(Bloomberg) — The recent selloff in firms tied to the private credit industry threw Ares Management Corp. “out with the bathwater,” according to BofA Securities Inc.
The rout in alternative asset manager stocks is an overreaction “to mainly a few minor data points,” BofA analysts led by Craig Siegenthaler said Wednesday. That, they added, is a “fire sale opportunity to buy Ares.”
Ares shares have plunged more than 30% so far this year, while Blackstone Inc. and KKR & Co. shares are down almost 30% after new artificial intelligence tools sparked worries about the private credit industry’s loans to software companies that were at risk of being disrupted by the advances in AI. The wild market gyrations, meanwhile, have drawn comparisons to the global financial crisis.
Shares of Blue Owl Capital Inc. — a poster child for the worries percolating in the $1.8 trillion private credit market — have plunged almost 40% this year and notched their worst monthly performance ever in February. Bearish bets against Blue Owl climbed to an all-time high earlier this month.
But to BofA analysts the selloff has gone too far, especially for their top pick buy-rated Ares, a “world class” alternative asset manager with some $160 billion of dry powder, which is the best way to play a return to fundamentals for the industry, they said. They also rate Blackstone, KKR and Blue Owl as buys.
Concerns over the industry have mounted in recent weeks. There have been questions regarding asset quality and private credit funds have grappled with a wave of redemption requests as concerns swirl around the quality of their loans — particularly to software firms under threat from AI. Last week Morgan Stanley and Cliffwater LLC were the latest money managers to cap redemptions from their multibillion-dollar private credit funds, following a similar move from BlackRock Inc.
The backdrop has evoked comparisons to the period preceding the 2008 financial crisis, with some worst-case default forecasts for the private credit sector reaching 15%. But to BofA the current situation is not a redux of the 2008 crisis.
“This is not a GFC repeat,” BofA analysts wrote. “In the GFC when the quality of private credit managers was lower and GDP growth was negative, defaults only reached 9%.”
Lehman Brothers and Bear Stearns had more than 30 times leverage while business development companies have around 2 times, they noted. Banks today are well capitalized and not carrying significant risks.
They argue there’s “misinformation around private credit despite a decent economic backdrop. This is causing the markets to overreact to minor data points due to fears that credit quality and net flows will get much worse.”
