Blackstone: We're in an 'epic credit bubble'

Friday, 27 Sep 2013 | 10:49 AM ET
The Blackstone Group LP logo hangs in the company's offices in New York.
Scott Eelis | Bloomberg | Getty Images
The Blackstone Group LP logo hangs in the company's offices in New York.

One of the world's largest investment firms believes the financial system is overly leveraged.

"We are in the middle of an epic credit bubble, in my opinion, the likes of which I haven't seen in my career in private equity," Joseph Baratta, The Blackstone Group's global head of private equity, said Thursday night at the Dow Jones Private Equity Analyst Conference in New York City. "The cost of a high yield bond on an absolute coupon basis is as low as it's ever been."

(Read more: 17 years until Earth runs dry?)

Baratta said Blackstone is "bullish" on the U.S. economy, but the "valuations we have to pay relative to the growth prospects are out of whack right now."

Baratta said the U.S. still has "clear headwinds" and is "range bound" between 1 percent and 3 percent economic growth.

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Blackstone, which manages $53 billion in private equity assets and $230 billion overall, is pursuing select investment opportunities in energy, transportation infrastructure, consumer finance, housing and construction, according to Baratta.

"We're not just levering up U.S. GDP into multiples today," Baratta said. "I do expect mean reversion to happen at some point on interest rates, on credit spreads, on the cost of some investment grade corporate credit."

The high valuation of many companies today makes it harder for them to grow. "The biggest risk to returns of this vintage is that exit multiples are depressed," Baratta said.

(Read more: 8 signs you're headed for financial ruin)

Asset bubbles: How top investors avoid them
The wisdom of crowds is popular, except when it comes to investing. When the masses rush into comparable trades and trends, the result is diminished returns and compromised capacity. As top investors seek the holy grail of non-correlated returns, how are they angling to strike first and avoid the crowds? With CNBC's Kelly Evans; Michael Novogratz, Fortress Investment Group; Michael Sacks, Grosvenor Capital Management; Steve Kuhn, Partner and Head of Fixed Income Trading, Pine River Capital Management; David Villa, Wisconsin Investment Board.

—By CNBC's Lawrence Delevingne. Follow him on Twitter @ldelevingne.

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