Blackstone Secured Lending (BXSL) recently reported a solid Q1 2024, with impressive figures like a 13.1% annualized return on equity and a healthy NAV increase. However, a closer examination of these seemingly ordinary numbers hints at a potential revolution brewing—one that could redefine how Business Development Companies (BDCs) operate in a tightening credit market.

The key to this potential shift lies in Blackstone's repeated emphasis on "reverse origination." This isn't just a fancy term; it represents a strategic move that utilizes Blackstone's vast scale and established private equity connections to proactively source deals instead of passively waiting for them to appear. In essence, it's about pinpointing companies within Blackstone's extensive private equity portfolio, many of which are publicly traded, that could gain from a tailored private credit solution.

During the earnings call, BXSL executives dropped intriguing hints, suggesting that this "reverse origination" strategy is fueling a considerable chunk of their pipeline. Brad Marshall, Co-CEO, highlighted this by stating, "at least half of our deal flow right now, we're going into the market and creating." He cited the example of Health Comp, a Q4 2023 deal where Blackstone acted as the sole capital provider, capitalizing on its incumbency and strategic value-add capabilities.

"Furthermore, Marshall revealed that at the end of Q4 2023, BXSL had pinpointed 100 potential "reverse origination" targets. While it's unlikely that all these targets will turn into actual deals, the sheer volume emphasizes the massive, untapped potential this approach brings. Blackstone, with its investment in over 3,000 companies through BXCI, is in a prime position to tap into this landscape."

Here's why this is significant. In a constricted credit market, characterized by compressing spreads and heightened competition for traditional deals, BXSL is carving out a unique edge. By proactively targeting companies within its existing network, it can secure proprietary deals with favorable terms and extended call protection.

Commitment and Funding Trends

The chart below illustrates BXSL's commitment and funding activity over the past few quarters. It underscores the recent surge in activity, potentially driven by the "reverse origination" strategy.

The strategy's success is evident. Despite the general trend of spread compression in the market, BXSL's Q1 2024 new investments still achieved an average yield of 11.4%, adding to its dividend. Moreover, repayments have been limited, indicating Blackstone's capability to protect its current portfolio and prolong the duration of high-quality assets.

This approach isn't solely about generating returns in a tough environment; it points to a potential major shift in how BDCs operate. Traditionally, BDCs have been more passive lenders, relying on deals generated by investment banks and private equity sponsors. Blackstone, however, is actively reshaping BXSL into a proactive deal maker, leveraging its expansive private equity network and scale to produce proprietary opportunities.

If Blackstone's "reverse origination" revolution proves successful, it could significantly alter the BDC landscape. Other BDCs, lacking Blackstone's scale and deep-rooted private equity relationships, may struggle to compete for deals in an increasingly saturated market.

"**Fun Fact:** Founded in 1985, Blackstone initially focused on mergers and acquisitions advisory. The firm's evolution into a global investment powerhouse, encompassing private equity, real estate, and credit, is a testament to its adaptability and strategic prowess."