Rising Interest Rates a Boon for Blackstone BDC, Interval Fund Investors
August 8, 2023 | Johnathan Rickman | Blue Vault
As interest rates continue to rise, investors in Blackstone’s business development company (BDC) and interval fund are seeing a similar spike in distribution payments, reflecting the asset manager’s profit-generating prowess amid extended economic turbulence. On Blue Vault’s July 26 webinar, A Deeper Look at Blackstone, Senior Financial Analyst Luke Schmidt said both funds are performing very well, with Blue Vault data revealing healthy returns from the funds’ respective investments in software, healthcare, IT services, and other resilient industries.
Read Part I of the Webinar Recap Here: Blackstone NAV REIT Performance Outshines Cash Flow Concerns
In case you missed it, here is some of the analysis that Schmidt shared during the webinar, which looked at both the Blackstone Private Credit Fund (Blackstone’s nontraded BDC) and the Blackstone Floating Rate Enhanced Income Fund (Blackstone’s interval fund):
Blackstone Private Credit Fund
At the end of Q1 2023, Blackstone’s nontraded BDC had total assets of $51.3 billion, reflecting almost 60% of the total nontraded BDC industry. Since its inception in early-2021 and through July 19, 2023, the fund has raised a total of $28.1 billion in capital, combining $16 billion in public capital and $12.1 billion in private capital raised.
Since the second quarter of 2021, the Blackstone Private Credit Fund has held more than half the assets of the nontraded BDC industry, peaking at 72% in Q4 2021. This was followed by a slow decline to end at 57.7% in Q1 2023. “A lot of that is due to the number of funds entering the industry and raising capital,” Schmidt said. To drive that point home, he noted that as of Q1 2023, all but four of the top 15 nontraded BDCs with $100 million or more in total assets were newer funds that sprang up over the last two years.
“That’s a good sign for the industry and its growth,” Schmidt said.
He also noted that while rising competition has also begun to eat into Blackstone’s capital raising efforts, the asset manager continues to raise the most capital in the nontraded BDC industry, raising $921 million in public capital in Q1 alone.
Schmidt also shared data showing that Blackstone’s nontraded BDC has generated rising distribution rates and “spectacular” returns.
The fund reported an annualized distribution rate of 10.14% for June 2023 for its Class I shares, up from 8.42% in June 2022 and 7.75% in June 2021. This promising trend is mirrored in data based on monthly, recurring distribution rates of its Class I shares, which rose from 6.33% in Q1 2021 to 10.17% in Q1 2023.
Schmidt noted that 98% of the fund’s loans are tied to floating interest rates. So, as interest rates rise, so do Blackstone’s earnings, allowing the asset manager to pass that on to investors. This scenario has also bolstered Blackstone’s consistently strong distribution payout ratios, Schmidt added. He also pointed out that because BDCs are regulated investment companies, they are required to distribute at least 90% of
their profits to shareholders. BDCs don’t pay corporate income tax on profits before distributing them to shareholders.
As for returns, the fund has reported 21.84% in total return through June 2023, with positive monthly returns in 26 out of 29 months. Schmidt also noted that the fund’s quarterly tender offers exceeded the 5% threshold in two of the last three quarters, but that Blackstone honored and redeemed all shares tendered in those two quarters where it did exceed that 5%.
Citing statistics from Blackstone’s website, Schmidt noted that the fund at the end of Q1 reported 97% of its $47.7 billion fair-value investments were in a senior position (senior secured debt), with 98% of these investments bearing floating interest rates. “[The fund] is positioned really well in those aspects,” he said.
Blackstone Floating Rate Enhanced Income Fund
Blackstone’s interval fund has had more ups and downs than its nontraded BDC. For instance, the fund experienced a rise in redemption requests late last year, prompting Blackstone to update its repurchase schedule to make it more investor-friendly, Schmidt said. Whereas most interval funds have a five percent-per-quarter policy, Blackstone now offers to repurchase 7.5% of its outstanding shares monthly.
Additionally, as of Q1 2023, Blackstone is positioned square in the middle of the top 30 credit-focused interval funds with total assets greater than $100 million — a position they’re not used to being in considering their dominance in the BDC and real estate investment trust (REIT) spaces, Schmidt said. The interval fund’s gross capital raise got off to a strong start in 2018 but leveled out when the pandemic hit and never fully recovered to its initial levels. Likewise, its net offering proceeds, which take repurchases into account, show that Blackstone spent more capital on repurchasing shares than they raised via the offerings.
This could be due to Blackstone’s generous repurchase policy compared to other funds, Schmidt said.
At the end of Q1 2023, Blackstone’s interval fund had total assets of $397.1 million, making it the 16th largest credit-focused interval fund. Since its inception in January 2018, it has raised $643 million in gross capital and $316.6 million in net capital.
The fund’s annualized distribution rate rose year on year to 9.76% in March 2023, up from 5.64% in March 2022. Since January 2020, the fund’s monthly Class I distributions have posted in the $0.12 range, rising steadily in mid-2022 to eventually reach $0.17 in March 2023. Schmidt again attributed this uptick in distributions to the convergence of rising interest rates and Blackstone earnings.
The interval fund’s total return since inception crested at 18.79% at the beginning of 2022, but currently pegs at 15.12% as of March 31, 2023. Its Class I returns have had some ups and downs along the way, primarily at the start of the pandemic and in more recent months.
The July 26 Blue Vault webinar also covered Blackstone’s REIT, known as the Blackstone Real Estate Income Trust. Blue Vault subscribers not only get access to a wealth of real-time performance data on these and other funds, but they can also access instant replays of our library of webinars. Join us today!
