Undervalued Private Credit Investing: Finding Value in Discounted Lending Funds

During their recent episode, Tobias Carlisle and Tim Melvin discussed Undervalued Private Credit Investing: Finding Value in Discounted Lending Funds. Here's an excerpt from the episode:

[Tim] Well, I think that again, if you look at the top tier, we had an interesting development today in private credit. Apollo has had a private credit fund out there for a really long time. I mean, it predates the credit crisis.

It was available probably in 2001, I think. And it used to be called Apollo Investment. They changed the name to Midcap Financial a few years ago.

Apollo has apparently made the decision to get out of the publicly traded security business because they liquidated their entire real estate lending portfolio. And it looks like they’re just going to liquidate that and move on. They sold this today.

They sold it to Ares. They sold it to Ares Capital, the largest BDC. This is a really good portfolio of direct lending loans.

And this now creates a $31 billion BDC, the biggest one by far. I’ll own that all day. I’m completely comfortable with owning anything that Ares is doing in the space because they almost invented it.

And they do have a relationship with Apollo, which means Apollo just did the SpaceX financing. They’ll be in line to get a piece of that. But down at the bottom end of the room, you’ve got a lot of these guys that they struck after the great financial crisis because all of a sudden, you had banks move out of this space.

They got completely out of takeover lending, middle market expansion lending. They were out completely at the gentle request of the regulators at the time. So now this huge need was there and they stepped in and they filled it, but they’re not necessarily as experienced and they’ve never been through a bad credit cycle before.

I would not own those, but I would own Ares all day. So it’s going to be very dependent on experience level, capital levels and survivability. The players that have not been in the space that make stupid loans are going to pay a price.