Tracy: Hello and welcome to another episode of the OddLots podcast. I'm Tracy Aloway.

Joe: and I'm Joe Wisenthal. Joe, I keep thinking about that Sam Alman hype cycle kind of phrase, the whole it's over and then we're so back thing. And obviously he was talking about AI and how people, you know, feel about AI, but I think you could apply it to a bunch of different markets at the moment. So AI obviously, but also private credit. Think back to the end of last year, right? We had all the JP Morgan, Jamie Diamonds, proverbial cockroaches emerging from private credit and people started to get really worried. Fast forward to January 2026 and a lot of those concerns seem to have faded into the background.

Tracy: Right. You wrote that thing, right? Like spreads everywhere are super tight and already we know that the uh the stock market is up for the year, but credit market is off to a very strong start of all flavors from what I understand.

Joe: Right. Stock markets stealing all the spotlight. But if you look at the corporate bond market, now this is the public bond market, not private, but spreads are, you know, at basically historic heights. I think the uh the high yield index is starting at its like tightest level ever in the history of the index for the year. This is crazy, but it also highlights an important point which is that spreads and returns are all relative. Yeah. Right. And so if the public market is absolutely booming, that could be a good thing for private credit, but also private credit competes with the public market, right? So if you're getting pretty good returns in public credit or leverage loans, something like that, maybe you're not going into private credit as much as you used to. What if you found a house that just had one cockroach? That would be Could you imagine?

Tracy: There's never one cockroach. That's the point.

Joe: There had to have been a first cockroach that enters the house. You get it really quickly in your uh and then you don't have a cockroach problem.

Tracy: Did I ever tell you I hate cockroaches so much. The first of all, the first Japanese word I ever relearned when I moved back to Japan as like a 14-year-old was kokori hoy hoy because I had to go down to the local kambini, the convenience store, and buy cockroach hotels because the entire apartment was infested. And secondly, I hate cockroaches so much. I once uh read an entire book about cockroaches just to know my enemy.

Joe: Wow.

Tracy: It was like 300 pages on cockroach.

Joe: Should we get the author on the podcast?

Tracy: Oh, it was actually a really good book. It was a sort of like cultural and scientific study of the history of cockroaches. But anyway, we are getting massively off topic.

Joe: Shall I introduce our guest? We do, in fact, have the perfect guest. All right, so we're going to be talking all things private credit, including how private credit is relating to the AI space. At the moment, we're speaking with Michael Zawatsky, also known as Z. He is the global chief investment officer for Blackstone Credit. So Z, thank you so much for coming on the podcast.

Z: Wonderful to be here. Thanks for having me.

Tracy: So I am told by your uh lovely Blackstone representatives that over the last 20 years you have grown Blackstone's credit franchise into the largest business by assets at Blackstone. How hard was that? Were you just sort of like riding a wave of corporate issuance?

Z: Well, let's talk about a few things that have happened here. You know, I often get asked about this growth of private credit and I think there's a misconception that that growth was driven by excess risk-taking. But when you actually step back and think about what's happened in the market, you basically had a innovative breakthrough that changed the way business was done that was better for all market participants. The way I like to analogize it to is what happened with Amazon in the retail space. Right? Before Amazon, if you wanted to go buy something, you had to go to the store. But Amazon kind of took out that middleman and brought you the consumer directly to the manufacturer and in the process created something that was simpler, more efficient, better for the economy, more transparent. What's private credit done? It's done the same thing. It's brought the borrower right up directly to our investors capital. We sometimes call it this farm-to-table model, right?

Z: What have you done in that process? You've cut out all the middlemen, all the syndication, all the trading desks, all the stuff that led to leakage along the way. And in the process, you built something that was better for all market participants. If you're a borrower, you get to speak directly to your lender. You get a customized solution. You get speed, certainty of execution. If you're an investor, you capture all of that excess leakage in the form of higher returns. And that's been the case for the last 20 years. And by the way, if you're the financial markets, you have an ecosystem that is less levered, more asset liability management, brings more financial stability to the overall ecosystem. When you have something that's really good for all market participants, it tends to grow a lot and that's what's happened in private credit.

Joe: What is the equivalent of like in this analogy which I really like, what is the equivalent of the web, right? So the reason Amazon could cut out the physical bookstore or the various other retailers etc is because the internet exists and that create solves some information problems etc. How would you describe the sort of like the thing that exists now such that so many different middlemen and so forth can be cut out

Z: scale. Okay.

