The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jonathan Guilford

NEW YORK, May 11 (Reuters Breakingviews) - Private-credit concerns keep spreading. Market pessimism has afflicted lending ventures run by investment firms from Blackstone BX.N to Blue Owl Capital OWL.N. Now, Apollo Global Management APO.N may be offloading a fund that it values at $3 billion, as it seeks to narrow a persistent valuation gap. Although it's not an especially bad performer, it carries outsized significance.

Listed business development companies, or tax-advantaged shells that invest in non-bank loans, have had a rough ride. On average, they now trade at 81% of stated net asset values per share, according to analysts from Raymond James. Ever since an awkward proposed merger between two Blue Owl BDCs failed in November, fears have grown that this fast-growing crop of lenders has accumulated dangerous piles of IOUs.

Nearly 6% of loans have switched from paying cash interest to payments-in-kind that add to principal instead, according to investment bank Lincoln International. FS KKR, a struggling BDC hit by the failure of Thoma Bravo-owned software developer Medallia, said on Monday that's getting a $300 million injection from its eponymous buyout shop parent. At Apollo’s MidCap Financial Investment, or MFIC — the one potentially up for sale, according to the Wall Street Journal — loans on non-accrual status are more than 5% of the portfolio based on amortized cost. Its shares trade at 83% of its stated value.

Various industry managers blamed recent tumult on a brief, post-pandemic period of overexuberance, particularly with respect to the software industry. During last week's Milken Institute Global Conference, sideline discussions emphasized a refocus on the core of direct lending: midsized corporate borrowers, less flashy technology, more loan protections.

MFIC’s non-paying borrowers, however, include both a chicken and ophthalmology chain. It focuses on the middle market and uses loan covenants for safety.

More troubling, MFIC sources its portfolio from MidCap Financial, which is one of Apollo's plethora of “origination platforms.” These controlled companies extend loans that slot into various sister portfolios. Apollo’s life insurer, Athene, through a vehicle known as AAA, owns the equity in these same lenders.

MidCap largely avoids the complex securitized wizardry that best characterizes Apollo's approach. Even so, it’s part of a sprawling organization considered one of the most sophisticated in private credit. AAA belongs to an “alternative” bucket at Athene that underperformed high internal expectations this past quarter largely because of a one-off stumble related to fraud elsewhere. Collectively, however, the latest developments suggest that mounting concerns about the industry are getting harder to wave away.

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CONTEXT NEWS

Apollo Global Management is in talks to sell MidCap Financial Investment, or MFIC, a publicly listed business development company, the Wall Street Journal reported on May 10, citing unnamed sources. MFIC invests in non-bank loans to midsize corporate borrowers, primarily those originated by Apollo-owned lender MidCap Financial.

CEO Tanner Powell said on MFIC's February earnings call that Apollo has "been active in evaluating potential strategies and options" with respect to its public vehicles.