While the rate hikes from the Federal Reserve and the subsequent moves in the Treasury curve have been a big focus on Wall Street over the past two years, another segment of the debt market has been booming. Companies have been increasingly turning to the private debt market in recent years as investment firms step in to fill part of the role previously performed by banks and the public debt market. Matthew Bass, the head of private alternatives at AllianceBernstein, said in a January outlook that private credit assets have nearly doubled since 2020 to $1.6 trillion, citing data from Preqin . Private credit firms can help companies raise money more quickly and with more flexibility than traditional lenders. For their investors, private credit can then serve as a higher-yielding fixed income replacement or as part of an alternatives portfolio. “We see demand for private credit from insurers, institutions and individuals for: (i) diversification benefits (vs equity risk and broader fixed income); (ii) attractive income generation; and (iii) improved terms for private lenders,” Morgan Stanley analyst Bruce Hamilton said in a Feb. 15 note to clients. Many everyday investors can’t buy into big private credit funds, but they can get exposure to the space through the stocks of some of the biggest private lenders. Many of those stocks have been hot over the past year, especially when compared to shares of traditional banks. Apollo Global Management is up 56% over the past year, for example. APO 1Y mountain Apollo is one of several stocks tied to private credit that has rallied sharply over the past year. Hamilton still sees upside in buying private credit firms, especially one stock. “While we see much to like about Apollo , Ares and KKR , given ~55-60% share price performance over the past 12 months, we see more priced in than for our preferred play Blackstone ,” the note said. Blackstone is one of the biggest private investment firms in the U.S., with around $1 trillion in assets. The company reported declines in net income and revenue in 2023 , but its private credit business was a bright spot that helped offset weakness in real estate. “Our credit and insurance teams had a remarkable year in 2023, with gross returns of 16.4% in the private credit strategies and 13% in liquid credit. These are extraordinary results for a performing credit business,” chief operating officer Jonathan Gray said in a call with analysts last month. Blackstone is up 35% over the past 12 months, but has a buy or strong buy rating from only 43% of analysts that cover it, according to LSEG. It also yields 2.6%. There are also private credit firms that trade outside of the U.S., for investors who are able to buy stocks in foreign markets. One of Morgan Stanley’s favorites is UK-based Intermediate Capital Group (ICP). “We conclude that ICP, along with BX in our global coverage, offer the most compelling risk/reward on the theme relative to a number of scaled U.S. players where we see positioning as strong but valuations as already reflecting this more fully,” the Morgan Stanley report said.
Source: cnbc.com
