The retailisation of private credit has been making waves in the fundraising world, with a number of funds — including major players such as Blackstone, Arcmont and Carlyle — seeking to harvest the capital of wealthy individuals for their private credit strategies.

The pros are clear — more capital in an increasingly competitive fundraising market is very much welcome — but does it also come with downsides? And why should individuals invest in private credit?

Having launched its strategy for individual investors in Europe in 2022, Blackstone Credit has been hard at work bringing its private credit product to European private investors. After two years opening up offices across Europe and educating distribution partners on the continent, it is now time to push on expansion.

In June 2024, Blackstone had raised €1bn for its private credit strategy for individuals, with big growth ambitions for the future.

9fin spoke with Mike Carruthers, senior managing director and European head of private credit at Blackstone, about their strategy, the benefit of individual investors in private credit, and the inevitable challenges.

1. Blackstone has been quite active in Europe over the last years — what opportunities are you seeing in the region?

We have viewed Europe as an important market for a long time, and we see a big upcoming opportunity set in this region, and there's now an even greater focus on growing and being more representative of our share in the US over here in Europe. We think it's a great place to do business. European economies have been resilient in the sectors we like — software, business services, healthcare —sectors that we have been leaning into thematically across the firm. If you look at our portfolio in Europe and compare that to the US, these sectors have had similarly strong overall performance.

Bankruptcy laws have also improved in Europe over the years — since the financial crisis most countries have made major changes to improve their bankruptcy laws, reducing the risk of a freefall insolvency, and there's now EU wide harmonization of schemes of arrangements, which is also a benefit for creditors.

In the long term, our goal is to further increase our market share in Europe. We've seen the US market change a lot in the last four to five years — bigger and bigger deals going to private credit, and more club transactions. Borrowers often want to have multiple lenders in their capital structure and we're seeing that come to Europe too, which gives you the ability to get more incumbency in deals and grow with those companies.

2. What are the main trends you are seeing in Europe right now?

There's been robust deal flow despite it being a relatively light M&A market. We're seeing a lot of refinancings, and a lot of portfolio companies doing M&A and needing more capital.

I feel more optimism around the M&A market improving. I think you have all the ingredients in place to have more M&A: cost of capital is coming down, spreads have tightened a bit, you're seeing the first interest rate cuts in Europe, and sponsors have held assets for a long time. Many of these assets have performed well and grown into their valuations. So, from a buyer's perspective, I think there's more confidence in making an acquisition, also because you now have two to three years of financials post-Covid.

Another thing we are seeing is more take private activity. We financed three take privates in the last year in Europe and I think that will be an ongoing theme in the rest of this year and into next year.

3. How is Blackstone bringing private credit to individual investors in Europe?

Taking a big step back, we launched our first strategy aimed at individual investors in 2017, and we’ve had great success with that over the years.  That was in real estate, and then we launched a similar strategy for credit in the US and the rest of the world in 2021. The first year was obviously a very big M&A year — markets were trading well post-Covid — and then you had 2022 where spreads widened and 2023 where spreads tightened. All through that three-year period we continued to deliver to our investors.

We want to be the leader of this type of strategy in Europe, so we started working on this well over three years ago now. We launched our European private credit strategy for individuals in October 2022. In terms of investor sentiment, that time was probably peak negativity on Europe, with a lot of headlines around gas prices and geopolitics, and we launched with one distribution partner

What we saw was a slow initial fundraising, quite small month-to-month, but we continued to deliver for our investors, and fundraising momentum has now accelerated. Over the two years since our launch, we have been able to build a track record, build out our teams on the continent, and get our distribution partners much more familiar with private credit for individual investors.

We have a program called Blackstone University, or BXU for short, where we're educating our distribution partners on what we do, how it works, and how it can drive returns. We need to make sure that the people that are using and distributing our product have all the information and transparency they need to evaluate our fund.

In the US, many of these large distribution partners have known private credit for years, they understand what we do differently compared with high-yield bonds and liquid loans, they understand why borrowers pay these spreads, the flexibility and the product that we offer to the borrowers. In Europe a lot of distribution partners are less familiar with  private credit. They're aware of it, they know the US has it available to individual investors, they're trying to understand why it's been successful in the US, but they just don't have the experience given the product wasn’t available.

