Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. Hello and welcome to
Speaker 1: the Money Stuff Podcast. I'm Matt Levine. I'm here with
Speaker 1: Kitty Greifeld and our guest is Paus Weinstein of Sappa
Speaker 1: Capital Management. I feel like we've thought since the beginning
Speaker 1: of this podcast but having you on to talk about
Speaker 1: closed unfund activism, but man, closed unfund activism has in
Speaker 1: a new form gotten really hot. I want to talk about,
Speaker 1: like what your trade is. You're out with a tender
Speaker 1: to buy what five ten percent of OBDC two five
Speaker 1: percent of OBDC to the Blue Owl private BDC ive
Speaker 1: had a thirty five ish percent discount to marked Navy,
Speaker 1: So like, what's the trade here? Like, are you like
Speaker 1: going in the book and like doing detailed credit work
Speaker 1: and being like, we think this stuff is worth seventy
Speaker 1: five cents on the dollar, so we'll pay sixty five?
Speaker 1: Are you hedging the credit? Are you trolling? Are you
Speaker 1: what's the sort of basic trade here?
Speaker 2: Why? Matt, do you assume it's not all the above?
Speaker 1: It's just a lot. I'm going to start. I'm going
Speaker 1: to start with trolling. The reason to assume it's trolling
Speaker 1: and not all of the above is because I think
Speaker 1: I think you mentioned before we started, people's first natural
Speaker 1: question is do you think you'll get.
Speaker 3: Any Okay, so I've read some people suggest, oh, this
Speaker 3: is some sort of pr blitz, like like to get
Speaker 3: myself in the story.
Speaker 2: We actually had the tenders. It worked well.
Speaker 3: We actually had the tenders ready before the Blue Oul
Speaker 3: story became a huge.
Speaker 1: Said the tenders like for OBDC two or like do
Speaker 1: you have fifteen of these ready?
Speaker 3: Togain, We have a few ready to go. We started
Speaker 3: with two, so there was you mentioned one of them.
Speaker 3: The other is Starwood s Reid. Starwood when b Reid
Speaker 3: had its problems and be Read being an interval fun
Speaker 3: that a few years ago had very high redemptions and
Speaker 3: was able to actually cure this problem because it was
Speaker 3: somewhat in isolation. It was b read and s Read
Speaker 3: in part because of the rise and interest rates and
Speaker 3: the real estate portfolio is suffering.
Speaker 2: They were able to cure it. They did a special
Speaker 2: transaction with Calsters and the problem.
Speaker 1: Basically Calters bought shares at nav and they use that
Speaker 1: to cast your blood.
Speaker 3: Or is that they got to earn a very attractive
Speaker 3: yield for I think supplying liquidity as needed and sort
Speaker 3: of just that there wouldn't be a kind of run
Speaker 3: on the fund, calm things down, and actually redemptions went
Speaker 3: below that five percent cap. But s Reat Starwood, this forady,
Speaker 3: almost four years ago is still gated and they at
Speaker 3: some point suspended and now they led out a certain
Speaker 3: amount of a month and that amount was increased, and so
Speaker 3: four years later it's still gated. And so the way
Speaker 3: this all happened, sorry that it's not trolling, Okay. The
Speaker 3: way it happened was we learned from some rias, some
Speaker 3: private wealth advisors that there was a block of twenty
Speaker 3: to thirty million from a single group of advisors of
Speaker 3: s REET that just wanted to sell. They wanted out,
Speaker 3: they didn't want to wait potentially multiple years. And s
Speaker 3: Read actually we felt like, you know, the nav's actually
Speaker 3: probably pretty good. It doesn't have the private credit problems.
Speaker 3: It's real estate. B Read has seen their NAV go up,
Speaker 3: and we felt like people need liquidity. They've waited now
Speaker 3: four years, they only gotten partial and so and the
Speaker 3: percentage that's you know, in the queue to redeem is
Speaker 3: very high. And so as that was happening, we also.
Speaker 1: Did you get the call because like you do close
Speaker 1: on fund activism.
Speaker 3: Like, yes, so they are. They are not close cousins,
Speaker 3: they're literally like brother and sister. You might even say
Speaker 3: they're like identical twins, but like there's one thing different
Speaker 3: about them, you know, the redemption rights. This kind of
Speaker 3: like history we have in closed in funds is not
Speaker 3: just like tangentially helpful. It is front and center the
Speaker 3: more or less the same. There were forty act products
Speaker 3: that manager is the sec to deal with if they
Speaker 3: don't treat their investors properly, we can avail ourselves of
Speaker 3: the courts as we have in closed end funds. And
Speaker 3: so I had tenders ready for Starwood and for Blue
Speaker 3: Owl because I was aware of outflows. Then the Blue
Speaker 3: Houl story took like three legs worse and we went.
Speaker 1: Right in Blue Ouse. So you were like aware of
Speaker 1: out those in particular. Yes, so were like I'm ready
Speaker 1: for the private credit industry generally or like Blue out particularly.
Speaker 1: I heard of some arias who went out.
Speaker 3: It was both because it was more like where do
Speaker 3: you start, you know, and prove the concept. And my colleague,
Speaker 3: my partner, Kieran Goodwin, has been ranting on Twitter in
Speaker 3: a good way for two and a half years, three years,
Speaker 3: about how the BDCs and interval funds have over promised
Speaker 3: liquidit either investors, you know, you have fire insurance in
Speaker 3: a sell off that you can get out, but it
Speaker 3: doesn't work if there's actually a fire.
Speaker 1: What is overpromise me? Because like I think a lot
Speaker 1: of them would say, we promised five percent tenders and
Speaker 1: we're doing five percent tenders.
Speaker 3: Yes, here's what I think over promised is. And maybe
Speaker 3: the docs even say this, But to say in a
Speaker 3: large sell off or in some scenarios where there's a
Speaker 3: lot of fear, it's going to take you potentially years
Speaker 3: to get your money back, you know, like where we say,
Speaker 3: you know you have those long disclaimers and then you
Speaker 3: actually say no assurance can be made that an entire
Speaker 3: investment won't be lost, and you're like, really, like we're
Speaker 3: going to lose one hundred do we have really to
Speaker 3: say that?
Speaker 2: I mean, maybe they did.
Speaker 3: I don't have a dog in the fight of like
Speaker 3: how good were their disclosures. I might need to remodel
Speaker 3: my house, I might need to I might need the money,
Speaker 3: And they say, well, look for the last twenty quarters,
Speaker 3: you would have been able to get out of all
Speaker 3: of it, because as long as it's under five, you're good.
