When a credit cycle turns, the herd leaves one behind.
That's the part people forget about a blowup. It's never the whole group at once.
There's always a first one, the name that takes the hit while everyone else points at it and says, see, that was the bad one, the rest of us are fine.
Bear Stearns went first. Lehman went next. The herd survived by leaving them behind.
Right now the herd is private credit, and it's the most crowded, most confident trade on Wall Street.
The banks stepped back, the money poured in, the yields looked safe, and for years nothing broke.
That is precisely the kind of calm that makes me nervous, because the cracks have already started.
Cliffwater just capped redemptions on a $31 billion fund after investors asked to pull roughly 17% of it. Moody's has turned negative on private credit vehicles at Blackstone and Golub.
The easy-growth era in this group is ending, and a credit-selection era is starting, where balance sheets and borrower quality suddenly matter again.
So if this group is going to leave one name behind, I want to know which one.
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I think it's Blue Owl.
Here's why. When redemption requests flooded the industry, investors pulled harder on Owl's funds than on the Blackstones and Apollos. Moody's cut its outlook on one of Owl's funds to negative.
The stock has held near $9.50 anyway, because the market still treats this as an industry-wide sentiment problem instead of asking which specific names carry the most risk.
In a credit cycle, the market always gets around to asking. When it does, I think it singles out Owl, because the people pulling their money already have.
That's why this might be the easiest put on the board.
I'm not calling for a crash tomorrow and I'm not betting the house. I'm buying cheap insurance on a thesis the crowd hasn't accepted yet, and the stock sitting near $9.50 is what makes it cheap. If I'm early, I lose a little.
If I'm right, this trades below $8 before the cycle is done, better than 20% lower from here.
Small if I'm wrong, big if I'm right.
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Finding a setup like that is one half of the job.
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Mark Sebastian