Bloomberg Audio Studios, Podcasts, radio News. Hello and welcome to the Money Stuff Podcast. I'm Matt Levine. I'm here with Kitty Greifeld and our guest is Paus Weinstein of Sappa Capital Management. I feel like we've thought since the beginning of this podcast but having you on to talk about closed unfund activism, but man, closed unfund activism has in a new form gotten really hot. I want to talk about,
like what your trade is. You're out with a tender to buy what five ten percent of OBDC two five percent of OBDC to the Blue Owl private BDC ive had a thirty five ish percent discount to marked Navy, So like, what's the trade here? Like, are you like going in the book and like doing detailed credit work and being like, we think this stuff is worth seventy five cents on the dollar, so we'll pay sixty five? Are you hedging the credit? Are you trolling? Are you what's the sort of basic trade here?
Why? Matt, do you assume it's not all the above?
It's just a lot. I'm going to start. I'm going to start with trolling. The reason to assume it's trolling and not all of the above is because I think I think you mentioned before we started, people's first natural question is do you think you'll get.
Any Okay, so I've read some people suggest, oh, this is some sort of pr blitz, like like to get myself in the story.
We actually had the tenders. It worked well.
We actually had the tenders ready before the Blue Oul story became a huge.
Said the tenders like for OBDC two or like do you have fifteen of these ready?
Togain, We have a few ready to go. We started with two, so there was you mentioned one of them. The other is Starwood s Reid. Starwood when b Reid had its problems and be Read being an interval fun that a few years ago had very high redemptions and was able to actually cure this problem because it was somewhat in isolation. It was b read and s Read in part because of the rise and interest rates and the real estate portfolio is suffering.
They were able to cure it. They did a special transaction with Calsters and the problem.
Basically Calters bought shares at nav and they use that to cast your blood.
Or is that they got to earn a very attractive yield for I think supplying liquidity as needed and sort of just that there wouldn't be a kind of run on the fund, calm things down, and actually redemptions went below that five percent cap. But s Reat Starwood, this forady, almost four years ago is still gated and they at some point suspended and now they led out a certain amount of a month and that amount was increased, and so four years later it's still gated. And so the way
this all happened, sorry that it's not trolling, Okay. The way it happened was we learned from some rias, some private wealth advisors that there was a block of twenty to thirty million from a single group of advisors of s REET that just wanted to sell. They wanted out, they didn't want to wait potentially multiple years. And s Read actually we felt like, you know, the nav's actually probably pretty good. It doesn't have the private credit problems.
It's real estate. B Read has seen their NAV go up, and we felt like people need liquidity. They've waited now four years, they only gotten partial and so and the percentage that's you know, in the queue to redeem is very high. And so as that was happening, we also.
Did you get the call because like you do close on fund activism.
Like, yes, so they are. They are not close cousins, they're literally like brother and sister. You might even say they're like identical twins, but like there's one thing different about them, you know, the redemption rights. This kind of like history we have in closed in funds is not just like tangentially helpful. It is front and center the
more or less the same. There were forty act products that manager is the sec to deal with if they don't treat their investors properly, we can avail ourselves of the courts as we have in closed end funds. And so I had tenders ready for Starwood and for Blue Owl because I was aware of outflows. Then the Blue Houl story took like three legs worse and we went.
Right in Blue Ouse. So you were like aware of out those in particular. Yes, so were like I'm ready for the private credit industry generally or like Blue out particularly. I heard of some arias who went out.
It was both because it was more like where do you start, you know, and prove the concept. And my colleague, my partner, Kieran Goodwin, has been ranting on Twitter in a good way for two and a half years, three years, about how the BDCs and interval funds have over promised liquidit either investors, you know, you have fire insurance in a sell off that you can get out, but it doesn't work if there's actually a fire.
What is overpromise me? Because like I think a lot of them would say, we promised five percent tenders and we're doing five percent tenders.
Yes, here's what I think over promised is. And maybe the docs even say this, But to say in a large sell off or in some scenarios where there's a lot of fear, it's going to take you potentially years to get your money back, you know, like where we say, you know you have those long disclaimers and then you actually say no assurance can be made that an entire investment won't be lost, and you're like, really, like we're going to lose one hundred do we have really to say that?
I mean, maybe they did.
I don't have a dog in the fight of like how good were their disclosures. I might need to remodel my house, I might need to I might need the money, And they say, well, look for the last twenty quarters, you would have been able to get out of all of it, because as long as it's under five, you're good. If it's ten, and that's a lot, you can get out of half five out of ten. But what happens if it's forty. You know what happens, You're getting out
of an eighth of it. And then of course the you know, I was going to bring my George Sorows Reflexivity book because what about the reflexivity? You know, a term that was overused in finance very long ago, but I think it's very apropos here the reflexivity of falling naves leading to larger outflows, leading to fores selling, leading to falling naves and then you're out in three or four years. I don't believe that the retail investor understood that, And I wonder if it's even disclosed.
Because I assume that like roughly none of these redemptions are people trying to remodel their houses, and like roughly all of it is like people worried about knaves.
