“No One Rings the Bell at the Bottom”

In his annual letter to shareholders, J.P. Morgan boss Jamie Dimon sounded the alarm on private credit. He wrote that losses could be much worse than expected for lenders because of weakening credit standards — compounding the fears of the hordes of investors already looking for redemptions from some semi-liquid private credit funds.

But while this is even more sobering news, for some savvy investors it presents a potential buying opportunity.

My colleague James Comtois published an article on institutionalinvestor.com quoting Arjun Raghavan,CEO of OCIO Partners Capital about his intentions to buy higher quality loans being sold off by managers seeking liquidity. In the piece, Raghavan said: “When there’s distress, it’s a great opportunity to play offense if you have liquidity… we have opportunities to acquire public market assets at a steep discount.”

And this sentiment has filtered through many conversations I’ve had over the past weeks, too. But while the private credit market may present a rare opportunity for some, for Sid Malhotra, CIO and co-founder at Kactus Capital (a New York-based SFO and winner of II’s Family Office of the Year in 2023), the price is still not quite right. While there is clearly value to be found, he said, determining if the discounts have bottomed out or are still likely to drop is incredibly difficult, and could be akin to “catching a falling knife.”

Malhotra said that the easiest way to monitor private credit and identify opportunities is to watch publicly listed BDCs, which trade daily and provide transparency into their underlying loan portfolios.

And some public BDCs are trading at discounts as high as 25 percent to net asset value. But Malhotra would only consider the highest quality BDCs if the discount is high enough. Ares, the largest publicly traded BDC, was trading at an 8 percent discount to NAV when we spoke with an indicated yield of 10.6 percent, despite the turmoil. The manager is among several taking steps to manage liquidity, but its pedigree means discounts have not fallen as deep as others.

“You need to be able to trust the manager, we stay with the firms that are proven credit investors in different environments,” he said. “Junk usually gets worse.”