Speaker 3: If it's ten, and that's a lot, you can get
Speaker 3: out of half five out of ten. But what happens
Speaker 3: if it's forty. You know what happens, You're getting out
Speaker 3: of an eighth of it. And then of course the
Speaker 3: you know, I was going to bring my George Sorows
Speaker 3: Reflexivity book because what about the reflexivity? You know, a
Speaker 3: term that was overused in finance very long ago, but
Speaker 3: I think it's very apropos here the reflexivity of falling
Speaker 3: naves leading to larger outflows, leading to fores selling, leading
Speaker 3: to falling naves and then you're out in three or
Speaker 3: four years. I don't believe that the retail investor understood that,
Speaker 3: And I wonder if it's even disclosed.
Speaker 1: Because I assume that like roughly none of these redemptions
Speaker 1: are people trying to remodel their houses, and like roughly
Speaker 1: all of it is like people worried about knaves.
Speaker 3: No, no, no, for sure, there's just the general people. Some
Speaker 3: people have cash needs, right, and yes, do they have
Speaker 3: cash needs? And they're like, how should I satisfy it? Okay,
Speaker 3: there's this thing I'm a little worried about, you know.
Speaker 3: I mean some like I don't want to answer all
Speaker 3: of the above to a lot of the either ords
Speaker 3: that you ask me so, but I do think in
Speaker 3: this case there's a percentage of people that want their
Speaker 3: money back because they need the money. I think when
Speaker 3: you go to like cliff Water, the shocking number of
Speaker 3: fourteen percent, which was only four percent, let's say, the
Speaker 3: quarter before, you can easily argue that extra ten or
Speaker 3: people worried about their naves or worried that the gate's
Speaker 3: going to shut. That an interval fund can't actually suspend
Speaker 3: a BDC can. So the products are not the same,
Speaker 3: but for sure they feed into each other. And the
Speaker 3: retail investor, I don't believe, understood that the liquidity of
Speaker 3: the underlying does not at all match the liquidity of
Speaker 3: their investment.
Speaker 4: Well, you mentioned brokers and something that I've been wondering
Speaker 4: about in all of this. I mean, Matt and I
Speaker 4: were discussing on a recent pod that, like, we live
Speaker 4: in a disclosure based society, and I'm sure that these
Speaker 4: disclaimers were laid out in the perspectuses, et cetera. But
Speaker 4: I wonder where the failure of communication was, whether it
Speaker 4: was on the brokers, on the salespeople putting their clients
Speaker 4: in this. And because it does feel like there's some
Speaker 4: structural mismatch of liquidity expectations here when it comes to
Speaker 4: retail investors in these products.
Speaker 3: Yeah, so one thing is and it's kind of why
Speaker 3: I have such a hard time getting the manager sometimes
Speaker 3: of closed in funds to do what I think is
Speaker 3: to do the right thing. It's like, and if I
Speaker 3: say to them, hey, you should turn this closed in
Speaker 3: fund into an open ended fund.
Speaker 2: And if you're am ninety five.
Speaker 3: Percent of it or open ended products and five or
Speaker 3: ten or are these closed ended products, whether they be
Speaker 3: BDCs or actual closed in funds, why do they fight
Speaker 3: me so hard? The C suite will fight me because
Speaker 3: the value the stock market will ascribe to an ETF
Speaker 3: where in theory you can get your money back tomorrow,
Speaker 3: and a closed in fund where in theory you're locked
Speaker 3: in forever. You know, other than my activism is so different,
Speaker 3: and so the lure, the kind of the drug of
Speaker 3: permanent capital. It sounds so good not even have to
Speaker 3: deal with investors. I mean, Bill Lackman, you know, benefited
Speaker 3: so greatly by this structure where he moved his hedge
Speaker 3: fund to be a closed in fund, because when he
Speaker 3: went through his draw down and he did great, you know,
Speaker 3: since eighteen people couldn't leave, and they left the by
Speaker 3: way of a twenty five to thirty five percent discount,
Speaker 3: which he also stopped up by buying back a quarter
Speaker 3: of the shares, something you don't see fs doing with FSK.
Speaker 3: So the thing is the reason you ask about the disclosures.
Speaker 3: It's kind of on the one hand, the sales commissions
Speaker 3: were so large to draw people to want to sell
Speaker 3: it the private wealth, and that, you know, that I
Speaker 3: think is a scandal. I think it'd be nice if
Speaker 3: the clients know, expost, what their trusted advisor was paid
Speaker 3: for putting them into this thing. My grandmother used to
Speaker 3: call drek. I don't know if that is a technical term,
Speaker 3: but if anyone understands Yiddish, they know what I mean.
Speaker 3: And so there are gonna be those questions how much
Speaker 3: were you paid? What were you paid?
Speaker 1: Oh?
Speaker 3: You know, and so that's interesting. And then the second
Speaker 3: part of it, you know, is that maybe there was
Speaker 3: some like benign you know, ignorance, but really the seeds
Speaker 3: of the destruction of these products are really rooted in
Speaker 3: the desire for the manager to raise retail money, but
Speaker 3: having to do it in this way where retail says,
Speaker 3: am I gonna be able to get my money back?
Speaker 3: And you offer these clauses in these terms to bring
Speaker 3: them in because you want that permanent capital. Turns out
Speaker 3: it's not so permanent. And by the way, it's not
Speaker 3: so permanent because because it's a forty C product, the
Speaker 3: board could be replaced and they could fire the manager,
Speaker 3: just like just as we've done in closed infunds.
Speaker 1: Yeah, this is what I was going to say. Like
Speaker 1: when I first started writing about your Tilted Blue al,
Speaker 1: I got emails being like, he's gonna take over of
Speaker 1: the fund, replace the manager, get the fees. I feel
Speaker 1: like with a five percent tender, that's not like top
Speaker 1: of mind. But are you is that like a possibility
Speaker 1: for some.
