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

Key takeaways

Private investment firms like Blackstone, KKR, and Blue Owl are facing turbulence due to client redemptions and sector-specific challenges.
Despite recent setbacks, some firms are increasing deal activity and asset sales, indicating efforts to adapt to the current environment.
A significant exposure to software companies vulnerable to AI competition has caused losses, but ongoing investments in AI may provide future growth opportunities.
Broader economic conditions, if they weaken, could impact the value and performance of private sector loans and investments, adding uncertainty to the sector's recovery.

Summary

The Current State of Private Investment Firms

This section discusses the challenging environment faced by major private investment firms such as Blackstone, Blue Owl, and KKR. Despite managing over $5 trillion and financing a broad array of assets including credit cards, corporate loans, and data centers, these firms have seen their stock prices decline recently, with drops ranging from 15% to over 30%. The industry is experiencing a client exodus from private credit funds, leading to financial strains and decreased deal activity. Blackstone and KKR have responded by increasing deal-making and asset sales, but Blue Owl has faced a notable slowdown in fundraising, signaling mixed signals amid ongoing sector difficulties.

Impact of Redemption Requests and Industry Recovery

The discussion highlights how redemption requests from individual investors are impacting private credit funds, with new money inflows slowing down. Blackstone reported reduced new investments in private credit, while inflows into private equity and real estate rose. Blue Owl faced a significant decline in new fundraising, emphasizing a cautious environment. The hosts analyze whether the worst of this withdrawal phase is over, considering recent slowdown trends yet recognizing ongoing industry challenges.

The Software Sector and AI's Role in Private Equity

A key concern for private equity firms is the exposure to software companies vulnerable to competition from AI. Blackstone incurred losses on software investments like Medallia and Cornerstone, with loans marked down significantly. While these issues have led to declines in certain sectors, firms are also heavily investing in AI, which could serve as a springboard for recovery. Blackstone's increased AI investments include partnerships with Broadcom and Google to finance AI infrastructure and build AI cloud platforms, suggesting that AI may help mitigate current sector struggles.

Economic Outlook and Its Effect on Private Investments

The conversation turns to the broader economic environment, noting a modest GDP figure that signals potential slowdown. If economic fundamentals weaken, the outlook for the loans and investments made by these private firms becomes uncertain. Many loans made during a strong economic period now face risks if profitability and economic conditions deteriorate, raising questions about the resilience of these investments in a downturn.

Show notes

Bonus Episode for July 31. Investment firms like Blackstone, KKR and Blue Owl have been battered over the past year by a client exodus from private-credit funds. WSJ lead financial reporter AnnaMaria Andriotis discusses the state of the industry’s recovery from a surge in redemption requests from rattled investors and whether these firms’ investments in AI can help them recover from blows to the software sector.

WSJ reporter Matt Wirz, who covers credit, hosts this special bonus episode of What's News in Earnings, where we dig into companies’ earnings reports and analyst calls to find out what’s going on under the hood of the American economy.

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