What’s News in Earnings: Can AI Investments Help Private Credit’s Recovery?

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Matt Wirz (0:33)

Hello, listeners. It is July 31st. I'm Matt Wirz, reporter for the Wall Street Journal, and this is What's News in Earnings. Our look at some of the biggest themes standing out this earnings season. It's been a tough year for private investment firms like Blackstone, Blue Owl, KKR. Seven of the largest of these firms now manage over $5 trillion.

They use that to bankroll everything from credit cards to corporate loans to construction of data centers that are popping up all over the country. But their once high-flying stocks have been battered of late by a client exodus from their private credit funds. Share price declines this year range from 15% for the likes of Blackstone and Apollo to more than 30% for Blue Owl. Ouch. There's also been gridlock in private equity deal making. There's been big losses from bets they made on software companies that risk being replaced by AI. Now, these companies are trying to flip the script. Blackstone showed a surge in deal activity while KKR has reported a record quarter for sales of assets in its private equity funds. Blue Owl though, a big player in private credit, reported a 37% drop in new fundraising from a year ago.

Will these fund managers rebound or stay stuck in the doldrums?

Here with me to dissect the recent earnings is AnnaMaria Andriotis, the journal's lead financial reporter and my colleague in covering the industry. All right, Blue Owl and Blackstone say the giant sucking sound coming out of private credit is quieting as client redemption requests decline. Is the worst over, AnnaMaria?

AnnaMaria Andriotis (2:25)

Okay, so one key thing here, Matt, redemption have been a big headline in terms of individual investors trying to pull their money out of credit funds. What Blackstone's earnings showed was that new money going into private credit slowed for the second straight quarter. Simultaneously, the inflows into other private investment categories like private equity and real estate increased. The company attributed what occurred to the retail channel, essentially individual investors who have now slowed putting more new money into its private credit business. And similarly, yesterday, Blue Owl also showed a slowdown in money raised for its private business $1.8 billion into Q of this year versus $5.8 billion a year prior. Pretty meaningful slowdown. But Matt, you reported yesterday on the latest earnings from Blue Owl and KKR.

The concerns about software companies. I mean, is this still a big issue?

Matt Wirz (3:31)

I would say it ain't over yet. That's my takeaway. The software issue is going to take years to play out. Blackstone, which you mentioned, they took a big loss on Medalia, which is this customer services software company that the private equity owner said, you know what, I'm done.

I don't want this company anymore. You take it off my hands. And the private credit lenders had to take it over. There's another company called Cornerstone On Demand. They make HR software. There's a private credit fund that just marked down a loan that they hold to that company to around 63 cents on the dollar. Not a sign that they think this business is booming. So even if the withdrawals are slowing down, it's going to take a really long time for them to return to the heyday that we saw when there was kind of a private credit gravy train going from like COVID all the way through to the end of last year. Silver lining, though, a lot of these firms that are invested in these software companies are suffering from competition from AI, they're also big investors in AI, right? So that is potentially a springboard for them to rebound. What do you think? Is that going to turbocharge these stocks again?

AnnaMaria Andriotis (4:44)

Okay, so Blackstone had a strong second quarter despite the private credit pullback that we talked about with individual investors. And the main reason for that, to your point, is AI. So when we talk about things like the building of data centers, owning stakes in companies like Anthropic, OpenAI, all of these different AI related investments are found throughout its major divisions, whether it's private equity or private credit in real estate infrastructure. And we're seeing the company assigning deal after deal in recent weeks. Blackstone's credit business announced that it's partnering with Broadcom to launch a platform that's backed by an initial $35 billion to finance AI infrastructure. Apollo is also in that deal. And then Blackstone and Google plan to create an AI cloud company to rival the likes of CoreWeave using Google's specialized chips. And this involves a $5 billion investment in equity capital from Blackstone.