20-Year Funds | Subprime by Another Name | CRE Absorption Leaders

🗞️ Sunday digest: private markets insights 5/31

Happy Sunday!

Every other week, we send a quick digest on what’s catching our eye across private markets.

Before we get into it, a quick shameless plug. I recently joined Morningstar’s Investors First podcast with CEO Kunal Kapoor to talk about the convergence of public and private markets. You can watch it here:

Today’s lineup:

1️⃣ Private equity: 20-year fund, anyone? - As long as you pick the right manager. And what 401(k)s will do to fees.
2️⃣ Private credit: rising competition, loosening structures, and the growing role of retail capital
3️⃣ Commercial real estate: multifamily supply slows and demand holds up, while industrial deliveries are still coming

Before we dive in:

Accredited Insight delivers the LP’s perspective on private credit, private equity, and CRE, drawing on hundreds of deals, and thousands of conversations. Paid subscribers gain access to our database of over 40 case studies and articles on everything from evergreen funds to due diligence (the kind of analysis that tells you what the GP pitch deck left out).

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📊 Chart of the Day

I know, this one’s a bit in the weeds, so let me translate.

Source: FSB

Before we had “private credit,” we had junk bonds (bonds rated below investment grade, or BBB-). They’ve since rebranded to high yield (sounds more appealing, no?)

The chart above compares the credit quality of borrowers across different parts of the leveraged finance universe, from public high-yield bonds to middle-market private credit. You’ll notice that private credit borrowers tend to cluster around the single-B rating bucket (the lower end of the junk bond universe).

Unlike public high-yield issuers, most private credit borrowers aren’t rated, are smaller, and operate with far less disclosure. At its core, middle-market lending is simply lending to highly leveraged, below-investment-grade companies.

Or, drumroll please...

Subprime business loans (how’s that for a name?)

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1️⃣ Private Equity

1. 20-year Funds

Blackstone is preparing to launch fundraising for the next iteration of its flagship core PE buyout fund later this year. Bloomberg reports that the strategy is expected to be highly concentrated (8–10 investments, $800M- $1B per deal).

The more interesting part is the expected holding period. This will be a traditional drawdown fund with a 20-year life. Blackstone’s Core PE I and II funds are still active today, with reported net IRRs of 15% and 16%, respectively, despite having exited relatively few investments (you’ll find the full track record here)

Source: company materials, highlighted are some large evergreen funds

👉 Here are deep dives on two of the funds:

BCRED: High Yield Now, NAV Erosion Later

Inside Blackstone's Private Equity Strategies Fund (BXPE)

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2. Pick the Right Manager (and Don’t Commit Chart Crimes)

This chart is starting to make the rounds, and I really — really — need to draw your attention to two things.

First, the obvious: you want to pick the right manager. If you can’t pick the right manger, is there a point in allocating to private markets? (rhetorical question. We are all above average at picking, right?)

Due Diligence on PE Managers: Doing it Like the Best

Second, look at the footnotes. Private equity, private credit, non-core RE and VC returns are reported as IRR. Large cap equities and bonds are time-weighted returns. These are not the same metric, and they don't behave the same way. (Read this and this for more on the topic).

Source: JPM

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3. Private Equity in your 401(k)

The process of bringing alternative assets to your 401(k) is moving along.

The Department of Labor has proposed a new ERISA safe harbor that could make it easier for 401(k) plans to offer alternative investments. If adopted, fiduciaries who follow a “prudent due diligence process” would receive greater protection from litigation, potentially opening the door to broader private market exposure inside retirement accounts.

🚊 Personally, I don’t think there’s much stopping this train. My base case is that private assets find their way into target-date funds within the next few years.

What I do expect, however, is fee compression. Fees are one of the few things in private markets that are truly transparent. Once people start paying attention, the pressure to lower the fees asset managers charge will increase.

Speaking of fees, Morningstar recently published its annual U.S. Fund Fee Study. For perspective, you’d need to roughly triple the scale on this chart to capture the fees charged by many evergreen private market funds.