No, no, no, for sure, there's just the general people. Some people have cash needs, right, and yes, do they have cash needs? And they're like, how should I satisfy it? Okay, there's this thing I'm a little worried about, you know. I mean some like I don't want to answer all of the above to a lot of the either ords that you ask me so, but I do think in this case there's a percentage of people that want their
money back because they need the money. I think when you go to like cliff Water, the shocking number of fourteen percent, which was only four percent, let's say, the quarter before, you can easily argue that extra ten or people worried about their naves or worried that the gate's going to shut. That an interval fund can't actually suspend a BDC can. So the products are not the same,
but for sure they feed into each other. And the retail investor, I don't believe, understood that the liquidity of the underlying does not at all match the liquidity of their investment.
Well, you mentioned brokers and something that I've been wondering about in all of this. I mean, Matt and I were discussing on a recent pod that, like, we live in a disclosure based society, and I'm sure that these disclaimers were laid out in the perspectuses, et cetera. But I wonder where the failure of communication was, whether it was on the brokers, on the salespeople putting their clients
in this. And because it does feel like there's some structural mismatch of liquidity expectations here when it comes to retail investors in these products.
Yeah, so one thing is and it's kind of why I have such a hard time getting the manager sometimes of closed in funds to do what I think is to do the right thing. It's like, and if I say to them, hey, you should turn this closed in fund into an open ended fund.
And if you're am ninety five.
Percent of it or open ended products and five or ten or are these closed ended products, whether they be BDCs or actual closed in funds, why do they fight me so hard? The C suite will fight me because the value the stock market will ascribe to an ETF where in theory you can get your money back tomorrow, and a closed in fund where in theory you're locked in forever. You know, other than my activism is so different, and so the lure, the kind of the drug of
permanent capital. It sounds so good not even have to deal with investors. I mean, Bill Lackman, you know, benefited so greatly by this structure where he moved his hedge fund to be a closed in fund, because when he went through his draw down and he did great, you know, since eighteen people couldn't leave, and they left the by way of a twenty five to thirty five percent discount, which he also stopped up by buying back a quarter of the shares, something you don't see fs doing with FSK.
So the thing is the reason you ask about the disclosures. It's kind of on the one hand, the sales commissions were so large to draw people to want to sell it the private wealth, and that, you know, that I think is a scandal. I think it'd be nice if the clients know, expost, what their trusted advisor was paid for putting them into this thing. My grandmother used to call drek. I don't know if that is a technical term, but if anyone understands Yiddish, they know what I mean.
And so there are gonna be those questions how much were you paid? What were you paid?
Oh?
You know, and so that's interesting. And then the second part of it, you know, is that maybe there was some like benign you know, ignorance, but really the seeds of the destruction of these products are really rooted in the desire for the manager to raise retail money, but having to do it in this way where retail says, am I gonna be able to get my money back? And you offer these clauses in these terms to bring them in because you want that permanent capital. Turns out
it's not so permanent. And by the way, it's not so permanent because because it's a forty C product, the board could be replaced and they could fire the manager, just like just as we've done in closed infunds.
Yeah, this is what I was going to say. Like when I first started writing about your Tilted Blue al, I got emails being like, he's gonna take over of the fund, replace the manager, get the fees. I feel like with a five percent tender, that's not like top of mind. But are you is that like a possibility for some.
Of these drawing from the lessons of closed in funds in the same way that retail was in some cases sheepish enough to buy what was sold to them. You know, they didn't call their broker. As I've already said in a prior podcast, a famous president of a very large fund said these products are sold, not bought. They didn't call their broker to say, get me the latest interval fund, as if they even know what that nomenclature means. They were told this, you know you want yield, you're seventy
three years old. This is going to give you a nice yeld, great manager. So they often will will even vote in a way that harms themselves, as bpr E just did in December. It just became a stock and they went from being able to get at NAV to now nursing a live thirty percent loss extra loss. So in order to actually take one of these over, you're going to have the manager tell the clients you shouldn't listen to them, and a lot of them are actually
going to not listen to the activist. But imagine this, Matt. Okay, we say we're going to do no fees for a year. Okay, how do you like that? Client? And then as long as the fund is below a thirty percent disc out all cash flow, we will buy it back in the open market.
You really want to talk about publicly listed close unfund activisms, but I want to talk about OBDC too.
Okay, I'm talking about I'll stick with that I was not even talking about closed in funds.
I was talking about.
Public b dcs. Okay, find that stateless state, right, I might be buying some of them. Okay, fine, so let's stick You're right the thing we did yeah, so okay, So if we tendered and got more and more and more and more, the same thing at the same point would be made.
I think in order.
Make sure if you can think of a private yeah.
I haven't really looked into it. So this all started with let me dip my toe in a space where people want to get out and they don't have a way of getting out in the pace they want to And we'll learn as we go and learn from the lessons of closed in funds. So yes, we had two of them ready before Blue Owl became a thing. We have others ready, and we in the market are super curious, are we.
Actually going to get hit?
Then you don't know if you're going to be hit.
It's too early because first it's like this clunky process that makes it hard to get it. They have to get it mailed to them, and there's a long form to fill out, and the thing that arrives in the mail is accompanied. It's sent by the manager, and it's accompanied by letter from the manager saying don't do we don't recommend you do this.
I thought you had said somewhere that Blue Awl was supportive of here, but like, is there some level of supportive between like saying you should do this in the letter and saying you shouldn't do that? Okay?
