Blackstone $22bn US Direct Lending Fund

Blackstone, one of the world's largest alternative asset managers, has impacted the direct lending arena, closing its first U.S. direct lending fund at an impressive $22 billion. This development marks a major milestone in the private credit market and offers several important insights for alternative business lenders.

Fund Details

• Fund Name: Blackstone Senior Direct Lending Fund (BXD)

• Type: Evergreen institutional U.S. direct lending fund

• Capital Raised: Approximately $22 billion, including anticipated leverage

• Target: Exceeded initial $10 billion target

The closure brings Blackstone's global direct lending platform to over $123 billion in assets under management as of the third quarter of 2024.

This fund significantly expands Blackstone's capacity in the direct lending market

Blackstone Credit & Insurance (BXCI) deployed or committed $40 billion in direct lending through the third quarter of 2024, more than double the total for all of 2023.

The firm has participated in several large-scale deals, including:

• CoreWeave: $7.5 billion financing facility

• Squarespace: $2.7 billion facility

• Fidelis: $2 billion

• Davies: £1.5 billion4

Impact on Regional Players

For regional lenders operating in the middle market, Blackstone's massive fund raise could have several implications:

Increased competition: While Blackstone primarily targets larger deals, their expanded capital base may lead them to dip into the upper end of the middle market more frequently.

Potential for partnerships: Smaller lenders might find opportunities to partner with Blackstone on deals that require local expertise or are too small for their direct focus.

Differentiation opportunity: Regional lenders can emphasize their specialized knowledge of local markets and industries as a key advantage.

Interest Rate Spreads and Terms

• Middle market direct lending spreads have tightened slightly, with first-lien loans averaging SOFR + 525-625 bps in Q1 2024, down from SOFR + 550-650 bps in Q4 20232.

• Average OIDs (original issue discounts) have remained stable at around 98.

• Leverage levels are under pressure in some industries, particularly those exposed to inflation and high CapEx requirements.

Middle Market Focus

The lower middle market (companies with EBITDA of $7.5-30 million) continues to offer compelling risk-adjusted returns, with average yields currently ranging from 11-12%.

Lower middle market deals have averaged 4.0x leverage since 2013, compared to 4.6x for upper middle market deals, providing better downside protection.

There's a positive outlook for M&A activity in the middle market, including an expected ramp-up in 2025, which should create ample lending opportunities.

Competitive Landscape

Apollo Global Management has been focusing more on asset-based lending and specialty finance sectors.

Ares Management has been expanding its presence in the lower middle market, potentially creating more direct competition for regional lenders.

Strategic Implications

Scale Advantage: Blackstone's massive fund size allows it to participate in both traditional middle-market deals and larger transactions that may be out of reach for smaller lenders.

Market Timing: Blackstone expects an active transaction environment with declining rates, positioning the fund to capitalize on market opportunities.

Diverse Deal Flow: The fund has shown the ability to lead in both large-scale deals and proprietary middle-market transactions.

Investor Confidence: The successful fundraise reflects strong investor appetite for private credit strategies.

As the private credit market continues to evolve, alternative lenders may need to consider their positioning, deal sourcing strategies, and potential for partnerships or scale to compete effectively in this growing sector.

Our Opinion

While the big players are making headlines with massive funds, there's still plenty of room for smart, focused lenders who know their local market and stick to their expertise and relationships. Potentially targeting deals in the $7.5-30 million EBITDA range where competition from larger players is less intense. Maintaining disciplined underwriting standards, as this has historically been a strength of middle-market lending.

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