‘LIQUIDITY RISK’: Strategic Wealth Partners CEO comments on investing in private alternatives

Private Credit, Private Equity & Banking Sector Analysis – Mark Ter Interview

Key Concepts:

• Private Credit: Lending to companies not through traditional public markets. Often involves higher yields but also higher risk and illiquidity.
• Private Equity: Investment in companies not listed on public stock exchanges.
• Gated Redemptions: Restrictions placed on investors’ ability to withdraw funds from private investment vehicles, common to manage liquidity.
• EBIDA: Earnings Before Interest, Taxes, Depreciation, and Amortization – a measure of a company’s operating performance.
• Senior Secured Debt: Debt that has priority over other debts in the event of a company’s default, backed by the company’s assets.
• Enterprise Value: A measure of a company’s total value, often used as a multiple in valuation.

I. Current State of Private Credit & Equity

Mark Ter, CEO of Strategic Wealth Partners, believes the current concerns surrounding private credit and private equity are “overdone.” He and his clients actively invest in both asset classes, specifically highlighting Blackstone as a preferred investment vehicle. The recent anxieties stem from fears of exposure to software loan defaults and subsequent investor redemptions. Ter emphasizes that gated redemptions are a standard practice in private alternatives to prevent forced asset sales during periods of high redemption requests. He draws a parallel to post-COVID experiences with private real estate funds, which faced similar redemption pressures but ultimately recovered.

II. Blackstone vs. Blue Owl – A Comparative Analysis

The discussion specifically addresses Blue Owl Capital Inc. and its recent stock depreciation. While acknowledging potential concerns at Blue Owl, Ter advocates for Blackstone as a more secure option. He points to Blackstone’s debt portfolio being 95% comprised of senior secured debt, providing a stronger position in case of borrower defaults – allowing them to take control of assets and potentially improve operations. In contrast, Blue Owl’s senior secured debt is around 70-73%. However, Ter also suggests that fears surrounding Blue Owl are likely exaggerated.

III. Liquidity Risk in Private Alternatives

A crucial point Ter stresses is the inherent liquidity risk associated with private alternative investments. He advises clients that these investments are not suitable for those needing immediate access to their capital. The inability to quickly redeem funds is a key characteristic of these asset classes and a major driver of current investor anxieties.

IV. Portfolio Company Strength – Blackstone’s Lending Portfolio

Ter provides insight into the financial health of companies within Blackstone’s lending portfolio. The average company generates $250 million in annual EBIDA, translating to an enterprise value of approximately $4-5 billion. He asserts these are substantial, legitimate businesses capable of continuing to meet their debt obligations.

V. Banking Sector Headwinds & the 10% Credit Card Interest Rate Cap

Ter also discusses the underperformance of the banking sector despite initial positive expectations at the beginning of the year. He identifies two primary headwinds: concerns surrounding private equity and the proposed 10% credit card interest rate cap suggested by President Trump. He dismisses the cap as highly improbable, arguing that it would effectively eliminate credit card access for individuals with lower credit scores (below 720-750) as banks would be unwilling to lend at such a low rate given the increased risk. He states, “There’s a 0% chance that happens.”

VI. Positive Outlook on United Rentals

Ter briefly mentions a positive investment outlook on United Rentals, acknowledging it as a long-term successful stock, aligning with the interviewer’s own positive view.

VII. Logical Connections & Synthesis

The interview follows a logical progression, starting with a broad overview of concerns in private credit and equity, then delving into a specific comparison of two key players (Blackstone and Blue Owl). The discussion then expands to the banking sector and the impact of potential regulatory changes. Throughout, Ter consistently emphasizes the importance of understanding the inherent risks and liquidity constraints of private alternative investments.

The central takeaway is that while caution is warranted, the current market anxieties are likely overblown, particularly for well-managed firms like Blackstone. He advocates for a nuanced understanding of the underlying fundamentals of these investments and a long-term perspective.

Data & Statistics Mentioned:

• Blackstone’s Senior Secured Debt: 95% of their debt portfolio.
• Blue Owl’s Senior Secured Debt: Approximately 70-73% of their debt portfolio.
• Average Blackstone Portfolio Company EBIDA: $250 million per year.
• Average Blackstone Portfolio Company Enterprise Value: $4-5 billion.
• Credit Score Threshold for Potential 9.9% Credit Card Rate: 720-750+