So I'll look, I'm I'm on your podcast. I'm all about radical honesty or possible. So when I when I say that, so first s Reet has already said to their investors, we don't we recommend against okay, And so the letter of ours will be accompanied by theirs from them saying don't you know we don't think you should do this?
What did I mean with Blue Owl?
I know two of the founders pretty well, and and so when I did this, I happen to have written to them to say hate. By the way, as I go into this, I don't have an activist angle. I'm just here to provide a bid, and they wrote me you know I'm not giving away states herecause I'm only singing back saying, you know, let's continue to have a dialogue. You know, we like each other this and that, and so like I didn't get any hate or any anger or anything like that, and so that was that was
my take. Now, as far as I know, they have not commented on whether.
They can't really recommend, so they could stay silent live if they're marking it at one hundred right.
Well, I think someone could say, while we think the portfolio is really attractive, we understand the liquidity needs of the clients may require for them to find a way to sell. You know, I think there's many ways to say you like something or you don't like something, and I think there is a world where they could be more neutral than Star War was.
But we'll see what they say.
I don't know.
I am curious what you make of the marks when it comes to some of these blue offhons that you're tendering for, because the fact that you're going through with this trader you would like to execute it. I mean, does that imply that you know, you think that the naves are accurate or to just maybe there's somewhere between, you know, a sixty five percent discount and one hundred percent.
I actually don't think we bid conservatively. I was was somewhere in New York last few year.
You were initially announced it was twenty to thirty five, and then you're bid down thirty five.
Well twenty little yeah, well I was capturing Starwood in there too, but because Starwd, I think we bid twenty seven.
Yeah.
So I ran into somebody who said you're gonna get hit on all of it.
You didn't bid low enough because and he's like, you're focused on NEV, but you should be focused on GAV And you know it's really looking at like the gross assets.
Yeah, you were saying this before. I think we were filming that a thirty five discount is not what it sounds like because these are levered funtons, right, you want to just sure.
So some funds are very levered. Some areo point seventy five leverage, some are one point five levered. That means leverage on top of you know, a dollar of stuff for the dollar that was given. So let's just say it was, you know, a turn of leverage. If you buy saying a minus thirty, it's like you're buying each
loan fifteen points below, not thirty points below. But then to your question, you have the fees, and some of them earn fees on like what's distributed so they could somehow even with all these price declines, still earn still earn fees. Some of them have high water marks that don't have catchups, some do, but there's the management fee that comes out of it. I think it's safe to say that we don't think that there's a lot of manager alpha these days in that space. So like those
fees are going to be eaten away. Those are not like for their brilliance. And then you have on top of it, you have a knave that everyone knows is too high. Okay, so let's leave aside. Where does Blue Oil rank in that continuum? But I think I think I Apollo is the firm that I follow, and Blackstone
the firms that I have incredible respect for. Blackstone also recently for how they treated their redeeming shareholders, and I have some a bunch of new counter examples, and Apollo, I think is considered the most conservative on the marks. But the marks are falling as we speak.
So if you have.
Naves that are too high across the board, even if they're more than too high at certain places, you also have to take that out of the discount. So what is appeeling? Okay, So now that I've like said, what's really bad about it? You know, okay, you start with you have fifteen, and then it's after fees thirteen and then you have the markdown is that at least those funds do have the ability to get back five percent
per quarter. So if they if they have only fifteen redeem you're going to get back a thirty your money in a quarter. But the way it's going, it was one, then it was four. Now Cliff order is fourteen. Boy, you know, someone should set up a poly market for
what Cliffworter redemptions are going to be next quarter. And we are aware, I'm not sure how much detail it's worthwhile going into in this podcast, but we're aware for some managers of marks on chunky positions of second lean or you know, other things that are not first lean that are off by compared not to our model, but compared to other funds, how they mark as much as twenty five points between the way Jamie Diamond now has
remarked the portfolio as well as fargo far behind. That constrains the manager on their leverage, their ability to leverage because of you know, the mark to market for the leverage facility. I really think this could be a systemic nightmare and in a.
Sense of how cal constrainting the markdowns are for the leverage facilities, Like I gather these places are run at like less leverage than they could be and like have some headroom there, but maybe that's not true.
Yeah, I think most of them are not near their leverage caps, so you would need a decent decline. But also just you can see the banks even just pulling back, and you know, why should they continue to land at the same levels or the same terms, you know, just like you saw in Wait where prime brokers pulled back. So you're probably right about that. But at the end of all that, so then why did we did because
it was a place to start. We are short at you know, public debt at what I terms really optimistic levels, so buying it at down thirty five, even with these adjustments, it's probably going to be an okay investment.
You say you're short public debt, like what like like like a match like how you'll debt against getting along this stuff? Or like is it I'm missing something like?
Yeah, A huge part of our capital is to provide investors tail protection, and so we our domain expertise is credit derivatives, and so the liquidity in higheld credit ratives as such where you can put on tens of billions, and and so I have that as a short. In some sense, this a discount fits as a long because if we're right, and if these buys at minus twenty seven or minus thirty five are bad buys, you know, look out below, and I point you to when the
cliff Water news came out. Since that minute, say, high yield has been suffering compared.
