Financial markets have been exhibiting wild swings with twists and turns tied to the war in Iran. Last year we saw an extreme divergence: the most expensive stocks got more expensive from a valuation framework, while the cheapest stocks got cheaper. Many of those expensive names have now declined 20-50%, with software stocks and the Mag 7 taking major hits. Energy stocks, by contrast, have been the biggest beneficiaries of the war and have seen tremendous performance.
We had sizeable positions in MLPs such as EPD, ET, MPLX, WES, AMLP, MLPA, and OKE. We also owned energy producers — Devon, ConocoPhillips, Chevron, Apache, and Occidental Petroleum — and benefitted from chemicals positions in Lyondell and Dow. These were stocks that sat in the doghouse for at least a year, sometimes several, only to roar to life as conditions changed.
We see the same setup in real estate and BDCs
I’m very confident we will see the same pattern in our real estate investments and our Business Development Companies (BDCs) — which are simply high-yielding loan portfolios. We’ve published a comprehensive report looking at previous crises: 2008, 2015, 2020, and the current bear market in BDCs. In every case, the survivors experienced ripping rallies. The companies that died usually either engaged in fraud or were reliant on short-term lending. Neither is the case today.
The current “crisis” is milder than 2008 by many standard deviations
Today’s BDCs are much stronger financially and carry less leverage than they did pre-GFC. They have strong sponsors behind them — Blackstone, Ares, Goldman Sachs, Morgan Stanley, Blue Owl Capital — firms managing hundreds of billions of dollars. They are focused mostly on first-lien debt, which has had by far the best recoveries in every credit cycle we’ve studied. Liquidity is strong.
Current valuations reflect credit outcomes worse than what was actually experienced during the Great Recession. The biggest “problem” area people are worried about — software exposure — is actually the best-performing loan category in the portfolio. AI will have a major impact on the industry, but companies currently growing their revenues and earnings are not going to suddenly stop paying their debt. These loans are relatively short duration, with roughly 1/5 of the portfolio paying off each year.
The private credit “gating” panic is ridiculous
All the hysteria about private credit funds gating withdrawals is overblown. On the first page of the prospectus, it says withdrawals are limited to 5% per quarter so the fund doesn’t have to fire-sale illiquid assets. Why? Because a fire sale would hurt every other shareholder.
Imagine owning 100 homes together with a business partner. Your partner decides he wants to cash out immediately and demands you sell everything right now — regardless of market liquidity or pricing — so he can get his cash back. That would obviously harm you, which is exactly why these vehicles have gating provisions in the first place. It’s a tonally overblown headline that sells clicks, not a crisis.
This is a long-term opportunity
This is a huge long-term opportunity — if you can avoid getting scared off by doom-and-gloom headlines with little substance. The setup mirrors what we saw in energy a year ago: deeply out of favor, high-quality cash flows, sponsors with the capital and discipline to ride it out. The difference is that in BDCs, you’re getting paid double-digit yields while you wait.
Tim Travis is CEO and CIO of T&T Capital Management. For deeper research on our current BDC positioning and the full comparative crisis analysis, contact us or subscribe to our research updates.