Speaker 3: Of these drawing from the lessons of closed in funds
Speaker 3: in the same way that retail was in some cases
Speaker 3: sheepish enough to buy what was sold to them. You know,
Speaker 3: they didn't call their broker. As I've already said in
Speaker 3: a prior podcast, a famous president of a very large
Speaker 3: fund said these products are sold, not bought. They didn't
Speaker 3: call their broker to say, get me the latest interval fund,
Speaker 3: as if they even know what that nomenclature means. They
Speaker 3: were told this, you know you want yield, you're seventy
Speaker 3: three years old. This is going to give you a
Speaker 3: nice yeld, great manager. So they often will will even
Speaker 3: vote in a way that harms themselves, as bpr E
Speaker 3: just did in December. It just became a stock and
Speaker 3: they went from being able to get at NAV to
Speaker 3: now nursing a live thirty percent loss extra loss. So
Speaker 3: in order to actually take one of these over, you're
Speaker 3: going to have the manager tell the clients you shouldn't
Speaker 3: listen to them, and a lot of them are actually
Speaker 3: going to not listen to the activist. But imagine this, Matt. Okay,
Speaker 3: we say we're going to do no fees for a year. Okay,
Speaker 3: how do you like that? Client? And then as long
Speaker 3: as the fund is below a thirty percent disc out
Speaker 3: all cash flow, we will buy it back in the
Speaker 3: open market.
Speaker 1: You really want to talk about publicly listed close unfund activisms,
Speaker 1: but I want to talk about OBDC too.
Speaker 3: Okay, I'm talking about I'll stick with that I was
Speaker 3: not even talking about closed in funds.
Speaker 2: I was talking about.
Speaker 3: Public b dcs. Okay, find that stateless state, right, I
Speaker 3: might be buying some of them. Okay, fine, so let's
Speaker 3: stick You're right the thing we did yeah, so okay,
Speaker 3: So if we tendered and got more and more and
Speaker 3: more and more, the same thing at the same point
Speaker 3: would be made.
Speaker 2: I think in order.
Speaker 1: Make sure if you can think of a private yeah.
Speaker 3: I haven't really looked into it. So this all started
Speaker 3: with let me dip my toe in a space where
Speaker 3: people want to get out and they don't have a
Speaker 3: way of getting out in the pace they want to
Speaker 3: And we'll learn as we go and learn from the
Speaker 3: lessons of closed in funds. So yes, we had two
Speaker 3: of them ready before Blue Owl became a thing. We
Speaker 3: have others ready, and we in the market are super curious,
Speaker 3: are we.
Speaker 2: Actually going to get hit?
Speaker 1: Then you don't know if you're going to be hit.
Speaker 3: It's too early because first it's like this clunky process
Speaker 3: that makes it hard to get it. They have to
Speaker 3: get it mailed to them, and there's a long form
Speaker 3: to fill out, and the thing that arrives in the
Speaker 3: mail is accompanied. It's sent by the manager, and it's
Speaker 3: accompanied by letter from the manager saying don't do we
Speaker 3: don't recommend you do this.
Speaker 1: I thought you had said somewhere that Blue Awl was
Speaker 1: supportive of here, but like, is there some level of
Speaker 1: supportive between like saying you should do this in the
Speaker 1: letter and saying you shouldn't do that? Okay?
Speaker 3: So I'll look, I'm I'm on your podcast. I'm all
Speaker 3: about radical honesty or possible. So when I when I
Speaker 3: say that, so first s Reet has already said to
Speaker 3: their investors, we don't we recommend against okay, And so
Speaker 3: the letter of ours will be accompanied by theirs from
Speaker 3: them saying don't you know we don't think you should
Speaker 3: do this?
Speaker 2: What did I mean with Blue Owl?
Speaker 3: I know two of the founders pretty well, and and
Speaker 3: so when I did this, I happen to have written
Speaker 3: to them to say hate. By the way, as I
Speaker 3: go into this, I don't have an activist angle. I'm
Speaker 3: just here to provide a bid, and they wrote me
Speaker 3: you know I'm not giving away states herecause I'm only
Speaker 3: singing back saying, you know, let's continue to have a dialogue.
Speaker 3: You know, we like each other this and that, and
Speaker 3: so like I didn't get any hate or any anger
Speaker 3: or anything like that, and so that was that was
Speaker 3: my take. Now, as far as I know, they have
Speaker 3: not commented on whether.
Speaker 1: They can't really recommend, so they could stay silent live
Speaker 1: if they're marking it at one hundred right.
Speaker 3: Well, I think someone could say, while we think the
Speaker 3: portfolio is really attractive, we understand the liquidity needs of
Speaker 3: the clients may require for them to find a way
Speaker 3: to sell. You know, I think there's many ways to
Speaker 3: say you like something or you don't like something, and
Speaker 3: I think there is a world where they could be
Speaker 3: more neutral than Star War was.
Speaker 2: But we'll see what they say.
Speaker 1: I don't know.
Speaker 4: I am curious what you make of the marks when
Speaker 4: it comes to some of these blue offhons that you're
Speaker 4: tendering for, because the fact that you're going through with
Speaker 4: this trader you would like to execute it. I mean,
Speaker 4: does that imply that you know, you think that the
Speaker 4: naves are accurate or to just maybe there's somewhere between,
Speaker 4: you know, a sixty five percent discount and one hundred percent.
Speaker 3: I actually don't think we bid conservatively. I was was
Speaker 3: somewhere in New York last few year.
Speaker 1: You were initially announced it was twenty to thirty five,
Speaker 1: and then you're bid down thirty five.
Speaker 3: Well twenty little yeah, well I was capturing Starwood in
Speaker 3: there too, but because Starwd, I think we bid twenty seven.
Speaker 1: Yeah.
Speaker 2: So I ran into somebody who said you're gonna get
Speaker 2: hit on all of it.
Speaker 3: You didn't bid low enough because and he's like, you're
Speaker 3: focused on NEV, but you should be focused on GAV
Speaker 3: And you know it's really looking at like the gross assets.
Speaker 1: Yeah, you were saying this before. I think we were
Speaker 1: filming that a thirty five discount is not what it
Speaker 1: sounds like because these are levered funtons, right, you want
Speaker 1: to just sure.
Speaker 3: So some funds are very levered. Some areo point seventy
Speaker 3: five leverage, some are one point five levered. That means
Speaker 3: leverage on top of you know, a dollar of stuff
Speaker 3: for the dollar that was given. So let's just say
Speaker 3: it was, you know, a turn of leverage. If you
Speaker 3: buy saying a minus thirty, it's like you're buying each
Speaker 3: loan fifteen points below, not thirty points below. But then
Speaker 3: to your question, you have the fees, and some of
Speaker 3: them earn fees on like what's distributed so they could
Speaker 3: somehow even with all these price declines, still earn still
Speaker 3: earn fees. Some of them have high water marks that
Speaker 3: don't have catchups, some do, but there's the management fee
Speaker 3: that comes out of it. I think it's safe to
Speaker 3: say that we don't think that there's a lot of
Speaker 3: manager alpha these days in that space. So like those
Speaker 3: fees are going to be eaten away. Those are not
Speaker 3: like for their brilliance. And then you have on top
Speaker 3: of it, you have a knave that everyone knows is
Speaker 3: too high. Okay, so let's leave aside. Where does Blue
Speaker 3: Oil rank in that continuum? But I think I think
Speaker 3: I Apollo is the firm that I follow, and Blackstone
Speaker 3: the firms that I have incredible respect for. Blackstone also
Speaker 3: recently for how they treated their redeeming shareholders, and I
Speaker 3: have some a bunch of new counter examples, and Apollo,
Speaker 3: I think is considered the most conservative on the marks.