Joe: Scale, right? The reason we couldn't do what we do today

Z: 20 years ago

Joe: is cuz we didn't have the capital base. We couldn't write a billion dollar plus deal. Here's an interesting fact. Before 2021, there were only $5 billion plus private credit deals done ever. Since 2021, 100 plus, and we at Blackstone have done most of them. So, what does that mean? We have the scale of capital to actually solve the problems for our clients. we have the breath of team to go out and cover the market and bring these solutions direct to our borrowers. And then the other thing that's happened is the expansion of private credit beyond what a lot of people think of it as which is middle market sponsor back direct lending into what we call the real economy. Right? taking what is a$ two trillion dollar market today and thinking about a 30 plus trillion dollar addressable market when you think about areas like private investment grade real assets assetbacked finance and so the other big piece of this is just the massive expansion in the addressable market that's come about

Tracy: so I take the point about you know customized financing solutions and bringing investors closer to capital and all of that but at the same time like the concern is that as the base grows, competition for deals increases and that's when you start to see not just potentially lower spreads but also more leverage and we have seen you know some first leans that are now uni trenches and things that would normally spark a little bit of worry. Is that something that you're seeing in the market?

Z: Well, it's funny. Look, I've been doing private credit for two decades. I think back to the deals that we were first doing in private credit 20 years ago and I would tell you I don't know that a single one of them would pass our investment committee today. They were small. They were cyclical. They were basically the stuff the banks wouldn't do. Fast forward to today. Think about the average direct lending deal we do. It's a $200 million EBIT business. It's 40% loan to value. PreGf loan to values on deals were 65% plus. And so when I think about the risk posture of a senior secured loan today, it feels pretty good relative to history. And then that needs to be combined with the fact that this opportunity in investment grade private credit I would say is the fastest growing opportunity we see in credit at Blackstone.

Tracy: Right? So this is the other new thing that's happening is uh IG private credit. So, you know, private credit extended to companies with very good balance sheets, not junk rated, uh, has become more of a thing. It's going mainstream and a lot of that is driven by AI issuance and techreated issuance. Talk more about what you're seeing in that space.

Z: Well, I think that's a big part of it, right? Anytime you see a significant need for capital which we obviously see in the data center buildout and then connected to that all the energy power and infrastructure that needs to uh accompany that. You see huge capital needs and markets that need that much capital need to access all available options and that includes public credit but that also includes private credit. Morgan Stanley put out a piece late last year that estimated that $800 billion of private credit alone is needed to finance the digital infrastructure build out over the next 5 years. Okay, so that's a massive number. I think what gets missed when people think about the financing element of financing a data center for example is we're financing 15 20-year take-or-pay contracts with

Tracy: take pay contract

Z: meaning think about a triple net lease contract. No matter what your usage is, no matter what your operating costs are, you're getting a fixed sum every single month from your tenant and they can't get out of that contract. Okay? And you're getting that from some of the highest quality credit counterparties in the world, right? Hyperscalers are the tenants in most of the data centers today. And so as I sit with my credit hat on, if I can lend against some of the best counterparties in the world against a known defined stream of cash flows and I can do that with 150 to 200 basis points of excess spread versus like rated public credit.

Joe: Yeah. Well, sorry, explain that. So, we the uh most creditworthy companies in the worlds are these cash flow gushers, the big tech companies, etc. What is the I still don't quite get what is the advantage for them of the private credit market spreads as you mentioned are wider. They can access the bond market. They do it all the time or they certainly can. So what is the what does private credit solve for the meadows of the world and the apples of the world such that they can't borrow um versus the public credit market? Customization, okay, speed,

Z: certainty, flexibility, bringing that solution direct to the borrower. Sometimes there's certain elements in terms of the timing or whatever the case may be that requires a private solution, confidentiality.

Tracy: Can you just explain that a little further? Like what is it about these projects specifically when you say like customization? People say customization all the time. Give us a specific example.

Z: Okay. Well, sometimes there's a construction element. Okay. So, you need to fund over time as opposed to funding all of your capital day one. That's a good example, right? Sometimes you need to structure in a certain way um in terms of the timing of the cash flows. That's another example. So there are things that are needed that don't necessarily increase credit risk, but they don't fit the cookie cutter mold of a straight away investment grade public bond.

Tracy: So this might be a difficult question to answer, but when you look at your own portfolio, your own very large portfolio, can you give like a rough estimate of how much AI exposure has increased over the years?

Z: Well, that's a fascinating question, right? Because um I tend to think about AI exposure pretty broadly, right? cuz I think AI will impact not just data centers and the direct um you know um first derivative impact but the second derivative impact the third derivative impact.

Joe: So you're looking at companies that could be disrupted as well.

Z: We're looking at it all and we have been looking at it all and this is this is part of working at Blackstone, right? Like we have unbelievable insights into what's going on all around the globe in all of these markets, not just within our credit business that has 5,000 plus borrowers, but our private equity business, our infrastructure business, our real estate business. We happen to own a couple of the largest data center developers in the world. We have a huge operating team that helps companies implement uh AI capabilities, help them play offense and defense when needed. And so we leverage all of these res resources and I think about AI impact across almost every business in our portfolio to varying degrees. But I think you have to be front-footed in thinking about that as an investor.

Tracy: What about direct exposure to let's forget about second derivatives.

