The Private-Credit Party Still Has Some Life Left

Private equity ('PE') is out... and credit is investors' new 'it' destination...

The past three years have been tough for PE. High borrowing costs made debt-financed acquisitions – a common PE strategy – less attractive and less profitable.

PE firms have struggled to find buyers for companies they want to exit. They normally either sell a business to another PE firm... or sell it to public investors through an initial public offering ("IPO").

With interest rates so high, not many buyers are willing to pay top dollar. And PE firms would rather not sell at all than sell at a discount.

In short, private equity seems like a lost cause at the moment. But that doesn't mean all private investments are troubled...

With PE investors heading for the hills, folks have flocked to a new private-market darling... credit.

While high interest rates are hurting PE, they've led to a ramp up in the private-credit market...

Many banks turned off the credit tap during the Federal Reserve's hiking cycle. Desperate companies had to seek loans elsewhere... especially the "zombie companies" that are barely scraping by.

Private lenders become their saviors. And as they jacked up their rates, it led to something of a boom in private credit.

According to financial company MSCI, private-debt funds have returned an average of 15.5% since 2022. They're doing far better than PE funds, which averaged a negative 1.4% return in the same time frame.

That's pretty unusual, especially in low interest rate periods. PE returns were 33.9% in 2020, for example, while private-debt returns were 7.2%.

It looks like that huge gap was short lived. In the first quarter of 2024, private credit returned 2%... compared with 1.3% for PE.

Said another way, we're getting close to the end of the private-credit party.

The market has been holding its breath for a rate cut. The Fed kept rates the same at its July meeting. But Fed Chair Jerome Powell hinted at a potential cut in September.

When that happens, the PE environment might turn around again. These funds could get a lot more popular versus private credit, similar to what we saw in 2020.

But in the meantime, interest rates are still at two-decade highs. There's plenty of opportunity left in credit.

Now, most everyday investors can't access private credit...

But the public credit market is yours for the taking... and that's where we focus our energy in our Credit Cashflow Investor advisory.

Each month, the Altimetry team and I recommend a low-risk corporate bond that's trading for far less than it should be (and yielding far more).

Bonds are a great place for your money amid recent stock volatility... because they tend to be far more predictable than equities.

You see, bonds are a legal contract. Unless a company goes bankrupt, it has to pay you back – on time and in full – by a predetermined date.

Said another way, you know exactly how much money you stand to earn... before you invest a dime.

Equity investors simply can't find that level of near-certainty.

Our most recent Credit Cashflow Investor recommendation is a bond from a beaten-down entertainment giant.

Thanks to a special clause in its bond contract, it may have to pay us back more than the face value of our investment. It's yielding about 6% annualized at today's prices. And it's still in "buy" range.

If you're ready to get started in the bond market, we're offering a year of Credit Cashflow Investor for 50% off the regular list price.

You'll also get access to our proprietary Credit Analyzer tool, which gives you a snapshot of the credit health for almost any U.S. company. Get started here.

It's rare for investors to flock toward credit instead of equity. When it happens, be sure to take advantage while you can.

Regards,

Rob Spivey
August 8, 2024