Speaker 3: But the marks are falling as we speak.
Speaker 2: So if you have.
Speaker 3: Naves that are too high across the board, even if
Speaker 3: they're more than too high at certain places, you also
Speaker 3: have to take that out of the discount. So what
Speaker 3: is appeeling? Okay, So now that I've like said, what's
Speaker 3: really bad about it? You know, okay, you start with
Speaker 3: you have fifteen, and then it's after fees thirteen and
Speaker 3: then you have the markdown is that at least those
Speaker 3: funds do have the ability to get back five percent
Speaker 3: per quarter. So if they if they have only fifteen
Speaker 3: redeem you're going to get back a thirty your money
Speaker 3: in a quarter. But the way it's going, it was one,
Speaker 3: then it was four. Now Cliff order is fourteen. Boy,
Speaker 3: you know, someone should set up a poly market for
Speaker 3: what Cliffworter redemptions are going to be next quarter. And
Speaker 3: we are aware, I'm not sure how much detail it's
Speaker 3: worthwhile going into in this podcast, but we're aware for
Speaker 3: some managers of marks on chunky positions of second lean
Speaker 3: or you know, other things that are not first lean
Speaker 3: that are off by compared not to our model, but
Speaker 3: compared to other funds, how they mark as much as
Speaker 3: twenty five points between the way Jamie Diamond now has
Speaker 3: remarked the portfolio as well as fargo far behind. That
Speaker 3: constrains the manager on their leverage, their ability to leverage
Speaker 3: because of you know, the mark to market for the
Speaker 3: leverage facility. I really think this could be a systemic
Speaker 3: nightmare and in a.
Speaker 1: Sense of how cal constrainting the markdowns are for the
Speaker 1: leverage facilities, Like I gather these places are run at
Speaker 1: like less leverage than they could be and like have
Speaker 1: some headroom there, but maybe that's not true.
Speaker 3: Yeah, I think most of them are not near their
Speaker 3: leverage caps, so you would need a decent decline. But
Speaker 3: also just you can see the banks even just pulling back,
Speaker 3: and you know, why should they continue to land at
Speaker 3: the same levels or the same terms, you know, just
Speaker 3: like you saw in Wait where prime brokers pulled back.
Speaker 3: So you're probably right about that. But at the end
Speaker 3: of all that, so then why did we did because
Speaker 3: it was a place to start. We are short at
Speaker 3: you know, public debt at what I terms really optimistic levels,
Speaker 3: so buying it at down thirty five, even with these adjustments,
Speaker 3: it's probably going to be an okay investment.
Speaker 1: You say you're short public debt, like what like like
Speaker 1: like a match like how you'll debt against getting along
Speaker 1: this stuff? Or like is it I'm missing something like?
Speaker 3: Yeah, A huge part of our capital is to provide
Speaker 3: investors tail protection, and so we our domain expertise is
Speaker 3: credit derivatives, and so the liquidity in higheld credit ratives
Speaker 3: as such where you can put on tens of billions,
Speaker 3: and and so I have that as a short. In
Speaker 3: some sense, this a discount fits as a long because
Speaker 3: if we're right, and if these buys at minus twenty
Speaker 3: seven or minus thirty five are bad buys, you know,
Speaker 3: look out below, and I point you to when the
Speaker 3: cliff Water news came out. Since that minute, say, high
Speaker 3: yield has been suffering compared.
Speaker 1: To Yeah, as you say, you said, look out below,
Speaker 1: Like is there like a scenario where like the stuff
Speaker 1: you can be short in high yield totally diverges from
Speaker 1: like PDC software loans.
Speaker 3: You're bringing up a good point about basis risk, right,
Speaker 3: This is not a match trade. And the average company
Speaker 3: in the HEILED index is quite a bit bigger and
Speaker 3: even better than a private credit portfolio. So leave it
Speaker 3: to the ingenuity of Goldman Sachs. Now they're pitching total
Speaker 3: return swaps on private credit portfolios.
Speaker 2: People want more of a one to one.
Speaker 1: Are the pitching to you?
Speaker 2: No, to everyone, Yeah, but you might need it.
Speaker 3: But also you know, as I saw in COVID, sometimes
Speaker 3: people who can't sell the thing they can't sell will
Speaker 3: sell what they can sell, and and so private credit
Speaker 3: can certainly infect public credit. And when I say what
Speaker 3: I saw on COVID, and I often say, like, my
Speaker 3: imagination and the markets is not great enough. First, So
Speaker 3: I don't think people's imagination here is great enough because
Speaker 3: so many people think we're going to buy none.
Speaker 1: I think when you say, like people think you're gonna
Speaker 1: buy none, like it's really it's like such a classic
Speaker 1: like market maker adverse election question, like you're either going
Speaker 1: to buy none or you're gonna get filled, and you're
Speaker 1: gonna probably immediately regret getting.
Speaker 3: Filled, probably if we get filled and oversubscribed or next
Speaker 3: bid is you know, decidedly lower. I've never been in
Speaker 3: a spot where like that information, that alternative data set,
Speaker 3: if you will, is so desired by the market because
Speaker 3: it's actually I'd be curious about a poly market on
Speaker 3: that too.
Speaker 1: Will all learn something if you get filled?
Speaker 2: Yeah, and it's not till April, by the way.
Speaker 3: Yeah, but like if we get filled, I mean there's
Speaker 3: a lot of people that think we're going to get so,
Speaker 3: as you said, so what does it mean, I don't
Speaker 3: even necessarily.
Speaker 1: I think my instinct is you get not because because
Speaker 1: of like the experience, and this is now a long
Speaker 1: time ago, but they traged to convert OBDC two to
Speaker 1: a public BDC, which was like the public BDC was
Speaker 1: trading like down twenty twenty percent something, and the shoulders revolted.
Speaker 1: So I extrapolate from that to like, the shoulders certainly
Speaker 1: don't want to sell to you down thirty five percent.
Speaker 1: But that was months ago, and.
