Gilles Dellaert, the global head of Blackstone Credit and Insurance (BXCI), has played a pivotal role in bringing together Blackstone's diverse credit and insurance groups. BXCI now manages an astonishing $350 billion in assets, constituting a significant portion of Blackstone's total credit assets and a substantial part of its $1 trillion-plus in assets under management (AUM). McKinsey's Andrew Reich, Ari Libarikian, and David Schoeman had the opportunity to engage in a detailed conversation with Dellaert at Blackstone's offices in New York. This edited version of their conversation offers valuable insights into the world of credit and insurance.

Uniting Credit and Insurance at Blackstone

Background and Career Journey

Dellaert was born and raised in Belgium, completing his college education there and kickstarting his career at a local bank. He then joined J.P. Morgan in Brussels before moving to its New York office. Later, he left to follow his boss to Goldman Sachs, where he worked in credit trading within the securities division. In 2006, he transitioned to the reinsurance group and eventually became the CIO while the business was still in its early stages. Through acquisitions, reinsurance, and organic retail growth, the business expanded and thrived. In 2019, Blackstone reached out to him, and he joined the firm on April 1, 2020, despite the challenging circumstances of starting a job during the pandemic.

Blackstone's Approach to Credit and Insurance

About a year and a half ago, Blackstone recognized the inefficiency of having credit lending operations spread across different business units. By bringing these activities together, they aimed to enhance the experience and outcomes for all stakeholders. As a one-stop-shop solutions provider, they can offer comprehensive services to both investing clients and borrowing clients. This integration allows for better decision-making by connecting more dots and leveraging the firm's unique position across various asset classes and sectors.The growth of Blackstone's credit assets, including its real estate debt businesses, to more than $430 billion over the past three years can be attributed to the combination of BXCI. However, at the core, it all starts and ends with investment performance. Blackstone is committed to delivering for its clients, just like a restaurant that needs to serve good meals to keep customers coming back. In the credit space, they build one-off offerings patiently and purposefully, leveraging their established equity-investing businesses. For example, having relationships from a successful $53 billion infrastructure equity business makes it easier to make loans to infrastructure borrowers, and a $600 billion global real estate portfolio facilitates real estate lending.

People and Processes for Differentiated Performance

A-plus people and a repeatable and scalable process are crucial for achieving differentiated investment performance. Blackstone attracts talent from various institutions, backgrounds, and schools, receiving over 50,000 applications for their first-year analyst class. The firm's culture emphasizes collaboration across BXCI and the entire firm. In addition to talent, they implement rigorous processes, investment discipline, accountability, and team play, which lead to excellent results.

BXCI's Strategy in Insurance

With its roots in asset management, Blackstone adopted a capital-light approach for its insurance business. This open-architecture model allows them to offer customized solutions to clients based on their needs. By serving multiple customers rather than buying a company and assuming insurance liabilities, they have achieved significant growth. The consistent strength of Blackstone as a third-party asset manager has been crucial in this regard, and clients have appreciated the customized and scalable approach.

The State of the Insurance Industry

The financial crisis was a turning point for the insurance industry, leading to prolonged low-interest rates and challenges in asset-liability management. Insurers had to transition away from asset-intensive businesses towards fee-generative ones. The rise in interest rates in 2022 provided a boost to annuity sales, making them attractive again. Private managers have become interested in insurance over the past decade, injecting about $30 billion of net new capital globally and transferring about a trillion dollars of liabilities to private capital-backed insurers.

Private Capital's Role in Insurance

The trend of allocating more to private credit is driving a gradual shift away from public fixed income. Investors are realizing the benefits of private credit, such as access to higher yields and reduced liquidity needs. Private capital is becoming more mainstream in the insurance industry, and CIOs are increasingly looking to increase allocations to private credit. This shift is driven by the aging population's need for savings and retirement products and the need for insurers to access yield enhancement.

The Interplay between Banks and Private Managers

The lending relationship between banks and private managers is highly complementary. They are partnering in various ways, such as buying loan pools and supporting each other's growth. This trend derisks the financial system by allowing loans to find their way onto the balance sheets of long-duration investors. As banks reprioritize lending activities, they are increasingly partnering with firms like Blackstone, creating win-win situations for both parties.

Risks and Echoes of the Past

Some investors are wary of the newness of the business, but Dellaert argues that lending is not risky. Looking at Blackstone's private investment-grade business, there have been nearly zero downgrades. Insurance companies have a history of being allocated to private credit in different forms, and they can now access these investments through third-party managers.

Impact on Retail Consumers

These changes have led to better pricing and outcomes for retail consumers. Companies that have adopted these strategies can offer more competitive rates in annuity products and long-duration life business. This benefits consumers, especially retirees, by providing them with access to the same benefits as large institutions.

International Expansion

Both Europe and Asia are important markets for the future. While it's difficult to predict which region will grow faster, managers need to be present in these regions to source relevant assets. Blackstone has been active in both regions for decades and has invested significantly in adding talent and strengthening its teams. In Europe, the focus is on products that comply with Solvency II and have longer durations.

The Role of AI, Data, and Digitization

Data is at the core of Blackstone's operations, and they are investing in data science capabilities and AI. Clients demand customized data reporting and analytics, and AI is already having an impact on the insurance industry, especially in operational functions. Deal teams, investment teams, and analysts are starting to use AI to review documents and scrub data.

Personal Leadership Style

Dellaert's leadership style revolves around talent. He focuses on selecting, nurturing, growing, and retaining the best talent. For senior people, he enables and empowers them to collaborate and excel in an entrepreneurial environment. The firm's culture encourages team play across divisions, and people are encouraged to be nice to each other and treat others with respect. Despite the growth of BXCI, Blackstone has managed to retain its culture and performance.