Joe: I take the point but like the reason I'm asking is because there are some concerns around concentration limits at places like insurers.

Z: Yeah. Look, we have over $500 billion dollar of assets uh and credit at Blackstone and I would tell you like the the amount of direct data center exposure is is a small minority of that. It would not rise to the level of something where any of our clients would feel like they have concentration. What about in terms of setting aside like formal concentration limits just in terms of like on a day-to-day business right now or over the last year how much of new new activity would you say is related to either sort of data centers or maybe some of the power uh yeah the power financing that is also needed for data centers. Look, um I would tell you it's a material portion of what we're doing because it is such a capital intensive.

Tracy: Yeah.

Z: Credit intensive part of the market.

Tracy: Yeah.

Z: But when I think about everything we're doing across our business and credit, it doesn't it doesn't screen as something that's, you know, significantly overweight. Like if I think about what we're doing in our private investment grade business, that's a real asset strategy broadly defined, right? That includes obviously digital infrastructure. It includes energy and power, but it includes residential mortgages, which is a massive asset class. It includes equipment finance. We just announced a deal recently um to do to do an aircraft engine partnership. And frankly, I'd say the single biggest thing that it includes is what we call corporate solutions. And these are largecale customized private credit partnerships with public investment grade companies.

Z: And so recently we did a deal with Rogers up in Canada where we did a $5 billion financing for them against their network infrastructure back hall. We then did a deal late last year with Serra Infrastructure to help them build out an LNG project. And we're seeing that not just in the US, we're seeing that globally. We announced a deal yesterday in fact with Ahold, the the European supermarket company to help expand their logistics footprint. And so I would tell you the biggest theme I see across our private investment grade business is this notion of what we call corporate solutions.

Tracy: Um what's it like sourcing deals at the moment? So Blackstone obviously very big. So I imagine people are coming to you constantly but at the same time one of the things we heard when the private credit market was very very hot was

Joe: there's a lot of competition for deals right and everyone wants um in on certain financing transactions. So what's it like?

Z: You got to take it market by market, right? We were just talking about private investment grade corporate solutions, some of these big infrastructure credit areas. I would tell you in that market there is more demand for capital than there are players like Blackstone with the scale to actually meet those needs. And so that is a market where I would tell you we have robust deal activity and that is a market where I see a lot of excess spread. I know you mentioned earlier that spreads are tight. That's an area where I would say spreads are actually quite attractive, right? If you think about public IG spreads today are 80 basis points. If you can make 250 basis points in like forl like credit rated risk like that's a lot of relative excess spread and that's happening because the demand for capital relative to the supply of capital is quite attractive and that's showing up for us as lenders. I'd say in the direct lending market um that's a market where spreads have tightened in sympathy with the liquid subinvestment grade markets but the excess spread remains right that excess spread of a couple hundred basis points persists I think what is helping is you are seeing this increase in deal activity we saw very strong M&A activity in the back half of last year if I look at our Q4 pipeline it's actually up 25% versus what it was at this time last year and I think we are optimistic about a strong recovery in deal activity that will help on your point in terms of sourcing deals in that market specifically. I think the other thing that's really important and and you asked this question around how do we scale a business part of it is not just waiting and sitting for the phone to ring. A huge part of what we do is think about the thematic areas within all of Blackstone, not just credit that we want to deploy capital in and digital infra energy and power. Those are good examples in the investment grade space, but there are also advance examples in the subinvestment grade space. Life sciences, utility services. And what our team does is we proactively identify these companies and pitch them customized solutions. And because we have the scale of capital to actually solve that problem, we can do that. We did a deal late last year with a company called Signant Health in the life sciences space, a billion-dollar plus transaction that we led. How did we do that? Well, we had financed their number one competitor. We had followed this loan because we had held it in our liquid book. And so, we had the idea, hey, let's call this company and say, you should do a private loan. And that's where the idea Asian comes. And that's where the differentiation in the market comes. A lot of people can pick up the phone.

Joe: Not a lot of people can create their own ideas and actually affectuate them. And I think that's something we're uniquely good at. everything is just sort of like scale and power laws and compounding return from having grown and having ha having that network the big get bigger it's really such an extraordinary thing and we see it in tech but we also clearly see it in finance I think with like you know the percentage of market share that acrru to the biggest players um clearly an advantage obviously want to talk more about the industry overall going back to you know Tracy mentioned that we're so it's so over we're so back or so or so cycle. So at the end of last year

Tracy: there were two things

Joe: um there were like two like kind of blowups um in but both were both related to autos. So uh treellor I don't know if I'm pronouncing triricor

Tracy: that's one of those words where I feel like very stupid pronouncing it the right way.

Joe: Yeah I do too.

Joe: And I'm like, should I just sayricolor like I don't So there was a precolor and then First Brands which I'm pretty sure I'm pronouncing correctly. And then there was like so that was like in the auto space and then there was all the stuff that went viral for about 5 minutes. There was something about the chips and maybe they're going to depreciate faster than people expect and a bunch of people are going to be holding the bag and I racket that out aside.