Speaker 3: That was months ago, and I think the difference is
Speaker 3: the collective will of those shareholders versus the individual action,
Speaker 3: because again, you know, you couldn't.
Speaker 1: Get fifty percent to vote for it, but can they
Speaker 1: get ten percent to sell to you?
Speaker 3: Yeah, Like there are gonna be some people that actually
Speaker 3: think our bid is high and will sell to us,
Speaker 3: and there are some people that think that they actually
Speaker 3: really need the money or they're afraid of marks coming
Speaker 3: down or getting gated worse. So I would say, I
Speaker 3: don't know, like I don't know, like you you know, I'm.
Speaker 2: Going to wait.
Speaker 3: Also, the form in which it occurs, it makes it
Speaker 3: hard to get filled. But I'd be surprised we didn't
Speaker 3: get some.
Speaker 4: I'm curious. I mean, this is something that we were
Speaker 4: talking about, and that makes the good point. We're all
Speaker 4: going to learn a lot if you do get filled.
Speaker 4: But is this the cleanest trade that you could have
Speaker 4: put on, because you know, you mentioned that your short
Speaker 4: public credit, You've said elsewhere that you know your long
Speaker 4: blue oul stock. It's a clunky process. It involves mail.
Speaker 4: There's scary letters being tossed about, and this isn't happening
Speaker 4: until April. So would there have been a cleaner, more
Speaker 4: efficient way to sort of go about this trade? Why specifically?
Speaker 4: Like this?
Speaker 2: Right?
Speaker 3: So what you could do is just try to buy
Speaker 3: individual loans that you like because they're for sale. The
Speaker 3: thing is that kind of secondary market for loans. In
Speaker 3: some sense, it's very competitive because the loans that they're
Speaker 3: going to be willing to sell to you at eighty
Speaker 3: eight instead of ninety eight maybe are not the ones
Speaker 3: you know. So first it doesn't play to our strength
Speaker 3: as like we're not a deep distressed shop. And you know,
Speaker 3: it's better than buying a thing at eighty eight that
Speaker 3: someone wants to sell to you at eighty eight and
Speaker 3: out of their whole portfolio is buying the whole thing
Speaker 3: at sixty five and probably so I think it is
Speaker 3: pretty clean if we get it. The mess is in
Speaker 3: doing something new for the first time. This will be
Speaker 3: really the first time this has happened, and operationally it's
Speaker 3: you know, you're writing thousands of tickets. They're pretty some
Speaker 3: of them are really small size. If it happens, so
Speaker 3: I think the danger, as we're early, we're going to
Speaker 3: lose money on this first trade.
Speaker 1: If you get it, Like, how do you get out
Speaker 1: of the trade. Is it like you put in your
Speaker 1: five percent every quarter or is it like you like
Speaker 1: call them up and cut a deal. Or is it
Speaker 1: you just hold it until twenty years or.
Speaker 3: I will be in line like everyone else and I
Speaker 3: will get my five percent a quarter.
Speaker 1: Which do you do that? Because like clearly you think
Speaker 1: value is somewhere between fifty five and one hundred ninety five.
Speaker 2: Yeah. No.
Speaker 3: By the way, one thing I learned my first year
Speaker 3: at Goldman Sachs as a summer intern is because I
Speaker 3: didn't know much, I knew that like, if you have
Speaker 3: a coupon of eight out of par and the price
Speaker 3: goes down, the eight goes up, your yield goes up.
Speaker 3: So now let's think about it in the context of
Speaker 3: this fund. Your yield instead of you know, getting seven
Speaker 3: percent at one hundred, you know, you're getting eleven percent,
Speaker 3: you know, or ten and a half percent at sixty five.
Speaker 3: Your checks from Blue Awl you're getting you Yeah, you're
Speaker 3: getting an enhanced coopon. Let's hope the nabs don't come
Speaker 3: down so quickly that you have, you know, principal losses.
Speaker 1: So there are people. There are dentists who are running
Speaker 1: it out who are very parish on this. There are
Speaker 1: you who are a bitter at sixty five but like
Speaker 1: sound pretty bearish on like broadly speaking, the portfolios of
Speaker 1: private credit. And then there's the people who run these
Speaker 1: funds who say they're pretty bullish and that this is
Speaker 1: all over blown and they're still getting institutional inflos and
Speaker 1: everything's marked at par and whatever I have written. If
Speaker 1: I were running like say Blackstone, and I were putting
Speaker 1: in my own money to cash people out when they're
Speaker 1: asking to redeem, I would be pretty annoyed that I
Speaker 1: was doing it at par and not at eighty or ninety.
Speaker 1: You are offering it sixty five, and like black Son
Speaker 1: can't really do that because like they have forty eight
Speaker 1: obligations and like it's a marketing disaster. But like I
Speaker 1: was thinking, there should be like a round robin where
Speaker 1: like Black cent is bidding eighty for like hps's loans,
Speaker 1: and HPS is bidding eighty for like Blue Owls loans,
Speaker 1: and everyone's bidding eighty for each other's loans because, like you,
Speaker 1: the publicly traded BDC's really closed one funds, right, which
Speaker 1: is like trading like eighty. You can you can go
Speaker 1: to a tender if you want, right, But like then
Speaker 1: you have these private funds where you could you are
Speaker 1: doing a tender at sixty five and you may get filled.
Speaker 1: Like why aren't the managers trying to buy back their
Speaker 1: own stuff at sixty five when they think it's worth
Speaker 1: one hundred?
Speaker 3: So without trying to flatter the interlocutor, I read what
Speaker 3: you said, and I thought that was so interesting. Why
Speaker 3: don't they just each buy their own stuff at eighty
Speaker 3: if I'm paying sixty five? Here's the problem with it.
Speaker 3: This is the irony of it to pay eighty when
Speaker 3: their own BDCs are at sixty only makes sense if
Speaker 3: they're going to redeem. Why does eighty make sense? Eighty
Speaker 3: makes sense only if you can get back one hundred
Speaker 3: sooner why would you not want to buy more more
Speaker 3: or less the same portfolio at sixty People are selling
Speaker 3: FSK at forty eight percent today, why not buy that back?
Speaker 1: You're saying you should buy its public BDC.
Speaker 3: That's yeah, you don't know, because the public BDC doesn't
Speaker 3: have the five percent a quarter put. So so if
Speaker 3: someone's going to pay eighty, they're going to pay eighty.
Speaker 3: The whole basis of it is so you can redeem.
