A corner of the lending world known as “private credit” keeps getting torpedoed by bad news.
But insiders continue to take the other side of this trade in a big way – which suggests the sector’s troubles are priced into stocks in the space. In my view, that means the group looks attractive for patient investors with a healthy risk appetite.
In the latest barrage, the credit rating agency Moody’s on March 23 cut its rating on a private credit fund run by the asset managers KKR (KKR) and Future Standard down to “junk” status.
Moody’s said bad loans rose to 5.5% of investments at the fund, called FS KKR Capital (FSK). That is one of the highest levels among the business development companies (BDCs) that it covers.
The move by Moody’s adds to the chorus of negativity about private credit lending. “Private credit” means debt issued by non-bank lenders like private equity firms and specialized funds. They usually lend to smaller companies that have trouble accessing the public debt markets. Private credit lenders typically offer higher yields to investors to offset the risks.
The risks have come home to roost in the past half year, with defaults and bankruptcies at the subprime auto lender Tricolor and the auto-parts supplier First Brands, among others. Analysts also worry that private credit funds have lent a lot of money to software companies whose businesses might get wiped out by the code-writing capabilities of artificial intelligence. Indeed, at FSK, the fund just hit by the Moody’s downgrade, software loans were the largest single category of lending, at 16.4% of loans.
All the troubles have created a run on the bank, so to speak. Investors have been asking for their money back big time. Private credit lenders like BlackRock (BLK), Blackstone (BX), Blue Owl Capital (OBDC) and Cliffwater are getting hit with redemptions.
FSK defended its capital structure in the media following the Moody’s downgrade, noting that debt maturities are spread out enough to be manageable.
That’s all well and good, but I have a bullish take on private credit companies for another reason. Over the past month or two, insiders at around a dozen private credit companies have stepped up to buy their company shares in a big way. They have put millions of dollars into their stocks, including at FSK, albeit in much smaller amounts there.
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At some point in any sector crisis, the bad news gets mostly priced in, which makes the related stocks look attractive. Insiders are telling us that time is now for private credit. Typically, sector-wide buying by insiders can be a bullish sector signal. Insiders are telling us the fears are overblown, and that is good intelligence.
Here’s a closer look at the insider buying at three of the biggies in the space.
3 Private Credit Stocks with Insider Buying
KKR (KKR)
KKR has three business lines: asset management, insurance and strategic holdings. KKR has a little over $740 billion in AUM. Private equity is a big part of its asset management division. In insurance, it owns Global Atlantic, which has $220 billion of assets, up from $72 billion when KKR bought it five years ago. The strategic holdings division owns companies outright.
The insider buying: Since early February, several directors and the two co-CEOs have put over $50 million into KKR stock. At 24.5 times trailing earnings, the stock trades at a 28% discount to its five-year average trailing price-to-earnings ratio.
Hamilton Lane (HLNE)
Hamilton Lane is an investment manager that helps its clients get exposure to alternative investments like private equity, private credit, real estate, infrastructure, real assets, and venture capital.
The insider buying: In the second half of February, the two co-CEOs and other insiders put over $3 million into their stock. At 18.3 times trailing earnings, the stock trades at a 35% discount to its five-year average trailing price-to-earnings ratio.
Ares Management (ARES)
Ares Management is an “alternative investment manager” offering exposure to private credit, private equity, real estate, and secondaries. That makes it ground zero in the current private credit scare.
The insider buying: In February, two directors put about $1.3 million into their stock. At 16.5 times trailing earnings, the stock trades at a 36% discount to its five-year average forward price-to-earnings ratio.
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