Tracy: Okay.

Joe: You get those uh blowups and the auto area. Jamie Diamond comes out with the cockroaches. What was your read on that moment? Was there reason to think that there are more trol out there?

Z: I would tell you when all of that was going down, we were scratching our heads. And the biggest reason we were scratching our heads were all of those examples were bankled, bagg syndicated, baggwritten deals that somehow got confused with private credit. And this is the biggest frustration for us because we looked at those deals and we said, "Hey, one of the advantages of private credit is you can actually do private level due diligence. You can get access to management team. You can do weeks of work. You can get private access to information." And so one of our observations there was there was this misconception and that's why we think it's so important to continue to educate on the distinctions between public credit and private credit and those situations um were public credit. I think the other thing that I think people maybe maybe don't appreciate is while private credit has gotten a lot of attention recently, private credit's been around for a long time. You can look at 20-year returns in private credit and you can see that they've outperformed liquid credit by several hundred basis points over 20 years through cycles. Also, you can look at the fact that realized losses over that 20-year period for the industry have been 1%. And so I think we look to the data, we look to the clarification, but then I think the last thing that's also important to highlight here is defaults happen in sub investment grade credit. And I think this is the other thing that I think gets missed. People see a headline about a credit issue.

Joe: We have thousands of credit in our portfolios.

Z: Some of them are going to have issues. That is normal. If you look at the long-term default rate in the leverage loan market, in the public high yield market, it's 3%. These things happen. We account for them in our underwriting. We account for them in how we mark our portfolio. And most importantly, we have the resources to deal with those situations. We have operating people. We've got a big workout team. And if we do have challenges in our book, I think to your point on scale, Joe, having the strength of Blackstone, the resource and intellectual capital of Blackstone to actually support those companies and drive good outcomes for our investors over term, that's what matters.

Joe: just uh I take your point about the 20-year returns, but you know, 20 years ago, the private credit industry barely existed, right? And then we've basically had a 17-year bull market except for five minutes in 2020. Um a 17-year bull market in risk assets. So I don't think it's crazy to say like yes the returns they're real they deliver the defaults are low defaults happen but I don't think it's totally crazy to wonder if you're a turning point because there's to some extent you can only take a 20-year track record so far if 17 years of them were in more or less a non-stop bull market.

Z: So here's what I see. First off, what I think will happen in the market is that you will continue to see private credit grow and you will continue to see strong private credit performance. That said, you're right. If I look forward versus looking back, I think you it's reasonable to believe that you will see more dispersion in the asset class. You will see some players underperform. You will see some players have higher losses. I don't think that means the entire asset class will face challenges because the model like we started with that Amazon analogy that still persists. The excess spread versus liquid markets that is durable. The way our clients access private credit and all of these new areas beyond direct lending, we're at the very very beginning of that very very long road. And so I think the long-term thesis for private credit is intact. By the way, you don't see massive waves of defaults outside of recessions. And it doesn't feel like to me we're headed into a recession. When I look at corporate um earnings growth, when I look at where consumers are, when I look at fiscal and monetary stimulus, none of that points to recession to me. And so when I look forward, I don't see we I don't see this big turning point for the industry. I see continued growth in the industry. But what I do see is more dispersion which is a good thing. If you think about all established asset classes, you have top quartile managers and you have bottom cortile managers. And so I think the asset class will be a lot more about who is better at originating deals, who is better at managing challenges in their portfolio, who has the broadest aperture to identify areas within credit broadly defined where clients can deploy where there is excess spread, where there is better risk adjusted returns. I think that's the era we're heading into and I would say we strongly embrace that era.

Tracy: Okay. So you don't see lots of defaults coming up, but what about liability management exercises or just restructuring debt? Because this is something that comes up occasionally. If you look at the default rate for private credit, I think officially it's below 2% something like that. But if you add back in the liability management exercises that we've seen at places like First Brands, um it goes higher. I think it goes to like 5% or something like that. Would you expect more companies to be restructuring debt as this dispersion effect maybe feeds through?

Z: Well, I think there's two pieces I want to unpack there. One, this whole notion of liability management.

Z: It really is a public market phenomenon and it exists in the public markets because public credit documents are really weak, right? It they don't have the same covenant protections that you have in private credit. And so, you can have debt layered in front of you. You can have collateral stripped. That's what's happened in a lot of these situations in the public markets. Fortunately, in private credit, the documents are more protective. And so, I think you will see less of that aggressive behavior in the private credit markets certainly versus the public credit markets. The second thing I would say, Tracy, is um the default is just the beginning. What really matters to clients are losses, right? Because the strength of a private credit document allows you to get to a table and negotiate with the owner for maybe more equity. Sometimes we have to take control of the company and we can use all of the resources of Blackstone to improve that company and actually deliver a strong outcome for our clients. And so I think those are the two points I would focus on. Yes, you will see defaults but the question is over time what is the loss experience for investors and that's something I think we have a lot of conviction in.