To Yeah, as you say, you said, look out below, Like is there like a scenario where like the stuff you can be short in high yield totally diverges from like PDC software loans.
You're bringing up a good point about basis risk, right, This is not a match trade. And the average company in the HEILED index is quite a bit bigger and even better than a private credit portfolio. So leave it to the ingenuity of Goldman Sachs. Now they're pitching total return swaps on private credit portfolios.
People want more of a one to one.
Are the pitching to you?
No, to everyone, Yeah, but you might need it.
But also you know, as I saw in COVID, sometimes people who can't sell the thing they can't sell will sell what they can sell, and and so private credit can certainly infect public credit. And when I say what I saw on COVID, and I often say, like, my imagination and the markets is not great enough. First, So I don't think people's imagination here is great enough because so many people think we're going to buy none.
I think when you say, like people think you're gonna buy none, like it's really it's like such a classic like market maker adverse election question, like you're either going to buy none or you're gonna get filled, and you're gonna probably immediately regret getting.
Filled, probably if we get filled and oversubscribed or next bid is you know, decidedly lower. I've never been in a spot where like that information, that alternative data set, if you will, is so desired by the market because it's actually I'd be curious about a poly market on that too.
Will all learn something if you get filled?
Yeah, and it's not till April, by the way.
Yeah, but like if we get filled, I mean there's a lot of people that think we're going to get so, as you said, so what does it mean, I don't even necessarily.
I think my instinct is you get not because because of like the experience, and this is now a long time ago, but they traged to convert OBDC two to a public BDC, which was like the public BDC was trading like down twenty twenty percent something, and the shoulders revolted. So I extrapolate from that to like, the shoulders certainly don't want to sell to you down thirty five percent. But that was months ago, and.
That was months ago, and I think the difference is the collective will of those shareholders versus the individual action, because again, you know, you couldn't.
Get fifty percent to vote for it, but can they get ten percent to sell to you?
Yeah, Like there are gonna be some people that actually think our bid is high and will sell to us, and there are some people that think that they actually really need the money or they're afraid of marks coming down or getting gated worse. So I would say, I don't know, like I don't know, like you you know, I'm.
Going to wait.
Also, the form in which it occurs, it makes it hard to get filled. But I'd be surprised we didn't get some.
I'm curious. I mean, this is something that we were talking about, and that makes the good point. We're all going to learn a lot if you do get filled. But is this the cleanest trade that you could have put on, because you know, you mentioned that your short public credit, You've said elsewhere that you know your long blue oul stock. It's a clunky process. It involves mail. There's scary letters being tossed about, and this isn't happening until April. So would there have been a cleaner, more
efficient way to sort of go about this trade? Why specifically? Like this?
Right?
So what you could do is just try to buy individual loans that you like because they're for sale. The thing is that kind of secondary market for loans. In some sense, it's very competitive because the loans that they're going to be willing to sell to you at eighty eight instead of ninety eight maybe are not the ones you know. So first it doesn't play to our strength
as like we're not a deep distressed shop. And you know, it's better than buying a thing at eighty eight that someone wants to sell to you at eighty eight and out of their whole portfolio is buying the whole thing at sixty five and probably so I think it is pretty clean if we get it. The mess is in doing something new for the first time. This will be really the first time this has happened, and operationally it's you know, you're writing thousands of tickets. They're pretty some
of them are really small size. If it happens, so I think the danger, as we're early, we're going to lose money on this first trade.
If you get it, Like, how do you get out of the trade. Is it like you put in your five percent every quarter or is it like you like call them up and cut a deal. Or is it you just hold it until twenty years or.
I will be in line like everyone else and I will get my five percent a quarter.
Which do you do that? Because like clearly you think value is somewhere between fifty five and one hundred ninety five.
Yeah. No.
By the way, one thing I learned my first year at Goldman Sachs as a summer intern is because I didn't know much, I knew that like, if you have a coupon of eight out of par and the price goes down, the eight goes up, your yield goes up. So now let's think about it in the context of this fund. Your yield instead of you know, getting seven percent at one hundred, you know, you're getting eleven percent, you know, or ten and a half percent at sixty five.
Your checks from Blue Awl you're getting you Yeah, you're getting an enhanced coopon. Let's hope the nabs don't come down so quickly that you have, you know, principal losses.
So there are people. There are dentists who are running it out who are very parish on this. There are you who are a bitter at sixty five but like sound pretty bearish on like broadly speaking, the portfolios of private credit. And then there's the people who run these funds who say they're pretty bullish and that this is all over blown and they're still getting institutional inflos and
everything's marked at par and whatever I have written. If I were running like say Blackstone, and I were putting in my own money to cash people out when they're asking to redeem, I would be pretty annoyed that I was doing it at par and not at eighty or ninety. You are offering it sixty five, and like black Son can't really do that because like they have forty eight
obligations and like it's a marketing disaster. But like I was thinking, there should be like a round robin where like Black cent is bidding eighty for like hps's loans, and HPS is bidding eighty for like Blue Owls loans, and everyone's bidding eighty for each other's loans because, like you, the publicly traded BDC's really closed one funds, right, which
is like trading like eighty. You can you can go to a tender if you want, right, But like then you have these private funds where you could you are doing a tender at sixty five and you may get filled. Like why aren't the managers trying to buy back their own stuff at sixty five when they think it's worth one hundred?