Speaker 3: Manager A is going to redeem from manager being manager
Speaker 3: be it and redeem from manager A. Well, okay, but
Speaker 3: so maybe that's a good trade in some ways, it's
Speaker 3: almost scary like then, it's just they don't even believe
Speaker 3: in the in the value of it. They believe in
Speaker 3: the structure giving the five percent a quarter, and that
Speaker 3: would be much less bullish signal. But yes, if they
Speaker 3: did that, they would they would have a higher bid
Speaker 3: than me. They also have their their GP stakes to
Speaker 3: justify you know, overpaying if you will. But I think
Speaker 3: when you see all these BDCs at really big discounts
Speaker 3: public BDCs, it's really hard to justify private BDCs at
Speaker 3: much smaller discounts. And that's what you're talking about here.
Speaker 1: Yeah, I thinks that's right.
Speaker 4: When it comes to this show. I also wanted to
Speaker 4: ask in both the example of Blue Al and with Starwood,
Speaker 4: you partnered with Cox. I believe I had never heard
Speaker 4: of them. They're based in Philly, they were founded in
Speaker 4: twenty twenty. Why go the partnership route? How did that
Speaker 4: come together?
Speaker 1: Like?
Speaker 4: Did they approach you? Did you approach them? How did
Speaker 4: it happen?
Speaker 3: From just our activity and closed end funds? We developed
Speaker 3: a following of you know, there's people that appreciate what
Speaker 3: we're doing in closed in funds, and John Cox was
Speaker 3: one of them, and so we developed a relationship. And
Speaker 3: he has his expertise with the private BDC market and
Speaker 3: he'd been doing in small size these kinds of transactions,
Speaker 3: and so it's something where we felt since he was
Speaker 3: aware of the flows in that market better certainly way
Speaker 3: better than us, it would be a very nice partnership.
Speaker 3: And that's one also that was forged through through Twitter.
Speaker 3: Like you know, he replied to a message I wrote
Speaker 3: many years ago, and so I actually have to say, like,
Speaker 3: in these last two weeks, I've learned so much about
Speaker 3: private BDCs thanks to people coming out of the woodwork
Speaker 3: to send us their analysis.
Speaker 1: Do you think of private credit? There's like a big
Speaker 1: institutional drawdown fun SMA business, and then there's like the
Speaker 1: sort of retail ish BDC stuff like do you have
Speaker 1: a sense of what the institutional funds take? You're trying
Speaker 1: to do a trade at like a thirty five percent discount?
Speaker 1: Like is there an equivalent mark in like the institutional market,
Speaker 1: Like is there a are there comps in that market?
Speaker 3: Yeah? You might imagine that. Aside from our phone ringing
Speaker 3: from reporters.
Speaker 1: It's from the institutions who want to stakes.
Speaker 3: Institutions that are very curious because they have these same
Speaker 3: kind of positions marked at.
Speaker 1: Par and you'll ask if you'll buy at sixty five?
Speaker 3: No, no, no, they're they're they're like wondering, are we
Speaker 3: going to get hit at sixty five? And if the
Speaker 3: answer is yes, and you're that institution, do you not
Speaker 3: redeem some at one hundred the way you can and
Speaker 3: then go buy this at sixty five? Because again, I
Speaker 3: think there's a huge reflexivity here that you know, and
Speaker 3: even if even if I can't, okay, even if I can't,
Speaker 3: I may get in on little to none. The existence
Speaker 3: of these portfolio is in public BDCs at sixty cents
Speaker 3: in the dollar. Forget about twenty five cents discounts forty
Speaker 3: fifty cent discounts. You know, maybe those are the more extreme,
Speaker 3: but at least thirty percent discounts for really great names
Speaker 3: is a huge stain on the manager's ability with a
Speaker 3: sophisticated investor to get them to buy new things at
Speaker 3: one hundred. And in fact of anything, not a lot
Speaker 3: of these institutions are not really trader, you know, Joe trader,
Speaker 3: like they're going to sell and buy. They are thinking
Speaker 3: about relationships and also long term movements, but it is
Speaker 3: hard to understand why their clients are not well served
Speaker 3: by redeeming a fund at one hundred and buying that
Speaker 3: same manager's fund at seventy. Even for example, I've said
Speaker 3: some great things about Apollo. I've known Jim Zelter since
Speaker 3: I was a kid. He's such a good guy and
Speaker 3: runs credit there and I've learned so much from him.
Speaker 3: But even like an Apollo beat is at a thirty discount.
Speaker 3: So so like that trade of in the in the
Speaker 3: vehicles that allow NAV redemption, like it like a private BDC,
Speaker 3: but lots of other kinds of things how do you
Speaker 3: not in a sense sell manager A at one hundred
Speaker 3: and buy Manager A.
Speaker 1: At seventy because you keep getting that they're continue to
Speaker 1: be institutional inflows like the drop off.
Speaker 3: Of not only that, I'm shocked, Like I keep coming
Speaker 3: back to how beautifully Blackstone has handled this and treated
Speaker 3: their investors. We saw, for example, I believe it's HPS
Speaker 3: which kind of top tick to sale to black Rock
Speaker 3: when you look at the GP stakes of all their
Speaker 3: peers and each lend. So one of their funds had
Speaker 3: a lot of inflows and they had more than five
Speaker 3: percent outflows, and they chose to only pay out five percent,
Speaker 3: but they could have paid out more than five and
Speaker 3: they and they had enough coming in that Like unless
Speaker 3: the logic it's like perverse that you say, well, if
Speaker 3: I pay out more than I'm telling people they should
Speaker 3: redeem more. I don't know if it's game theory, but
Speaker 3: like if I got six percent inflows and I six
Speaker 3: percent outflows, you know, I mean I work in a
Speaker 3: hedge fund. We have investors and want their money back quarterly,
Speaker 3: and we just hand it to them. But this idea
Speaker 3: of like no, I'm going to get you, I'm gonna
Speaker 3: suspend you. I really think the managers that do that stuff,
Speaker 3: and especially the ones that convert to a closed in
Speaker 3: fund like Blue Rock did, they are destroying the value
Speaker 3: of their brand. And if they don't think they are
Speaker 3: because their investors are too unsophisticated to understand it, they
Speaker 3: might be right for a little while. But I am
Speaker 3: surprised that more funds are not acting like Blackstone and
Speaker 3: paying out extra redemptions to say, come on, guys, you
Speaker 3: know we're going to actually treat you really well.
Speaker 1: Yeah, Like I'm sympathetic to like what HPS said is,
Speaker 1: you know, we promised rights, but also like spreads are wide,
Speaker 1: so we're gonna put money to work, right, Like we're
Speaker 1: in the businesses making loans, Like we have inflows to
Speaker 1: make loans, and we're gonna make loans of our inflows.
