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Blackstone ups single risk transfer investments

Blackstone Group, the world’s largest buyout firm, has emerged as a major player in the acquisition of bank loans critical to the private equity industry, despite exposing itself to risks generated by its own operations in the process, according to a report by the Financial Times.

Recently Blackstone, which manages over $1tn in assets, has become a substantial investor in significant risk transfer products underpinned by subscription lines – short-term loans utilised by private equity funds to finalise deals ahead of receiving capital from investors.

Due to its substantial size, the company has assumed risk on credit lines linked to its own buyout funds, though the firm states these constitute only “a single-digit percentage” of the portfolios on which it has exposure. This unique situation has led to concerns in some quarters, about the potential ‘circular’ nature of the risk involved, according to the FT.

Blackstone though, has dismissed the notion of circular risk, arguing that its investors are “the ultimate risk counterparty the lender is exposed to”, and noting that no investor has ever missed a capital call in its 40-year history. The firm maintains that its funds represent a small portion of the portfolios for which it provides SRTs, and that all its subscription line SRTs are in highly diversified portfolios.

The Wall Street-listed group has been acquiring these assets through its Blackstone Multi-Asset Investment unit, which manages hedge fund-style investment strategies. Banks typically use SRTs to hedge against default risk on a pool of loans, either by transferring assets to a special-purpose vehicle that issues bonds or through derivative products while retaining the assets on their balance sheets.

While credit facilities to private equity form a minor part of the SRT market, they are increasingly popular due to their perceived safety.

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