So without trying to flatter the interlocutor, I read what you said, and I thought that was so interesting. Why don't they just each buy their own stuff at eighty if I'm paying sixty five? Here's the problem with it. This is the irony of it to pay eighty when their own BDCs are at sixty only makes sense if
they're going to redeem. Why does eighty make sense? Eighty makes sense only if you can get back one hundred sooner why would you not want to buy more more or less the same portfolio at sixty People are selling FSK at forty eight percent today, why not buy that back?
You're saying you should buy its public BDC.
That's yeah, you don't know, because the public BDC doesn't have the five percent a quarter put. So so if someone's going to pay eighty, they're going to pay eighty. The whole basis of it is so you can redeem. Manager A is going to redeem from manager being manager be it and redeem from manager A. Well, okay, but so maybe that's a good trade in some ways, it's almost scary like then, it's just they don't even believe
in the in the value of it. They believe in the structure giving the five percent a quarter, and that would be much less bullish signal. But yes, if they did that, they would they would have a higher bid than me. They also have their their GP stakes to justify you know, overpaying if you will. But I think when you see all these BDCs at really big discounts public BDCs, it's really hard to justify private BDCs at much smaller discounts. And that's what you're talking about here.
Yeah, I thinks that's right.
When it comes to this show. I also wanted to ask in both the example of Blue Al and with Starwood, you partnered with Cox. I believe I had never heard of them. They're based in Philly, they were founded in twenty twenty. Why go the partnership route? How did that come together?
Like?
Did they approach you? Did you approach them? How did it happen?
From just our activity and closed end funds? We developed a following of you know, there's people that appreciate what we're doing in closed in funds, and John Cox was one of them, and so we developed a relationship. And he has his expertise with the private BDC market and he'd been doing in small size these kinds of transactions, and so it's something where we felt since he was aware of the flows in that market better certainly way better than us, it would be a very nice partnership.
And that's one also that was forged through through Twitter. Like you know, he replied to a message I wrote many years ago, and so I actually have to say, like, in these last two weeks, I've learned so much about private BDCs thanks to people coming out of the woodwork to send us their analysis.
Do you think of private credit? There's like a big institutional drawdown fun SMA business, and then there's like the sort of retail ish BDC stuff like do you have a sense of what the institutional funds take? You're trying to do a trade at like a thirty five percent discount? Like is there an equivalent mark in like the institutional market, Like is there a are there comps in that market?
Yeah? You might imagine that. Aside from our phone ringing from reporters.
It's from the institutions who want to stakes.
Institutions that are very curious because they have these same kind of positions marked at.
Par and you'll ask if you'll buy at sixty five?
No, no, no, they're they're they're like wondering, are we going to get hit at sixty five? And if the answer is yes, and you're that institution, do you not redeem some at one hundred the way you can and then go buy this at sixty five? Because again, I think there's a huge reflexivity here that you know, and even if even if I can't, okay, even if I can't, I may get in on little to none. The existence of these portfolio is in public BDCs at sixty cents
in the dollar. Forget about twenty five cents discounts forty fifty cent discounts. You know, maybe those are the more extreme, but at least thirty percent discounts for really great names is a huge stain on the manager's ability with a sophisticated investor to get them to buy new things at one hundred. And in fact of anything, not a lot of these institutions are not really trader, you know, Joe trader,
like they're going to sell and buy. They are thinking about relationships and also long term movements, but it is hard to understand why their clients are not well served by redeeming a fund at one hundred and buying that same manager's fund at seventy. Even for example, I've said some great things about Apollo. I've known Jim Zelter since I was a kid. He's such a good guy and runs credit there and I've learned so much from him. But even like an Apollo beat is at a thirty discount.
So so like that trade of in the in the vehicles that allow NAV redemption, like it like a private BDC, but lots of other kinds of things how do you not in a sense sell manager A at one hundred and buy Manager A.
At seventy because you keep getting that they're continue to be institutional inflows like the drop off.
Of not only that, I'm shocked, Like I keep coming back to how beautifully Blackstone has handled this and treated their investors. We saw, for example, I believe it's HPS which kind of top tick to sale to black Rock when you look at the GP stakes of all their
peers and each lend. So one of their funds had a lot of inflows and they had more than five percent outflows, and they chose to only pay out five percent, but they could have paid out more than five and they and they had enough coming in that Like unless the logic it's like perverse that you say, well, if I pay out more than I'm telling people they should redeem more. I don't know if it's game theory, but like if I got six percent inflows and I six percent outflows, you know, I mean I work in a
hedge fund. We have investors and want their money back quarterly, and we just hand it to them. But this idea of like no, I'm going to get you, I'm gonna suspend you. I really think the managers that do that stuff, and especially the ones that convert to a closed in fund like Blue Rock did, they are destroying the value of their brand. And if they don't think they are because their investors are too unsophisticated to understand it, they
might be right for a little while. But I am surprised that more funds are not acting like Blackstone and paying out extra redemptions to say, come on, guys, you know we're going to actually treat you really well.