4. What are the advantages for the private credit market to include individual investors?

Generally, private equity firms when they buy a company are much more growth and acquisition oriented, versus cutting costs. So they want credit funds that can grow with them — even when the market sells off, they want to be able to raise debt capital from them. Often when the market sells off, the best acquisition opportunities present themselves.

As a result, borrowers want to have a lender that has significant capital available through the cycle to support their portfolio companies as they grow.  They typically wouldn’t have a preference whether that capital is coming from an institution, an individual, or an insurance partner — they just want to make sure their lenders have capital and are able to provide it with a long-term perspective.

Having access to institutional, insurance and individual capital is a powerful combination.  Institutions can tend to act a bit more counter-cyclical than individual investors — they may see a good opportunity to allocate more capital to private credit when spreads widen. Individual investors are growing their share of alternative assets; however, they may see the stock market go down and temporarily pull back from allocating to less liquid assets.

5. Some people say that retailisation might lead to more regulation of the market.. What are your thoughts on these concerns?

I feel like the general direction of travel from the regulators is towards getting more investment in alternative products. If you take the ELTIF legislation across Europe, a unified passport around what you can distribute,  regulation is moving more in favor of easing access to private credit for individuals. Around 90% of companies are private, so by restricting individual investors to a much more narrow subgroup of investment opportunities you're not doing them a real service. I think that is something recognized by most constituents of the market – the investors, the private markets firms themselves, and ultimately regulators as well.

That the ELTIF 1.0 regulation moved to 2.0 because governments across Europe recognized that 1.0 didn't do enough to simplify access to this market shows there's a broad push to make this easier and make it work better for everyone.

6. What are the challenges when bringing individual investors into private credit?

The biggest workstream for us across the board is education. In Europe, the education process is in the early stages for many investors, so there are many meetings and the team is spending time providing insights and explainers in local languages across the continent. Our team in Italy for example is going out from Milan to cities across Italy, spending time with rooms full of interested investors in each location, explaining what we do and why we do it.

It's fascinating because private credit as an asset class for individual investors is not new, but in Europe it is. We've been doing this for a long time in the US and we've been investing in direct lending in Europe for almost a decade, so we’re explaining to our distribution partners and investors this is not new asset class, but something already well established. I’d say getting that message across and educating people on the asset class has generally been the biggest challenge for us to work on in the past few years.

7. What are the benefits for investors in private credit?

We believe that private credit has many key benefits; two which are important to individual investors are being floating rate, and being senior secured.

Floating rate means you do not take duration risk, and can benefit from elevated rates to drive yields. While we know that rates might be shifting lower this year, we anticipate that they’ll remain elevated compared to recent history, and so this is a major benefactor for the asset class. Being senior secured means sitting at the top of the capital structure which provides investors with greater potential downside protection and capital preservation.

Beyond those two, I would say the diligence process of private credit enables us to go alongside the buyer of a business, often for one to three months in the data room doing all the work. If you compare that to bonds where there's a roadshow — it's much shorter and you typically don't get access to consulting reports, accounting reports, forward-looking financials, and you typically don't get a lot of time with the management team and with the buyer of the business. We believe this has an impact on the quality of companies we select for our portfolio, which ultimately is extremely important when it comes to delivering for our investors.

We believe all of this makes for a better investment experience in private credit compared to liquid alternatives.

8. What are your future plans for the European private credit strategy ?

The first two years were really about establishing an entrance into different markets, different countries, and working out the challenges, the systems, and the reporting in those markets.

It was also about establishing that proof of performance, which we've done now for a couple of years. We are in the early stages of a big market opportunity and I think we have a leadership position in that. We want to keep growing — we want to grow our individual funds, we want to grow our institutional funds, and we want to grow with our insurance partners.

9. With the Olympics coming to an end last week, if you had to compete in an Olympic sport, in what sport do you think you'd have the best chance of a medal?

Is it cheating to pick a sport in the Winter Olympics? Because I'd say ice hockey. I used to play and it's my favourite thing to watch at the Olympics. When I was at university my friends and I drove down from Toronto to Salt Lake City where the Winter Olympics were in 2002. It was a 24-hour drive, and we went to a bunch of hockey games.

I went to Paris to watch the gymnastics and beach volleyball — my wife and two daughters are into gymnastics and it was great seeing Simon Biles compete in person.

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