Speaker 1: And there's a reason that there's a reason there's limited
Speaker 1: liquidity here, which is that like the underlying product has
Speaker 1: limited liquidity, and like we're not gonna just like shut
Speaker 1: down our business money.
Speaker 2: But they wouldn't have had to they had more inflows
Speaker 2: than outflows.
Speaker 1: They could have paid what I believe is they had
Speaker 1: like something like nine percent requested outflows and like they
Speaker 1: had more inflows than the five percent paid that not
Speaker 1: more than the nine percent.
Speaker 2: Busy.
Speaker 3: Yeah, right, so I'm used to funds shrinking and rising.
Speaker 3: I you know, I launched in a very hard time
Speaker 3: in nine went up to five point four billion. We
Speaker 3: we then were as low as one and a quarter billion.
Speaker 3: We paid out every outflow and we didn't We were like,
Speaker 3: here's your money. I hope you come back, but this
Speaker 3: like kind of we only owe you five. Yeah, but
Speaker 3: the manager does have an ability to go to seven,
Speaker 3: and so you could. And when Blackstone had more than seven,
Speaker 3: they actually solved it through this like extreme action of
Speaker 3: paying one hundred. As you know, you were saying, why
Speaker 3: didn't they pay eighty? So you're right, HPS is well
Speaker 3: within its rights to do it, and I think really
Speaker 3: well them as a manager, but I think I would
Speaker 3: have done it differently. And I think these BDCs a
Speaker 3: giant discounts. That's these public bdc That's a whole other
Speaker 3: topic that has some interesting nuance that I'd love to.
Speaker 1: Talk a bit more about it.
Speaker 3: Like, yeah, so I'm not only making the news in
Speaker 3: this blue out thing, but I'm also watching the news
Speaker 3: and I watched this conference call, and you know, FSK
Speaker 3: is run in part by somebody that I think very
Speaker 3: well of and worked well with at Deutsche Bank, Dan
Speaker 3: Peter Zach And I really like Dan. And I don't
Speaker 3: know whose voice was on the call. I like saw
Speaker 3: this on Twitter. But basically, this analyst from another fund
Speaker 3: asked so gently a question where I would you know,
Speaker 3: in my sharp be elbows from closing funds. I would
Speaker 3: have been a little bit less, you know, it would
Speaker 3: have been polite, but like he was super polite. He's like,
Speaker 3: so your fund is trading at a fifty percent discount
Speaker 3: to book.
Speaker 2: I'm going to have paraphrase, you have.
Speaker 3: Some loans that came do that, you got paid your
Speaker 3: money back, you got some coupons in Why do you
Speaker 3: continue to make new investments when you can buy back
Speaker 3: your portfolio at a fifty percent discount. Now, I'm going
Speaker 3: to paraphrase, if the nav is right, that's one hundred
Speaker 3: percent guaranteed return. If the nav is wrong and it's not,
Speaker 3: shouldn't be one hundred, it should be an eighty. It's
Speaker 3: a sixty percent guaranteed return. So any kind of like wow,
Speaker 3: I can make a new loan at five hundred over
Speaker 3: and I can make an eleven percent awesome loan or
Speaker 3: it's thirteen percent awesome loan. So what's really going on
Speaker 3: is you don't want your fund which has a NAV
Speaker 3: of five point six billion but is trading a two
Speaker 3: point eight billion. You don't want that five point six
Speaker 3: to shrink because you're paid fees. By the way, they're
Speaker 3: paid fees on NAV. You know, you invest in these
Speaker 3: funds at this discount, they're paid their fee on basically
Speaker 3: twice the price. You don't want to shrink. And so
Speaker 3: when they don't go into the market and buy back
Speaker 3: shares at a fifty percent discount, which is one hundred
Speaker 3: percent to the upside because they want to make a
Speaker 3: new loan at twelve percent, greed is laid bare.
Speaker 1: Yeah, I get that. I feel like the last six
Speaker 1: months until the last two weeks has been a lot
Speaker 1: of talking about like retailizing private credit, and if I
Speaker 1: were a big manager, I might think I want to
Speaker 1: have a big listed retail private credit permanent capital vehicle
Speaker 1: for the long haul to put into four oh one ks,
Speaker 1: to like be my flagship public vehicle and earning one
Speaker 1: hundred percent return by shrinking that down to yeah, is
Speaker 1: short sighted. We're in a we're in a tough optical
Speaker 1: period for retail private credit. But like, if your long
Speaker 1: term vision is you want to have a huge permanent
Speaker 1: retail private credit vehicle, then like buying back shares hand
Speaker 1: over fist is the wrong move. Now I take your
Speaker 1: point that maybe it's the right move because it's like
Speaker 1: cheryld er friendly and well, you know.
Speaker 3: Agreative handover fist doesn't mean buying back one hundred percent
Speaker 3: of the shares. If you said, I'm going to have
Speaker 3: a fee holiday because I'm we're so sorry that your
Speaker 3: stock's gone from you know X to you know point
Speaker 3: four x, we're not going to charge fees for a year,
Speaker 3: and we're going to take all cash flow and buy
Speaker 3: back stock as long as the stock is at least
Speaker 3: a thirty percent discun or we're going to do that
Speaker 3: for a year and at least up to twenty five percent. Okay,
Speaker 3: then they know they have seventy five percent left, Okay,
Speaker 3: But in doing so, they would be raising the NAV
Speaker 3: point by point by point, which would make the discount
Speaker 3: even bigger if the stock didn't go up, okay, because
Speaker 3: the NAV would be going up and so the discount
Speaker 3: would be so they actually for buying back twenty five percent.
Speaker 3: The shares may only shrink in my view ten percent
Speaker 3: fifteen percent, but they would have been a manager that
Speaker 3: did the right thing. They raised the nave up, which
Speaker 3: had raised the price up. So this is where my
Speaker 3: history with closing funds is so useful. I saw my
Speaker 3: friend who runs Newburger Berman do that for a high
Speaker 3: old fund, and that fund, after they did a tender
Speaker 3: with us, which was very hard to get them to do,
Speaker 3: that fund was able to issue equity and all of
Speaker 3: the buybacks they did, they were able to raise even
Speaker 3: more money in the secondary market, issuing at a premium
Speaker 3: a high old fund. And so I think it is
Speaker 3: it's so behooves managers not to pick one name managers
Speaker 3: of BDC's trading at a more than thirty percent discount
Speaker 3: to shrink, to grow their nav but to show their
Speaker 3: shareholders that they care about them.
