Private credit is booming in Wall Street: 3 stocks to buy

For a long time, private equity was the hottest thing in Wall Street. Now, with interest rates sitting at their highest level in 2 decades, the private equity industry is being challenged by private credit. 

Private credit has also boomed following the mini banking crisis that led to the collapse of Silicon Valley Bank (SVB), First Republic Bank (FRC), and Signature Bank. This collapse has led many banks to start focusing on strengthening their balance sheets. This article will loom at some of the best private credit stocks to buy.

Private equity vs private credit

Before I mention the stocks, it is important to explain the difference between private equity (PE)  and private credit (PC). PE is when a private equity company buys a full or partial stake in another company, improves it, and then sells it or takes it public. A good example of a recent PE deal was Blackstone’s buyout of Rover in a $2.3 billion deal.

Private equity has gone through major challenges in the era of high interest rates as the value of most companies have gone down. For example, Blackstone acquired Ancestry in a $4.7 billion deal in 2020. While the present value of Ancestry is not public, chances are that it is much smaller since 23andMe, its competitor, has lost over 91% of value since 2021.

Private credit, on the other hand, is a process where these firms provide companies with loans. As a result, unlike private equity, returns in this industry have risen as interest rates have jumped. Besides, most loans in PC industry have variable rates.

The private credit industry, also known as shadow banking, has grown so much in the past few years. As a result, the total assets under management in the sector has doubled since 2019 to over $1.6 trillion.

Best private credit stocks

There are two main ways to invest in private credit stocks. First, you can invest in Business Development Companies (BDCs), which are entities structured like REITs. You can read my REITs vs BDCs article for a comparison. Some of the top BDCs in the industry are Main Street Capital and Blackstone Private Credit Fund.

Second, you can invest in diversified private equity companies like Blackstone, Apollo Global, and KKR. These companies offer diverse solutions like private credit, private equity, infrastructure, real estate, and insurance.

My best private credit companies to consider are Blue Owl (OWL), Apollo Global Management (APO), and New Mountain (NMFC).

Apollo Global Management, which I covered in detail here, is one of the biggest private equity companies in the world. While it is always compared with the likes of Blackstone and Carlyle, it is quite different. 

For one, it has access to cheap permanent capital and it makes most of its money in private credit. It has over $443 billion in private credit funds and $109 billion in private equity and $80 billion in real assets. 

Blue Owl, on the other hand, is a firm that most people have never heard about. It was formed by the merger of Dyal and Owl Rock. The company has over $79.5 billion in credit, $25.9 billion in real estate, and $51.4 billion in strategic capital. Of its $157 billion in assets, $123 billion of it is permanent capital.

Blue Owl, owns a large stake in Blue Owl Capital Corporation (OBDC). The company is growing fast, has a strong dividend growth potential, and has more room to grow.

The other good private credit stock to consider is New Mountain Finance (NMFC), which provides direct lending solutions. It focuses on senior secured loans and select junior capital solutions. Unlike Blue Owl and Apollo, it is a relatively small firm with over $45 billion in assets. However, it has a huge growth potential and also provides an exciting 10% dividend return.