Yeah, Like I'm sympathetic to like what HPS said is, you know, we promised rights, but also like spreads are wide, so we're gonna put money to work, right, Like we're in the businesses making loans, Like we have inflows to make loans, and we're gonna make loans of our inflows. And there's a reason that there's a reason there's limited liquidity here, which is that like the underlying product has limited liquidity, and like we're not gonna just like shut down our business money.
But they wouldn't have had to they had more inflows than outflows.
They could have paid what I believe is they had like something like nine percent requested outflows and like they had more inflows than the five percent paid that not more than the nine percent.
Busy.
Yeah, right, so I'm used to funds shrinking and rising. I you know, I launched in a very hard time in nine went up to five point four billion. We we then were as low as one and a quarter billion. We paid out every outflow and we didn't We were like, here's your money. I hope you come back, but this like kind of we only owe you five. Yeah, but the manager does have an ability to go to seven,
and so you could. And when Blackstone had more than seven, they actually solved it through this like extreme action of paying one hundred. As you know, you were saying, why didn't they pay eighty? So you're right, HPS is well within its rights to do it, and I think really well them as a manager, but I think I would have done it differently. And I think these BDCs a giant discounts. That's these public bdc That's a whole other topic that has some interesting nuance that I'd love to.
Talk a bit more about it.
Like, yeah, so I'm not only making the news in this blue out thing, but I'm also watching the news and I watched this conference call, and you know, FSK is run in part by somebody that I think very well of and worked well with at Deutsche Bank, Dan Peter Zach And I really like Dan. And I don't know whose voice was on the call. I like saw this on Twitter. But basically, this analyst from another fund asked so gently a question where I would you know,
in my sharp be elbows from closing funds. I would have been a little bit less, you know, it would have been polite, but like he was super polite. He's like, so your fund is trading at a fifty percent discount to book.
I'm going to have paraphrase, you have.
Some loans that came do that, you got paid your money back, you got some coupons in Why do you continue to make new investments when you can buy back your portfolio at a fifty percent discount. Now, I'm going to paraphrase, if the nav is right, that's one hundred percent guaranteed return. If the nav is wrong and it's not, shouldn't be one hundred, it should be an eighty. It's
a sixty percent guaranteed return. So any kind of like wow, I can make a new loan at five hundred over and I can make an eleven percent awesome loan or it's thirteen percent awesome loan. So what's really going on is you don't want your fund which has a NAV of five point six billion but is trading a two point eight billion. You don't want that five point six to shrink because you're paid fees. By the way, they're
paid fees on NAV. You know, you invest in these funds at this discount, they're paid their fee on basically twice the price. You don't want to shrink. And so when they don't go into the market and buy back shares at a fifty percent discount, which is one hundred percent to the upside because they want to make a new loan at twelve percent, greed is laid bare.
Yeah, I get that. I feel like the last six months until the last two weeks has been a lot of talking about like retailizing private credit, and if I were a big manager, I might think I want to have a big listed retail private credit permanent capital vehicle for the long haul to put into four oh one ks, to like be my flagship public vehicle and earning one hundred percent return by shrinking that down to yeah, is short sighted. We're in a we're in a tough optical
period for retail private credit. But like, if your long term vision is you want to have a huge permanent retail private credit vehicle, then like buying back shares hand over fist is the wrong move. Now I take your point that maybe it's the right move because it's like cheryld er friendly and well, you know.
Agreative handover fist doesn't mean buying back one hundred percent of the shares. If you said, I'm going to have a fee holiday because I'm we're so sorry that your stock's gone from you know X to you know point four x, we're not going to charge fees for a year, and we're going to take all cash flow and buy back stock as long as the stock is at least a thirty percent discun or we're going to do that
for a year and at least up to twenty five percent. Okay, then they know they have seventy five percent left, Okay, But in doing so, they would be raising the NAV point by point by point, which would make the discount even bigger if the stock didn't go up, okay, because the NAV would be going up and so the discount would be so they actually for buying back twenty five percent. The shares may only shrink in my view ten percent fifteen percent, but they would have been a manager that
did the right thing. They raised the nave up, which had raised the price up. So this is where my history with closing funds is so useful. I saw my friend who runs Newburger Berman do that for a high old fund, and that fund, after they did a tender with us, which was very hard to get them to do, that fund was able to issue equity and all of the buybacks they did, they were able to raise even more money in the secondary market, issuing at a premium
a high old fund. And so I think it is it's so behooves managers not to pick one name managers of BDC's trading at a more than thirty percent discount to shrink, to grow their nav but to show their shareholders that they care about them.
What do you think they'll do? We're sort of I don't know. Halfway through this quarter is like BBC private BDC redemption requests. We have all these stories about public BDC's trading at discounts. There's going to be next quarter you know who knows, right, Like, how's this going to shake out? Is it all going to be you tendering for stuff? Or is like someone going to find.
All me this whole space is like seven hundred billion. I think that there isn't uniform everyone on the same day votes. So Blackstone maybe because they were the best manager were able to give or one of the best managers, were able to give their investors the least amount of time, and so the investors had to notify the Q one redemption at the early est date. So Blackstone was the
first to announce because they have that brand. I think if Blackstone had not announced seven point nine, there would have been less redemptions with everyone else.
Yeah and yeah, I think it's clearly like everyone sees the last one.
All right, and now people saw cliff Water and Blue I will still open for redemptions.
