This Asset Manager Could Be Building Back Trust in Private Credit

On the March 9 episode of The Morning Filter, David Sekera and Susan Dziubinski discuss one of Sekera’s stock picks of the week, Blackstone BX, and why the alternative-asset manager stands out from its peers in the private credit markets. Here is an excerpt from the show.

Is Blackstone Stock a Buy?

Susan Dziubinski: Your final stock pick this week is Blackstone. Run through the key metrics on it.

David Sekera: Blackstone’s trading at a 37% discount to fair value, puts it well into 4-star territory. Nice, healthy dividend yield at 4.3%. In fact, it’s really getting pretty close to 5-star territory. Now, we do rate this one with a high uncertainty, but that’s offset my mind by being a wide economic moat based on intangible assets and switching costs. And I’d also note of the alternative asset managers, this is the only one we rate with a wide economic moat.

Why We Like Blackstone Despite Private Credit Concerns

Dziubinski: Now, Blackstone stock has been knocked down quite a bit this year, along with the stocks of other asset managers with exposure to private credit. So now, given that, Dave, why do you like it?

Sekera: I’ve kind of been vacillating on this one over the course of the weekend a little bit, to be honest. So let me first talk about why I initially picked this as being a pretty interesting opportunity last week, and then why, over the course of the weekend, I’ve kind of been second-guessing myself on this one.

So, again, the company is an alternative asset manager, essentially, they make money on charging fees based on the amount of assets they have under management. In our view, we think that this company is the best of breed among those nontraditional asset managers.

The other thing that I think is a positive on this one is they allowed 7% of redemptions in their private credit fund, even though the documentation only required 5%. So, in my mind, I think that shows they have better liquidity than their competitors who closed their gates. May also be indicative of better credit quality in their fund compared to some of those competitors. As far as the dividend goes, When I talked to Gregg [Warren] he said he didn’t see any near-term risks of that. So, at least if nothing else, you’re getting paid a pretty good dividend yield as we work through all the machinations as far as what’s going on in the private credit market.

We’ve talked private credit a number of times in the past. Why I have a lot of concerns about private credit specifically, especially as far as Morningstar DBRS talking about how they’ve seen the fundamental credit quality in the private credit market weaken over the past year, year and a half. So I’d say if private credit isn’t as bad as we think it is, this thing is very, very undervalued. And even if private credit does go through a major repricing and restructuring, this one is the least exposed. It’s going to be a survivor in the marketplace, and I would say it’s probably positioned in a good place to be able to buy up private credit exposure from those other funds, that, to the downside, are going to be forced sellers. And in this one, if you have that capital, like I think they will, they’re going to be able to buy up a lot of those positions at big, deep discounts.

So offsetting all of that, and why I’ve really been second-guessing myself over the course of the weekend, private credit is still in the stage where it’s getting worse; credit quality is deteriorating. I don’t think credit spreads have probably widened out enough in order to fully reflect kind of the fundamental deteriorating. Now we don’t have a way to see where private credit spreads are actually right now in those funds. But just taking a look at, like, the high-yield market, the public high-yield market as a benchmark, if you look at the Morningstar High Yield Index, the credit spread there for that index is only 310 basis points. That’s only about 50 basis points higher than where the historical lows or historical tights are. For perspective, the index was over 450 last year following the “Liberation Day” tariffs. When markets were falling in 2002, it went up over 500. Those are more to me, like, average, or even slightly better than average type credit spreads compared to where they’re trading today at just over 300. We have seen a lot of other private credit funds halting redemptions, closing their gates.

Thinking about private credit, I do think this is going to be at higher risk of a spike in default if oil prices were to stay higher for longer. So I’d say this is one, if you want to get involved now, I’m not going to necessarily disagree with that. I’d start with maybe a smaller position and keep this one on the watchlist. So that way, if it does trade down, if private credit does become worse, this is definitely the one that would be my pick after we get to deeper and deeper valuations.

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