Source: Morningstar

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2️⃣ Private Credit

The two charts below tell you the whole dang story of private credit in general, and direct lending in particular (a roughly $1.2 trillion subset of the broader private credit market).

As fund managers raised enormous amounts of capital, loan spreads compressed (chart on the left, chart in the middle). More competition generally means lower pricing, just like we all learned in Econ 101.

Source: BIS

What’s harder to capture in a chart is the other consequence of competition: underwriting standards tend to loosen. One example is the continued rise of covenant-lite loans, which give lenders fewer protections if a borrower starts running into trouble. Another example is rise of PIK (or payment-in-kind).

PIK Is Whispering. Are You Listening?

BIS also notes: “Historically, private credit funds were the remit of institutional investors, but the share of assets under management (AUM) accounted for by retail investors climbed from virtually zero to 13%, or $280 billion, in the past decade.”

And virtually all of that retail capital sits inside BDCs and evergreen vehicles.

Why does that matter? Because we’ve introduced predictable human behavior into an inherently illiquid asset class. When returns are strong, money flows in. When returns slow or headlines turn negative, investors tend to head for the exits.

Watch Liquidity. Closely.

How does it all play out? I don’t know. But if I owned an evergreen private credit fund, I'd be paying very close attention to liquidity.

👉 I contributed to a TSCS piece on private credit marks and sealed jars of olive oil, and what it looks like when prices don’t have to clear. It opens in ancient Piraeus and lands in today’s BDCs.

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Borrowers

A quick note on the borrowers themselves.

If you’ve been reading this newsletter for a while, you know my biggest criticism of private markets is opacity. Outside investors have very limited visibility into borrower fundamentals, including earnings quality and repayment capacity (do they make enough money to pay back the loan?) Much of this information simply isn’t disclosed.

The first chart shows debt-to-EBITDA multiples. The solid lines include manager adjustments and add-backs; the dashed lines exclude them.

For reference, 7x leverage means a company has debt equal to seven years of EBITDA. That’s earning before interest expense, taxes, capital expenditures, and other very real cash demands.
(Adjusted EBITDA is a fudged EBITDA)

Source: FSB

The second chart should be included in every middle market direct lending pitch deck. More than 40% of borrowers are generating negative cash earnings after interest, tax, working capital and capex. Many borrowers are “asset-light” SaaS companies.

These are the modern day NINJA loans (remember those? No income, no job, no assets)

Source: FSB

How do companies with negative cash earnings repay loans? Often, they don’t.

They refinance them. Which, of course, depends on private credit fund managers continuing to raise fresh capital. As long as new money keeps flowing into the asset class, borrowers can often extend maturities and kick the can down the road. The real question is what happens if fundraising slows..

📍 Which brings us to the main point: it helps to understand where these borrowers sit on the risk spectrum (and what you’re being paid for it..)

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3️⃣ Commercial Real Estate

Good News for Multifamily (on two fronts)

The chart on the left shows rent growth (it’s still positive!) vs occupancy (it’s moving up!) The chart on the right shows multifamily construction starts (down, which will bring supply down) and deliveries (also down, which will put upward pressure on rents going forward).

Source: JPM

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From the NAR Insights: U.S. multifamily demand remains above historical norms but continues to lag supply.

👉 Here’s why you should care about demand/supply and a plethora of other things if you invest in real estate:

How to Read a Real Estate Pro Forma: Part 4

Industrial is still normalizing, with absorption up 30% YoY to 122.7M SF but supply still outpacing demand, pushing vacancy to 7.6% and slowing rent growth to 1.3% despite strong logistics-driven leasing and outsized activity in Dallas-Fort Worth.

And finally, here is the absorption leaderboard for both asset classes:

Source: NAR

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Thanks for reading! As always, if you have any suggestions, reply to this email, leave a comment, or hit me up on socials (unhinged me on X, slightly more filtered me on LinkedIn)

-Leyla

P.S. New here?

Here’s where you’ll find the full archive (somewhat organized):

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