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There’s a private credit boom going on, and underworked, bonus-anxious investment bankers and their asset management colleagues are ON IT.
Initial public offerings have yet to rev up for 2024, but later today the Palmer Square Capital BDC will start trading on the New York Stock Exchange, after pricing 5.45mn shares at $16.45 a piece yesterday. Huzzah!
As the name suggests, this is a “business development company”, a weird but fascinating and uniquely American construct. They’re basically investment trusts that make loans to smaller companies, have a 2x cap on leverage, usually list shares on a stock exchange and have to pay out 90 per cent of profits to investors.
Alphaville got its mitts on the Palmer Square Capital BDC deck, which you can read here, including a slide showing the investment yield on offer in these vehicles.
The Palmer Square Capital BDC is the first of a bunch of BDC IPOs in the pipeline, helped by the ravenous demand for non-bank “private credit” that Alphaville has discussed ad nauseam.
Oh, and the 27.6 per cent returns that listed BDCs notched up last year, thanks to a combination of rising rates helping juice the payments they collect on their floating rate loans and the price appreciation all bond proxies enjoyed when people started betting that rates have peaked.
IFR reports that Morgan Stanley is currently marketing its Morgan Stanley Direct Lending Fund at the moment — eyeing a pricing next Tuesday — while Nuveen Churchill Direct Lending Corp is likely too list later on that week.
However, despite the thiccc yields that BDCs offer/promise it seems unlikely that the current ripple of IPOs will become a wave.
The best thing about BDCs is that they are mostly transparent, publicly traded vehicles. The worst thing about BDCs is that they are transparent, publicly traded vehicles.
The reality is that many investors these days like the opacity and artisanal marking of truly private credit funds. They’ll talk about “harvesting illiquidity premiums” til the cows come home of course, but they’re actually willing to pony up for the lack of reported volatility.
Just look at Blackstone’s private, non-traded BCRED. Its reported returns look like a gentle upward slope rather than the broken crag of public BDC shares.
It’s only been around since 2021 and has already amassed assets of over $50bn — making it larger than the 10 biggest public BDCs combined. In fact, by net assets it seems to be as large as the top 15.
Here’s a telling Barclays chart from a great post Alex wrote last week on the ∾ cough ∾ curiously divergent marking of some BDC loans.
As you can see, there’s been a huge shift from the public BDCs that have dominated since the industry’s birth in the 1980s towards perpetual private BDCs like Blackstone’s BCRED.
So if you are worried about how private credit funds might perform in a less hospitable economic climate but still fancy a bit of exposure, most investors are probably going to keep preferring the blissful obliviousness offered by private BDCs and other nontraded private credit vehicles.
Read the full article here