Tracy: Okay. So the other thing besides the uh first branch and first branch and trial blowups was the

Joe: you just want to keep saying

Tracy: I just I'm going to say like 10 more times um was this anxiety about you know the quality of some of these data center finding like oh are the chips going to be as valuable as people think and um you know actually I was just looking up like um some of the credit default swaps on Oracle actually uh basically continuing to hit new highs coreweave which is another one that people were watching a lot that's actually come in a bit So maybe I don't know people are chilled out a little bit but from the um capital provider the the the lenders um what is the appetite right now for AI or related infrastructure financing in the wave of some of these hiccups and what we see in like the CDS market for what might be some proxies for this kind of stuff.

Z: Look, I think the nature of the risk matters, right? I don't want to paint it with a broad brush cuz you hit it. The type of collateral matters. Who your counterparty matters for us. Whether we're financing chips, we're financing a data center, we don't want to take residual value risk, right? I don't view that as credit risk. So, if I can invest in chips, if I can invest in a data center that has investment grade counterparty risk and my debt will fully be repaid inside of that contractual agreement, whether it's triple net or whatever. Um, and I don't have to take residual value risk. I don't care what that data center is worth in year 25. I don't care what those chips are worth in year 7. That's really good risk. I think when you confine it to that which is what we are doing I think that's quite attractive. Will folks take that next layer of risk? They might, but you need to make equity returns.

Joe: any pullback like in some of the you know the less triple net whatever they like compare say okay January 2026 versus January 2025 any anxiety because we know that there is incredible demand for the buildout right it's this multi-year multi- trillion dollar thing from your perspective right now how uh strong is the capital base for that buildout has it changed at all

Z: I think when you have the contractual protections And I'm highlighting I think the demand is there. Now

Joe: there been some change since 2025.

Z: I would tell you that because the demand for capital is so significant and bigger than the supply of available capital. When you see that happen, you see spreads tend to widen. That's a healthy thing. That's a good thing for the markets. And I think some of those deals that don't have the protections that I highlighted, they have a harder time getting done in the credit markets. And you see them get funded in the equity markets. I think both of those things are healthy. I think when I take a big step back,

Z: there is a lot of chatter about this market, but we are firm believers in the impact of AI. Sure. And I think the bigger risk is underestimating the impact of it on your broader portfolio like I was alluding to before.

Tracy: Um, what was the fourth quarter actually like for you and what sort of questions were you getting from investors? Because we know, you know, some other private credit players like Blue Owl got a bunch of redemptions. Um, did you see similar pressures?

Z: Look, anytime you tend to see um some of the press that you highlighted, it's natural to get questions and we embrace those questions and we address them with the facts that I just highlighted. I think for us, we continue to see very strong demand for credit. I was around the world I think twice in the fourth quarter meeting with um our clients around the world and I would tell you in aggregate they want more private credit, right? our institutional clients. I think year-to-date through 9:30 inflows were up over 50% versus where they were a year prior. We held a forum with many of our big clients um late last year to discuss relative value and risks in the credit market. And actually, it was great for me because it was a way I could actually survey our clients on their views. And I would tell you they continue to be very bullish on private credit. If anything, they feel underallocated to private credit as an asset class. And so I think the momentum will continue.

Joe: This sort of touches on one of my favorite um things to talk about like sort of portfolio construction, but for these mega clients,

Joe: if they say, "Okay, we're underallocated or we want more of this." What is it that in their broad portfolio allocation the characteristics of private credit are solving for them right now?

Z: Yeah. Well, look, yield.

Tracy: Okay.

Z: Everyone loves yield, right?

Z: Everybody loves yield. And I think even with spreads tighter and with rates coming off a little bit, even with that, the yield in credit relative to the earnings yield of the S&P is as attractive has been over a very long period of time. So, credit remains attractive. I think when valuations are expensive like they are across the world today in most asset classes, being defensive at the top of the capital structure really matters. Diversification, right? Most of our clients have a lot of credit risk, corporate credit risk, excuse me, corporate risk in their portfolios, whether it's private equity or on the credit side. What about real assets? That's why assetback finance, that's why investment grade have been so um convincing for you know so high conviction for our clients because it offers that diversification. It offers that access to real hard assets that are downside protected versus corporate risk. And then I would say the other big theme for our clients around the world is something we call multi-asset credit. It is this notion that credit as a whole is a place I want to be deployed into. However, I'm also recognizing the fact that markets eb and flow. Where one market within credit is attractive, one might be less attractive. How do I partner with someone like Blackstone across everything we do over a dozen different asset classes within credit to build a diversified, resilient, higher yielding portfolio that allows me to pivot to the best opportunities in the market wherever they may be?

