A Canadian national of Northern Irish parentage, Michael Carruthers joined GSO Capital Partners – the forerunner to Blackstone Credit – in London in 2006, thinking he would be based there for a couple of years. It ended up being 13. With a Canadian wife and other family in Canada, the plan was to return at some point – and in March 2019, that’s what transpired.
When Carruthers expressed his desire to return [to Canada], “Blackstone were great about it. They said, ‘Let’s figure out what we can do in Canada and the US Midwest’.” The role that followed largely revolved around US companies buying Canadian companies and vice versa – deals that Carruthers would originate.
It turned out to be a prolific period, investing across a range of strategies including Blackstone Credit’s flagship private credit fund BCRED – a perpetual business development company launched in January 2021 – “which meant we had access to scaled capital in an active M&A market”. Carruthers was involved in both fundraising for, and deployment of, BCRED.
Return to the Old World
But despite Carruthers anticipating a long stay in Canada, the firm came to him with a proposal to move back to London. Poised as it was to launch ECRED, BCRED’s equivalent retail-focused vehicle in Europe, as well as being in the process of raising a third European senior debt fund, the firm needed more senior execs back in the Old World – especially as the size of the investment team in the region was growing rapidly.
With strong ties to Canada but having missed London, Carruthers admits the decision was not easy – but in the end, the pull was too strong.
So back he came, as European co-chief investment officer alongside Milan-based Andrea Valeri. He also works closely with Mike Zawadzki, global CIO for Blackstone Credit, and US CIO Rob Petrini. “We make investment decisions through our committee rather than there being a single person making a yes or no decision,” insists Carruthers.
One thing Carruthers reflects on as he sets foot in London again is how much has changed since he first called the city home in 2006. He says GSO then had around $2 billion of capital in Europe, much of it focused around hedge fund-type strategies and collateralised loan obligations. Following the purchase of GSO by Blackstone in 2008, the firm became more of a distressed and mezzanine specialist. It was only in 2015, he says, that it moved significantly into direct lending and unitranche.
With his focus now on the ECRED retail product and the European senior debt strategy, Carruthers has returned to Europe at an interesting time for the private debt market. Over the past 12-18 months, he says the direct lending market has been financing only the highest quality companies “because these were the only companies getting to a successful exit. Most owners of businesses are reluctant to go through the lengthy process of preparing and launching a sell-side transaction only for it to fail or be pulled in this period of volatility in the markets”.
In the past year, he says, it has been an environment where “you’ve had great companies getting sold, limited competition from the banks because of hung syndications and private credit competition was also less because fundraising had slowed for some firms”.
The banks are back
Today, he says, the banks are once more back on the scene – for certain types of deal at least, such as refinancings or sponsor-to-sponsor transactions where there is an existing capital structure and a tight timeframe. Here, he says, they are being “pretty aggressive”. But this is not the case when it comes to carve-outs and take-privates: “They’re still putting forward term sheets but their flex terms are more conservative.”
A flurry of deals in recent weeks and months has made everyone feel really busy, albeit from the low base set in H1. But Carruthers cautions against any notion of a deals boom akin to 2021: “I think we’re going to have more activity in Q4 than in the first half of this year, but don’t anticipate returning to 2021 M&A volumes any time soon.”
Carruthers says some factors are placing a brake on activity, even though it’s picking up. One is the high cost of first-lien debt, meaning you either have to assume the borrower will deliver strong growth or that the cost of finance will come back down over the next two or three years. This means tension between buyers and sellers and the risk of sales processes collapsing.
On the other hand, in support of deal activity, sponsors keen to raise fresh capital know the pressure is on to show results by returning capital to their LPs. In addition, portfolio company performance is holding up well. Carruthers says the number of portfolio companies on a ‘watchlist’ is consistently around 3-4 percent of the total – with generally only around 1 percent a problem for the debt holders rather than equity holders. The proportion has not changed, he says, over the last 18 months.
The market, in his view, is gaining in confidence. “My biggest concern 18 months ago, when the equity markets were rapidly falling, was that our underlying portfolio company performance would also suffer. That has not played out and we’re encouraged by the resilient performance that we’re seeing.”
The fundraising revival
Blackstone experienced a retail boost in the first half of 2023, with interest in semi-liquid funds and drawdown funds
After a tough environment for raising new capital last year, culminating for Blackstone in the negative press around BREIT redemption requests, Carruthers noted a pick-up on the retail side in the first half of this year despite redemptions continuing to be “a bit elevated”.
“We’re seeing an attractive fundraising environment for both semi-liquid funds and drawdown funds, with interest in private credit from investors across Europe, North America, the Middle East and Asia,” says Carruthers. He also notes that, with firms again able to write bigger cheques, the market may be moving once more towards a “whole loan” approach and less towards syndication.
In April, affiliate title Buyouts reported that Blackstone was targeting $10 billion for a new US direct lending fund. The firm closed the largest-ever energy transition private credit fund on $7.1 billion in August – beating a $6 billion target – and, in the same month, closed its fourth tactical opportunities fund on $5.2 billion, moving comfortably past a $4.5 billion initial target.