Private credit resilience provides opportunity for yield

For investors looking for yield in volatile markets, private credit may provide an ideal opportunity.

“What this asset class has proven without a doubt is how durable and resilient it is,” said Mitchell Goldstein, partner and co-head of Ares Credit Group, Ares Management Corp., in a recent interview. Ares is a global alternative investment manager headquartered in Los Angeles.

Listen to the full podcast on Advisor To Go, powered by CIBC Asset Management.

“Almost in any market, private credit is providing hundreds of basis points — 200-, 300-plus basis points — of premium versus leveraged loans and high-yield bonds,” he said. “At its core, private credit is a yield product.”

The yield of the Cliffwater Direct Lending Index, an asset-weighted index of about 14,000 directly originated U.S. middle-market corporate loans, was 11.76% as of Sept. 30. 

Recently, “the volatility in the markets allowed us to really invest in great companies … all the while enjoying these higher yields and higher spreads,” Goldstein said.

He remains bullish on private credit for the rest of the year.

“We are seeing credit performance in the portfolio,” he said, in reference to the Ares Strategic Income Fund. “We have stated publicly that our cash-flow growth, our EBITDA [earnings before interest, taxes, depreciation and amoritzation] growth rates are actually accelerating.”

Goldstein suggested investors conduct due diligence before investing in private credit, including knowing the manager.

“Make sure you invest with managers that have been doing this for a long time, not a lot of turnover in the team, and that have a proven track record in all types of markets,” he said.

He said his team tends to invest in non-cyclical companies with high margins and high free cash flow, avoiding low-margin cyclical companies in the automotive, oil and gas, gaming, lodging, home building, and real estate sectors. He cited personal care company Suave, which Ares helped private equity firm Yellow Wood Partners, based in Boston, acquire from Unilever last year.

“This private equity firm specializes in corporate divestitures,” Goldstein said. “They know how to buy orphan brands out of corporations, incentivize management, change strategy [and] invest in the brands where perhaps the brands were not being invested in properly.”

Referring to Suave, Goldstein said, “We like these types of iconic brands that are consistent revenue generators and cash-flow generators.” And “the cherry on top,” he said, is that Suave announced its acquisition of ChapStick from U.K.-based Haleon PLC earlier this year.

“It is our hope that this portfolio will continue to grow,” Goldstein said.

He said half of the business Ares does comes from its existing book.

“You combine the investment philosophy of non-cyclical companies with the benefit of being able to invest in your best companies, and that’s really what drives a lot of the growth,” he said.

This article is part of the Advisor To Go program, powered by CIBC Asset Management. It was written without input from the sponsor.