Joe: M um setting aside some of the uh cockroach phenomenon of late 2025, there was another thing that happened that was pretty big for the credit market and that was the withdrawal of the leverage lending guidelines for banks.

Joe: Uh basically making it easier for them to uh do broadly syndicated loans. Would you expect that to increase competition between the banks and the you know BDC's so to speak?

Z: Look, that one's gotten a lot of attention and I've spoken to a lot of my friends at the banks recently. I think the reality is on new direct lending deals, the market, and by the market, I mean the private equity sponsors, they've largely spoken, right? Like speed, certainty, flexibility, customization, all the stuff I hit on, that's a really good thing for them, especially when they're buying a company and they're in a competitive auction process. Even deals that met the leverage loan lending guidelines that were in place over the last two years, 85% of them were financed privately, right? So even when you had complying deals, they were borrowers were still choosing private credit. I'd say today our partnership opportunities with the banks, particularly on the investment grade side of what we do, it is more uh it is bigger than anything I would say that we've seen over the last several years. The bank's desire to partner with us where they keep the client arrangement, they keep the servicing, we keep the asset. We are seeing that as a global dynamic especially around some of these longer duration asset classes, these hard asset asset classes and those are the exact things that our our investors want and so I think that partnership opportunity um will continue to grow.

Tracy: This is the friendmy dynamic that we've spoken about before right so private lenders are in competition with the public lenders the banks but at the same time we're seeing more partnerships. No, and there's a lot of intu intuitive there about, you know, wanting to keep that relationship, but also this element of like, okay, the speed and customization, the financing. I have a question actually about management, internal management and the art of growing a business. You mentioned being proactive. So, you're going to have people on the phone and they're like, we did this thing. Would you be interested in this solution? And so forth. You have this big company. You're building it over time. I'm curious like how do you design a system such that you have lots of people working the phones but um wanting to grow their own books but not lower standards and let garbage into it and how do you think like how do you build those systems into it so that the person on the phone isn't you know yeah bringing in a bunch of garbage just to grow volume

Z: I love this question so um as I think back at the history of our business at blastoning credit obviously we've seen tremendous growth we've seen tremendous success. Um, a big turning point for me personally was co because up until that point in time, we ran each of our businesses almost as verticals, right? We whether it was direct lending or asset back finance or liquid credit, we had PMs in each of those businesses and they ran each of their businesses from raising the capital to investing the capital to manage the team almost as a vertical entity.

Z: We had no horizontal layer. But what co taught us when we were all at home in our pajamas and the markets were going wonky that we needed that connectivity. It would be really valuable if one piece of our business was really connected with the other piece of our business. And so we started building out our CIO office which I lead as a horizontal layer to connect all of the dots and bring tremendous consistency across our teams. And 5 years on that team is now 120 plus people. And what that team does day in day out is unifying the fabric of every single one of our investment businesses. And so we have a single investment committee that whether you are a direct lending deal or an asset back deal or a liquid deal, you go to that same investment committee, same underwriting standards, same memo, but most importantly the same people hearing the deals from all the different parts of the Blackstone credit ecosystem to know where are the best opportunities. By the way, that investment committee also includes senior representatives of Blackstone outside of credit. What are we learning in private equity? What are we learning in infrastructure that might influence this decision? The way we aggregate and monitor data, we now have one centralized portfolio company reporting system. And so anytime we see weaknesses in an area, instantly the entire team knows that and say, "Okay, let's pull back origination in this sector and let's lean into origination in this other sector." And so systemizing our data, centralizing our processes, being even more plugged into the themes we see more broadly at Blackstone, that has been a critical part of our journey and I think a huge competitive advantage for us going forward.

Tracy: I just want to go back to where we started the conversation and I mean really the beginning of the conversation, your job title. So CIO for Blackstone Credit and insurance. I think this is really important and underappreciated in many ways, but the partnership between insurers and private credit has been phenomenal. Like a lot of the private credit growth that we are seeing is coming directly from insurers. How important is it to I guess be an insurance company if you're in the private credit space or have access to that pool of capital?

Z: Sure. Well, couple points I want to really hit here. Um, one is our business model in insurance because it is different than some others, right? We don't have a captive insurance balance sheet. We don't originate insurance liabilities directly at Blackstone. All we do is act as a third-party asset manager on behalf of insurance clients. That's what we do best. That's all we want to do. Brick by brick. We've built our client base. It's a fully open architecture model. All of our clients sit shoulder-to-shoulder. Um, and so I think that business model is critical, right? We don't want to compete with our clients. Um, and we want to make sure that every single one of them gets a great experience with us. I think that's a business model question. And I think that's an important part of how we set up that franchise. The second piece is the why. Why are insurance companies seeking private credit capital? Well, in the case of a lifeur, you're writing a 40-year life insurance policy. In case of writing an annuity, you're writing a a set uh contract. Um the best way to manage assets against those liabilities are safe cash paying contractual assets. Those assets are exactly what we originate in private credit. And that excess spread that we've been talking about throughout this discussion, 150 to 200 basis points for investment grade like for like credit, that is extraordinarily valuable for insurance companies versus just buying traditional liquids on the screen. And we've seen US insurance companies adopt that in scale with a ton of success. And one of the big themes I see going forward is that same idea expanding to Europe, expanding to Asia because it is such a strong fit for insurance company balance sheets, highquality, safe, contractual, longduration investment grade assets.

