong in retirement plans?

It makes a lot of sense when you think about giving investors access to opportunities beyond the 60%/40% mix of stocks and bonds. Retirement plan participants have traditionally not had access to this pool of assets. It needs to be done carefully and monitored, but opening up this asset class to this investor base makes a ton of sense.

Tell me about your early career, and how you came to focus on private credit.

I grew up outside of Ottawa, went to Queens University for a degree in economics, and then moved to Vancouver to work. I decided to get an M.B.A., and after graduating from McGill University, I started working for a division of CIBC. I was involved in a new effort to bring alternative investments to individuals.

Back then, the focus was mostly on private equity. The risks of alternatives weren't well understood, and funds were structured in a way that mechanically made it more complicated for individuals to participate. The adoption was pretty limited.

A major event in my life happened around then when I went to a private-equity conference in New York City. As I left the conference, I met the woman who would become my wife. We were both waiting at a taxi stand. She had attended the conference, as well. I moved to the U.S. probably three months later.

Was meeting your wife a big part of the reason you moved to New York?

It was the only reason.

After I moved down, I got a job with RBC, effectively doing the same thing I had done at CIBC -- finding a way to package alternative investments for individual investors. I transitioned to work on the credit side, and in about 2005 that business was sold to Bennett Goodman's GSO Capital Partners.

I saw a big market opportunity in private lending, so I started that effort in 2007, and Blackstone bought GSO in 2008. When they bought us, collective assets in credit were $20 billion. Now, Blackstone's entire credit business is about $484 billion.

BCRED alone has $73 billion in assets. Was the growth smooth, or jump-started by market events?

From 2008 through 2020, we created multiple credit offerings, including in private credit, and they grew the way most alternative asset classes grew. It wasn't until 2020 that we saw private credit markets really accelerate. That happened as we were ramping up our public BDC [BXSL] and about to launch our private BDC, BCRED.

Interest rates had been cut to near-zero. Is that what made private credit so attractive?

On the investor side, it was exactly that. Rates were zero, and 90% of the fixed-income market was yielding less than 2%. Investors were seeking yield, and private credit offered a premium to what investors could get in public markets. And, they could get these higher yields in a vehicle where capital could be fully deployed and they would have access to periodic liquidity.

On the company side, in 2020, bank balance sheets were fairly full and there was a mergers-and-acquisitions boom. Companies backed by private-equity investors were looking for more-customized solutions. Larger companies started accessing private capital solutions, and once they tried it, they realized the solutions were in some cases better than public options. Before 2020, fewer than 10 deals were for $1 billion or above. Since 2020, there have been more than 200 such deals.

You have earned some bragging rights for seeing this opportunity nearly 25 years ago, but you seem pretty grounded.

I hope that is true. I still have my Canadian roots in me. Also, Blackstone as an organization keeps you very humble and hardworking. You don't have a lot of time to sit back and marvel at the past.

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