If you’re earning 500 over a base rate today, that’s 5.5 plus upfront fees, you’re earning 11.5% on an unleveraged basis if you put a little leverage better than that. So the risk return to us still feels compelling. Some sponsors [Technical Difficulty] risk for the common equity, not the capital structure. So overall, we have not seen signs of excess. And there’s pretty good discipline in the market and that gives us a lot of confidence.
Michael Chae: Jon, I’ll just chime in on that. Two things, one, to put a fine point on Jon’s point about 44% loan to values, what that obviously means is, because these are mostly sponsored transactions with new equity being invested, that 56% of the capital structure on a new deal is being put up with cash equity junior to this debt from high quality sponsors. So that is sort of another dimension too that we think the risk reward here. And then on default rates, as I mentioned in my remarks, less than 40 basis points for our business in the first quarter. There is — we are demonstrating — because I think a couple of years ago, there were some concern in the marketplace about what would happen with the default rates for folks like us.
There is differentiation, there is outperformance depending on the borrower selection and the individual private credit player. And so we’re operating at a fraction, I think, of the overall market default rate, which is normalizing. So I think we feel really — and that’s while being a leader in deploying capital in private credit.
Operator: We’ll go next to Brennan Hawken with UBS.
Brennan Hawken: Just two on real estate, one housekeeping and one sort of more forward looking. Could you touch on the impact of the rate hedge in BREIT in the first quarter and April to date? And then more on the forward looking side, appreciate the comments on supply and real estate. But given that rates have actually started to back up and sure long rates are a little off the peak but not by much. What drives the confidence in real estate bottoming, wouldn’t we need the cap rates to move up as much as base rates or close to as much as base rates have moved up in order to draw that demand into the market?
Michael Chae: Brennan, first, just on the data question in terms of the impact of the swaps, it was about 1 point out of the 1.8% net performance for BREIT.
Jon Gray: And then on cost of capital, certainly a rising 10 year, not helpful, but I think it’s important to put it into context. As you noted, it’s lower than it was in October but also debt capital being so important. So if you went back to October, it was extremely difficult to borrow money. Spreads were much wider and banks were very reluctant to lend in the space. In the first quarter, as I noted, we’ve seen a fivefold increase in CMBS issuance. So the fact that debt capital is more available and the cost is meaningfully lower because of the spread not as much the base rates, that’s a helpful sign. So it is more positive than it was six months ago. Backing up 10 year treasury, as I noted, not helpful. But the fact that overall, it does feel to us at some point here the Fed is going to bring rates down, there will be some downward pressure, that should be helpful.
But the cost of capital overall coming down is helpful. And that’s why we’re seeing, even today, despite the backup in rates more folks showing up to buy assets than certainly we saw six months ago.
Operator: We’ll go next to Bill Katz with TD Cowen.
Bill Katz: Just coming back to the opportunity in global wealth management. I was wondering if you could talk a little bit about where you’re seeing the volume coming from, to the extent you get that kind of granularity from the distributors? And then secondly, just given the tremendous focus on many of your peers into the space, also wondering how you sort of see the competitive environment unfolding as we look ahead?
Jon Gray: So Bill, we see demand pretty broad based. Obviously, we have a lot of strength in US with the biggest distribution partners. We’ve been at this, as a reminder, for a very long time. We’ve got a lot of relationships with financial advisers and their underlying customers. The performance of our drawdown funds, the performance of BREIT, of BCRED, has created a lot of goodwill that we’re able to tap into. And so I would say it’s broad based in the US. We are seeing strength overseas as well. Japan is a market where we certainly have seen more openness to our products and we’ve had success there. Historically, some of the markets more tied to China, Hong Kong, Singapore are a little slower today, but we’ve had strength in those markets over time also.
And Europe, I’d say, is an emerging market as is Canada. So I think it’s a global story. It’s still primarily US but it’s growing. And within the US, what’s interesting is we’re still — if you look at the penetration of financial advisors, still in the very early days. Really a small percentage are allocating to alternatives. And we think that can broaden quite significantly as these products deliver for clients as they begin to recognize the benefit of alternatives trading some liquidity for higher returns. So we think there’s a lot of room to grow. And the fact that we have 300 plus people on Joan Solotar’s team, we’ve got this very powerful brand, we’ve had strong performance. All of that, I think, bodes well for us and makes us a differentiated player in this space.
Operator: We’ll go next to Brian McKenna with Citizens JMP.
Brian McKenna: I believe you’ve recently hired a senior data exec to leverage AI across your private equity portfolios. So can you talk about your approach to leveraging data and AI across your portfolios and what that might mean for additional value creation over time? And then can you also talk about how you leverage data on the deployment front? I’m assuming a lot of the data you have across the entire platform gives you insight into emerging trends globally. And so how does all of this translate into where you ultimately invest?