Joe: So I've never worked in insurance or private credit, but I've worked in the media industry and the digital media industry. And one of the phenomenons that you see is company starts and they buy various thirdparty solutions off the shelf like oh I'm going to like buy a piece of software to run my uh content management system for the website. Then you grow and then you grow and you're like you know what this uh third party solution doesn't work I need to build my own software for managing my content etc. Does what happens like do insurance companies hit a point where it's like you know what

Tracy: we we we've enjoyed doing business with you but we actually want to launch our own private credit arm and we know that there are some of course I mean there are insurers who are joined at the do all do they what is there a point where it just makes sense for them to like have their own private credit shop or is it sort of case by case whether that makes sense for them?

Z: Well, I think the direction of travel broadly is the other way, right? The reason why our business has grown so much is because insurance companies have said, "Hey, Blackstoneone, you're really good at this. You've got a huge dedicated team. You've got tons of expertise. We can't replicate it." But that is company by company and some continue to do some things in house. Some have certain strategies where they have that expertise and they'll continue to do that in house and we're happy to complement in the areas where we can be editive. But I would say the overall direction of travel is a realization that we have built out this infrastructure, this origination team, this CIO portfolio man management franchise, this allocate asset allocation framework and clients want to benefit from that.

Joe: Uh you've mentioned excess spreads throughout this conversation and I take the point that everything is relative. I think I mentioned that in the intro, but it is also true that spreads on direct lending have fallen over the past year. So, I think we went below 10% for like the first time in 3 years, something like that. They used to be in the mid to low teens. What do you see happening to spreads next year or this year, I should say, because it seems kind of concerning to me if we're getting more supply, but spreads are grinding tighter.

Z: Yeah. Well, look, I think there's a couple of things there. First, you mentioned it, right? Um, borrowers do have choice, right? And so there is going to be some connection to where the liquid markets are and over time that 200 basis point spread for privates versus liquids has held and it holds today. And so I think that's one thing to watch and I think that relative value point you made is the crit critical point. I think the second thing is um yes you are starting to see more M&A supply but we're still well off where we were 5 years ago. And so I think there's still a lot more room to run. And when I kind of step back and I look at the simple math of private equity dry powder versus private credit dry powder, private equity dry powder outstrips it five to one. Okay. And so I think there's still a lot more room to run in the supply equation. I think spreads today are pretty stable. And I think our clients earning that excess spread versus liquids, earning that absolute return, which still feels quite good even though it's not the same as it was 3 years ago still feels quite good relative to where equities are valued today and other things in their portfolio.

Joe: In private assets in general, one of the popular critiques is that, you know, people call volatility laundering. It's like, oh, look, I had a rough quarter in my in my stock portfolio and my whatever, but my credit portfolio is flat this quarter and because there were no trades, there were no marks and that makes me feel sleep easier at night. And the the accusation is is an industry built to some extent on this notion of like here's this asset class that just like helps me sleep better at night, it doesn't doesn't move, etc. What do you what's the response to the volatility laundering claim in in private assets generally?

Z: Yeah, a couple things there. First, I looked to a 20-year loss ratio, right? Like, you can't hide that over 20 years. And I think those stats speak for themselves. Second, you're right. Like, this question around valuations have have been out there in private assets. I mean, Blast's been around for 40 years. We use a best-in-class process with third party valuation providers. We mark our book every single quarter. Um, and and those third parties are the ones that are doing it. And we mark that to market. company fundamentals, market moves, that all shows up. What's funny to me is, you know, when we do see underperformance in an asset and we mark it down, which we do on our watch list assets, we get questions about that. People are paying attention to that. Yet, they are also asking us out of the same breath, are you actually marking your assets? And so, I think if you actually look at our portfolio, you will see a small subset of the book that isn't doing what we expected to do, and we mark those accordingly. I think that's healthy. I think that's good. I think that provides some buffer for our clients and we'll continue to use our third party wellestablished process to continue to do so.

Joe: Uh you mentioned dry powder earlier and this is a truism of markets which is dry powder always seems to be waiting in the wings like no matter where we are in the credit cycle someone's talking about dry powder. I'm sort of surprised to hear that much the number you cited in the private credit space because again like we have seen phenomenal growth and there's still cash lying around that needs to be deployed.

Z: Look, we continue to see strong flows into the market, right? The product is doing what it's supposed to do which is generate strong consistent outperformance for clients relative to liquids. I think as long as you see that continue, you're going to continue to see strong flows across all of our client types, whether it's insurance, institutions, individuals.

