Why Diversification Beats Concentration Lessons from Blackstone's $380M Private Credit Markdown
Lessons from Blackstone's $380M Private Credit Markdown
Sometimes the market provides perfect teaching moments. On August 6, 2025, Blackstone Secured Lending Fund delivered one when it marked down its largest holding—a private credit loan to Thoma Bravo-backed software company Medallia Inc.—to approximately 87 cents on the dollar.
This single position represented 5.37% of the fund's net assets, totaling more than $380 million at par but now valued at around $338 million—a $42 million hit from one loan. The markdown represents a continued decline from 94 cents two quarters ago to 89 cents last quarter.
"The company is underperforming our expectations and the mark reflects that," Brad Marshall, Blackstone's global head of private credit strategies, explained during the earnings call, responding to an analyst who characterized the markdown as evidence of "some degree of stress."
The Fundamental Problem with Concentration
This situation illustrates why diversification matters more in credit than almost any other asset class. Unlike equity investing, where concentrated positions might generate alpha, credit is fundamentally about avoiding losses rather than hitting home runs. When you're lending money, your upside is capped at getting paid back with interest—but your downside is 100% of your investment.
Given market efficiency, smart investors focus on capturing broad, diversified exposure to minimize idiosyncratic risk—the kind of company-specific or manager-specific risk that doesn't compensate you for taking. The goal should be capturing the "beta" of the private credit asset class, earning appropriate compensation for credit and illiquidity risks.
Unlike equity markets where market-cap weighting theoretically provides efficiency, credit risk resembles a put option sold by the lender. This makes diversification not just helpful, but essential for optimal portfolio construction.
A Better Way: Maximum Diversification in Practice
In my June 11, 2025 Substack column, I highlighted why Cliffwater's CCLFX represented my preferred approach to private credit allocation. The fund's diversification profile demonstrates what proper risk management looks like in this space.
As of June 30, 2025, CCLFX's $29.7 billion in assets under management were spread across more than 3,900 loans with minimal concentration:
Largest single exposure: Just 0.6% of net assets.
Blackstone's largest exposure: 5.37% of net assets—roughly 9 times larger.
This isn't just better than Blackstone; CCLFX's 0.6% maximum exposure is half the 1.2% average for the CDLI Index and just 11% of the 5.5% average of the largest 25 BDC lenders, with some funds showing concentration multiples far higher than this average. The fund maintains superior diversification across the top 5, 10, 15, 20, and 25 holdings compared to peers, and is even more diversified than its benchmark, the CDLI Index.
Beyond Single-Name Diversification
While Blackstone's Medallia markdown provides a clear lesson about avoiding concentration, effective private credit investing requires diversification across multiple dimensions:
Industry and Sector Diversification: Avoiding overexposure to any single economic sector or industry group that might face systematic challenges.
Lender Diversification: Spreading risk across multiple direct lending relationships rather than concentrating with a few large players.
Seniority Structure: Maintaining appropriate exposure to first-lien positions versus more subordinated debt.
Loan-to-Value Ratios: Understanding and managing the underlying collateral coverage across the portfolio.
Sponsor Quality: Ensuring loans are backed by private equity sponsors with proven track records of successful portfolio company management.
Leverage Management: Keeping fund-level leverage minimal—ideally no more than necessary to cover operating expenses.
Liquidity Management: Maintaining appropriate liquidity buffers for redemptions and new opportunities.
The Real Cost of Chasing Yield Through Concentration
Blackstone's experience with Medallia provides a timely reminder that in credit investing, what looks like higher returns through concentration often simply reflects uncompensated risk-taking. When that single 5.37% position moves against you—as it inevitably will in some cases—the impact on overall fund performance can be substantial.
While management fees and expense ratios matter, they shouldn't be the primary criteria for selecting private credit exposure. A slightly higher fee for significantly better diversification and risk management often represents superior value for investors.
The Bottom Line
Private credit can provide attractive risk-adjusted returns and portfolio diversification benefits, but only when approached with appropriate risk management. Blackstone's $42 million lesson from a single loan serves as a powerful reminder that in credit investing, it's not about hitting home runs—it's about consistently getting on base while avoiding strikeouts.
For investors seeking private credit exposure, prioritize maximum diversification over concentration, comprehensive risk management over yield chasing, and proven operational excellence over marketing promises. Your portfolio will thank you when the next Medallia situation inevitably arises.
Larry Swedroe is the author or co-author of 18 books on investing, including his latest Enrich Your Future. He is also a consultant to RIAs as an educator on investment strategies.