We'll see you know. And once you go to like.
Yeah, and then like what do they do? Like you get fifteen? Yeah, like what do you? What do you doing? Well, so let me argue again, there's an hpis example which, like you lot people in the private credit space were like that's they did the right thing for in the liquid product I know you disagree.
Well, look, no one made me the head of these firms, So like that's just my opinion. If they're just going to pay out five percent a quarter and those redemptions are going to keep rising as they did for for example, Starwood, they're going to have a multi year problem where it's also going to be hard to raise new funds and then they're going to be exposed to what's happening in private credit. And again, I don't have to be a Merlin to know that the navs are too high at
all of these funds. And they're not only too high because it's too hard for them to mark them down. They'll mark down what they observe, and then they'll do some like matrix pricing. But JP Morgan just marked everything down, so doesn't everything then have to come down? So I think that really if the idea is just pay out the five okay, so there's going to be this huge queue and let's hope things stabilize. You know, Blackstone was able to stabilize be read beautifully and maybe it maybe
it doesn't become as bad a thing. But at the same time, you see all these horses together from the default rate rising to the kind of nav recalibration, it's not hard to see it getting really bad, and so I wanted to at least say like, on the one hand, when finally the bottom comes in, this product will be really attractive, just like you know, eight closing funds got destroyed.
But in O nine when it was time to buy, you're like, wait, I get to buy the HIGHLD market at the lows and I get another thirty points discount on top, Like this will be a great long At some point. I think I'm early with this first tender, but I think where we priced it will probably do okay.
They talk about like how is this going to shake out? How the managers are going to do it? And you mentioned be read as a shining star of what you should do, Like is there a play like that here?
As they're like getting institutions to sign up to do something like what you're doing, you know, like to provide liquidity again, Like the thing that troubles me is like the talk is the institutional market is still pretty good, right, and that's it's like a strange disconnect from like the dentist's redeeming.
Yeah, I mean, if only there wasn't that pesky thing called pub BDCs, and we could we could wonder about the thought experiment of Saba bidding sixty five cents when there's the real world examples of tons of stuff at sixty fifty five sixty five seventy.
So like, yes, you can.
You can have this kind of cognitive dissonance where the manager can still raise new money at NAV while their old money is at from smart investors while their old money is at seventy. Because someone is a bucket to make new private credit investments, but they don't have a bucket to do BDCs because they don't do tickers, they don't do market You know. That gets to another thing, back to one of your recent guests, Okay, who I
have like huge admiration for. Like I think if I had to be like on a desert island of somebody, I think it's cliff astness. Okay, And not just because I get to put you know, sunscreen on his on his bald head to protect him, but also we were just by the way, coincidentally in Milan during the US hockey game. It was just an amazing he's a huge hockey fan and I'm aspiring. But when he talked about volatility laundering. He's really like the father this whole, like
the bug becomes the feature. I want to just tell you, really, I agree.
With that all the time, like his point that like people want liquidity, and like arguably, yeah, you know, public B two c's traded seventy percent traded at thirty percent discount because they tell you that, and private credit brought on funds and don't trade at discount because they don't tell you.
Then, So there's a moment in April twenty twenty three when I kind of howl at the moon because I saw one pager from Cliff Water that professed an eleven sharp in their fund and you know, we all know eleven sharp takes you back to like the land of the dinosaurs, when when you would have had a big draw down, but this thing where private credit gets marked every month the same. So I kind of howld at the moon. Kieran Goodwin howld at the moon, and Cliff jumped in in that debate, you know, and I was
thinking about that conversation. We're just howling it into Twitter.
Twitter.
First, no one is like, no, that eleven sharp is right?
Yea, yeah, Oka, Well, obviously Cliff Water put it on their page.
You know.
So all right, I think I've said enough about them. But but but the really story is about it.
You know how much of this there?
Oh my god, the story is a year. The story actually continues to September. September. I'm sitting in the office of the CEO of a really venerable insurance company and they want to put my closed in fund product on their platform. Could look at the ETF on stock ee change. Let's say we made twelve percent or something, okay, And he says, you know, here's my problem. You want me to pay these fees. By the way, they're not two and twenty or whatever, but I want a fee discount.
And I said, well, we're capacity constrained. And he said, well, but Apollo is giving us a fee discount. And I said, well, but Apollo is basically unlimited capacity to keep making more private credit. And he said, but you don't understand. My investors for the last three years have received one percent a month, like clockwork, one every single month, twelve a year,
you know, with leverage minus fees. So now they were able to get twelve and literally zero marked market volatility back to the cliff order sharp of eleven, you and the other end have made twelve, and there's plenty of volatility, and how can I justify paying your fees when I can get the twelve, you know, really easily. Now, I had a call with that investor yesterday. Okay, that investor is so curious because there are super long lots of private credit funds. They are super curious if I'm going
to get hit. But they're also in super pain because they're seeing what's happening to private credit.
And so you know what.
Kind of pain are that Are they still getting one percent a month?
Nope?