Joe: uh question I ask a lot of people today in January 2026 within your organization. Are you finding productive applications of generative AI tools that make your life easier and reduce uh free up working hours from people who to do other things?

Z: Yeah, look, this is a huge focus for us and I think I would be lying if I say we have the golden ticket today,

Z: but we have a lot of focus on this area. How do we make our business more efficient? How do we make it easier on our teams? Whether it's building models, knowing what questions to ask in their due diligence process, data aggregation and analysis, all of this stuff is in motion. It's at various stages of development. Um, and I think you will continue to see us lean into that significantly. It can never replace the investment decision, right? That's still going to be central to our process. But I think anytime we can use AI to drive efficiency, and I like I said, we have tools that allow that to like create the start of an investment committee memo, the start of a model, aggregate data so we can help our team see trends earlier. All of these things are in process and I think more and more you'll see higher adoption.

Tracy: Could you imagine a future where valuation is done more by AI? Because I think about the third party valuation services. They're doing matrix pricing which is basically inferring the market value from you know other clues they can get.

Joe: Inference is like you know that's AI basically.

Z: Look, I I think using AI to support that process, you know, where have market spreads moved? Okay, this company's performance was X. How does that translate into a mark? I think you will see just like I I highlighted on the investment process. I think you will see adoption of support tools driving efficiency, driving accuracy, driving scale. At the end of the day, you still need a human at the end of that to make the decision. Um, but I do think you'll see it incorporated more and more into our workflows.

Tracy: What skills are you looking for when you think about recruiting in 2026 and 2027?

Joe: A lot of people anxious about what they should what they should know, what they should be studying, etc. What are the skills that today are still clearly valuable and will be valuable that you would want to see in a new recruit?

Z: Well, look, first and foremost, the people we look to hire at Blackstone, incredibly hardworking, genuinely good people, motivated by, you know, taking on more, growing, some of these like fundamental traits like

Z: that is universal and I think that will never change.

Z: I think in an environment where you're using more and more productivity tools, how do you interact with people? People want to, you know, do deals with folks that they feel like they can trust. they develop good relationships. How do you think forward around corners? These are the types of critical thinking and communication skills that I think are going to be even more valuable to layer on to all like the basic stuff we have always looked for in the people we bring into the firm.

Tracy: All right, Z, we're going to have to leave it there, but thank you so much for coming on all Thoughts. Really appreciate it.

Z: It was my absolute pleasure. Thank you.

Joe: Thank you so much. That was a lot of fun. I learned a lot. Thank you.

Tracy: Joe, I'm a journalist or a podcast host. Maybe there's a difference.

Joe: No, no, no. There's no no we're journalists. People ask me at parties, what do you do? I say I'm a journalist.

Tracy: All right. All right. Uh the natural tendencies of journalists is to uh be a little bit more pessimistic than an investor. I mean, if you're an investor, almost by definition, you have to be optimistic.

Joe: I agree.

Tracy: A paranoid optimist.

Joe: That's right. But I do see some signs of worry in the private credit market. So, beyond the cockroaches um that we talked about, you know, we have more companies doing liability managements. The documentation point I found kind of surprising because in our previous conversations and certainly in some of the research that I see people say that documentation is declining. So investor protections are basically going down and there's more convergence with the public market and things like that. So, I I take the point that like every private credit investor that we have on this show is going to say that they're different and they're more selective and things like that. And it may be true, but overall, if you're seeing documentation go down and leverage go up and supply increasing, that seems kind of bad.

Tracy: Yeah. No, I mean, look, I think the thing that I I guess I mean, all of that sounds very intuitive to me in these tensions. The other thing that and it's sort of related to this is like how do you maintain like okay you think about the fundamental service right you think about the fundamental service of like speed and custom customizability and so forth

Tracy: and then the tension that exists is like okay you want to like turn this around right away etc and the tension between that and like robust documentations and I mean again 20-year to some extent speaks for itself. But on the other hand, like you could see how these things over time would come into um especially come into tension such a competitive environment.

Joe: Exactly.

Tracy: I want to you know what you you place a phone call to me because you need money. I want to be able to give you an answer right away.

Joe: I'm going to say yes very quickly. I want to be able to say yes to you to maintain your business, to maintain that line and the tensions that could potentially emerge between like our relationship as the lender to the borrower versus, you know, my relationship to my uh people who want protections, etc. You could see how those uh would emerge for sure.

Tracy: Yeah. All right. Shall we leave it there?

Joe: Let's leave it there.

Tracy: All right. This has been another episode of the Odd Thoughts podcast. I'm Tracy Aloway. You can follow me at Tracy Aloway.

Joe: And I'm Jill Weisenthal. You can follow me at the stalwart. Follow our producers Kerman Rodriguez at Kerman Arman Dashelobennett atbot and Kaleb Brooks at Kalebrooks. For more OddLots content, go to bloomberg.com/odlots.

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