Because you know, SOFA went down because you know, some loans made it five hundred or now at three fifty. So distributions were cut, by the way, what started the ball rolling with outflows where distribution cuts and retail investors were like, wait a second, we had a deal. You're gonna pay me one percent a month. Now you're only paying me eighty four basis points, and so that kind of started the quote no snowflake ever believes it started
the avalanche. And so that investor is now facing you know, the first brands default, the Tricolor default, and so there's there's the problems of defaults, the problems of mark to market write downs, the problems of outflows, the problems of lower sofur although so far the interest rate market is not pricing much lower rates despite the recent market moves, and so that thing of volatility laundering, which is like just about the best two word quote for to talk
about wrong with Wall Street, ever, is like that should be the title of what's happening here? Is that for too long the problems were masked and now they're the you know, the curtain gets pulled back. And Cliff was absolutely right, and it took a while. And in the meantime, because it took a while, the industry is two and a f trillion.
Something I'm curious about is the path forward for you? Because, okay, we'll find out in mid April. If you get hit at sixty five, maybe you'll get over subscribed, which would certainly be informative. But what happens if you don't really get any hits, Like do you then raise your bid? What is the path forward from there?
I don't know. Have you not met me before? Do I just go Do I just put my bowling ball in the bag and go home? No, let me give you the answer the instead of trying to be funny about it. When I put that bid in the markets are in a certain state. Yeah, quarter later, you know, are people going to sell to me when redemptions were nine percent?
Maybe? Maybe not.
If redemptions are twenty percent, it stands to reason they're more likely to sell. So I don't give up easily, especially if we're doing something you know that we think is of value to our clients. But I really think if the market gets worse and then our bid probably goes lower. But I think it's clear that there's a value to provide a bid when people need a bid and there isn't one, and if we don't get hit on any yes, maybe our bid has to go up. Or maybe it's just we were a little early.
It's interesting that you went to bowling as the example of the sport.
I'm a sub one hundred average bowler.
My best sport and is not saying much is tennis, and I'm like a three and a half usta. So it's you know, unless you want to call chess a sport. I guess yeah, oh yeah, I put my chess pieces in the bag and went home. Yes, you got me. I stunned to you stun silence for the first moment.
I do want to ask about dats, but.
Yeah, we're running up on times. Let's talk about debts.
Okay, oh my god, that's digital assets.
I talk about a car crash.
Well, let's talk about the car crash. There's a bunch of dbts digital acid treasury companies that are trading at discounts to NAV right now, would.
That entice you?
You seem like a busy man.
But well, look, there are a couple of things that no one would disagree with about the crypto market. One is that various less than white shoe characters are present in it, you know, as evidenced by the number of that have gone to jail to release from jail thanks to some donations or otherwise. And so that world, it has some really ethical, awesome people. And then it and as some others, and I think one of the issues for us with debts which we don't have with closed
end funds. And you know, again, if someone can educate us or BDCs. I was going to say, you're always worried about as an activist, if you wanted to actually be an activist, that they're going to do something really deluded, you know, like effectively a poison pill. And I don't believe that it is impossible. It may not be easy. I don't believe it's impossible for a DAT to issue shares way below nav maybe even you know, well below the share the price that's trading at, to a select
group of investors. And now if they issued it to everyone, you'd say, okay, I can get my Proada portion, but I would hate to buy something at a thirty five percent discount. TOV find that they issue a lot of shares at fifty to a select group, and now I've been diluted. We saw the threat of a poison pill on a closed in fund that we owned.
We went to court.
Court sided with us, but the manager did it for four straight quarters, and that was a closed in fund.
Is just because like a DAT is not a forty fund line.
I don't I'm not sure, but I believe they can. Because it's not a closed in fund close in funds, they cannot do dilutive offerings without offering them to everyone. And then the second thing is like, all right, it's one thing for Elon Musk wanting to pay himself a trillion dollars. But you know, I think a DAT can decide it wants to pay its CEO a lot of money, and I have a handpick board and basically take money
out that way. One of the cool things I think about your jobs you can always go to where it's hot and interesting. And I would say that's also one of the cool things about my job is I'm supposed
to stay in my sandbox. But my sandbox of RV and mispricings, you know, it doesn't include what was that company called movie pay or movie phone or whatever movie past, like, you know, like that that was a fun one that I just was a reader about, Like, but like, what's I think one neat thing about this space is the ability to break new ground or do something new in a space that's central to a lot of investors, as
evidenced by the size of the market. So I am really enjoying, like kind of exploring the creative side of trying something new. I'm hoping that it doesn't lead to nothing, but if it does and we don't get hit, it's not the end of the world. But I'm really enjoying rolling in my sleeves and learning about this space even more deeply.
If you do get head, you'll be a little more nervous. It's not that big. Yeah.
By the way, if I get hit and things change a lot, I'm happy to come back on or whatever, you know like that. I think what's neat about this is this story will continue to be a story. I don't mean my part of it, but the private credit market.
This is the story.
You're going to keep rowling, keep playing chess.
My big takeaway I want to launch a shop called black Owl. I feel like that's the only iteration.
Only Whita, only blue space. That was the Money Stuff Podcast. Thanks to pous Winston for coming up.
Thanks to both here all right, rock and roll?
Did you enjoy that?
I talk about this in my house when no one's there. I just talk to the law.
I talk to the mirror.
Yeah, And that was the Money Stuff Podcast.
I'm Matt Levine and I'm Katie Greifeld.
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