Speaker 1: What do you think they'll do? We're sort of I
Speaker 1: don't know. Halfway through this quarter is like BBC private
Speaker 1: BDC redemption requests. We have all these stories about public
Speaker 1: BDC's trading at discounts. There's going to be next quarter
Speaker 1: you know who knows, right, Like, how's this going to
Speaker 1: shake out? Is it all going to be you tendering
Speaker 1: for stuff? Or is like someone going to find.
Speaker 3: All me this whole space is like seven hundred billion.
Speaker 3: I think that there isn't uniform everyone on the same
Speaker 3: day votes. So Blackstone maybe because they were the best
Speaker 3: manager were able to give or one of the best managers,
Speaker 3: were able to give their investors the least amount of time,
Speaker 3: and so the investors had to notify the Q one
Speaker 3: redemption at the early est date. So Blackstone was the
Speaker 3: first to announce because they have that brand. I think
Speaker 3: if Blackstone had not announced seven point nine, there would
Speaker 3: have been less redemptions with everyone else.
Speaker 1: Yeah and yeah, I think it's clearly like everyone sees
Speaker 1: the last one.
Speaker 3: All right, and now people saw cliff Water and Blue
Speaker 3: I will still open for redemptions.
Speaker 2: We'll see you know. And once you go to like.
Speaker 1: Yeah, and then like what do they do? Like you
Speaker 1: get fifteen? Yeah, like what do you? What do you doing? Well,
Speaker 1: so let me argue again, there's an hpis example which,
Speaker 1: like you lot people in the private credit space were
Speaker 1: like that's they did the right thing for in the
Speaker 1: liquid product I know you disagree.
Speaker 3: Well, look, no one made me the head of these firms,
Speaker 3: So like that's just my opinion. If they're just going
Speaker 3: to pay out five percent a quarter and those redemptions
Speaker 3: are going to keep rising as they did for for example, Starwood,
Speaker 3: they're going to have a multi year problem where it's
Speaker 3: also going to be hard to raise new funds and
Speaker 3: then they're going to be exposed to what's happening in
Speaker 3: private credit. And again, I don't have to be a
Speaker 3: Merlin to know that the navs are too high at
Speaker 3: all of these funds. And they're not only too high
Speaker 3: because it's too hard for them to mark them down.
Speaker 3: They'll mark down what they observe, and then they'll do
Speaker 3: some like matrix pricing. But JP Morgan just marked everything down,
Speaker 3: so doesn't everything then have to come down? So I
Speaker 3: think that really if the idea is just pay out
Speaker 3: the five okay, so there's going to be this huge
Speaker 3: queue and let's hope things stabilize. You know, Blackstone was
Speaker 3: able to stabilize be read beautifully and maybe it maybe
Speaker 3: it doesn't become as bad a thing. But at the
Speaker 3: same time, you see all these horses together from the
Speaker 3: default rate rising to the kind of nav recalibration, it's
Speaker 3: not hard to see it getting really bad, and so
Speaker 3: I wanted to at least say like, on the one hand,
Speaker 3: when finally the bottom comes in, this product will be
Speaker 3: really attractive, just like you know, eight closing funds got destroyed.
Speaker 3: But in O nine when it was time to buy,
Speaker 3: you're like, wait, I get to buy the HIGHLD market
Speaker 3: at the lows and I get another thirty points discount
Speaker 3: on top, Like this will be a great long At
Speaker 3: some point. I think I'm early with this first tender,
Speaker 3: but I think where we priced it will probably do okay.
Speaker 1: They talk about like how is this going to shake out?
Speaker 1: How the managers are going to do it? And you
Speaker 1: mentioned be read as a shining star of what you
Speaker 1: should do, Like is there a play like that here?
Speaker 1: As they're like getting institutions to sign up to do
Speaker 1: something like what you're doing, you know, like to provide
Speaker 1: liquidity again, Like the thing that troubles me is like
Speaker 1: the talk is the institutional market is still pretty good, right,
Speaker 1: and that's it's like a strange disconnect from like the
Speaker 1: dentist's redeeming.
Speaker 3: Yeah, I mean, if only there wasn't that pesky thing
Speaker 3: called pub BDCs, and we could we could wonder about
Speaker 3: the thought experiment of Saba bidding sixty five cents when
Speaker 3: there's the real world examples of tons of stuff at
Speaker 3: sixty fifty five sixty five seventy.
Speaker 2: So like, yes, you can.
Speaker 3: You can have this kind of cognitive dissonance where the
Speaker 3: manager can still raise new money at NAV while their
Speaker 3: old money is at from smart investors while their old
Speaker 3: money is at seventy. Because someone is a bucket to
Speaker 3: make new private credit investments, but they don't have a
Speaker 3: bucket to do BDCs because they don't do tickers, they
Speaker 3: don't do market You know. That gets to another thing,
Speaker 3: back to one of your recent guests, Okay, who I
Speaker 3: have like huge admiration for. Like I think if I
Speaker 3: had to be like on a desert island of somebody,
Speaker 3: I think it's cliff astness. Okay, And not just because
Speaker 3: I get to put you know, sunscreen on his on
Speaker 3: his bald head to protect him, but also we were
Speaker 3: just by the way, coincidentally in Milan during the US
Speaker 3: hockey game. It was just an amazing he's a huge
Speaker 3: hockey fan and I'm aspiring. But when he talked about
Speaker 3: volatility laundering. He's really like the father this whole, like
Speaker 3: the bug becomes the feature. I want to just tell you, really,
Speaker 3: I agree.
Speaker 1: With that all the time, like his point that like
Speaker 1: people want liquidity, and like arguably, yeah, you know, public
Speaker 1: B two c's traded seventy percent traded at thirty percent
Speaker 1: discount because they tell you that, and private credit brought
Speaker 1: on funds and don't trade at discount because they don't
Speaker 1: tell you.
Speaker 3: Then, So there's a moment in April twenty twenty three
Speaker 3: when I kind of howl at the moon because I
Speaker 3: saw one pager from Cliff Water that professed an eleven
Speaker 3: sharp in their fund and you know, we all know
Speaker 3: eleven sharp takes you back to like the land of
Speaker 3: the dinosaurs, when when you would have had a big
Speaker 3: draw down, but this thing where private credit gets marked
Speaker 3: every month the same. So I kind of howld at
Speaker 3: the moon. Kieran Goodwin howld at the moon, and Cliff
Speaker 3: jumped in in that debate, you know, and I was
Speaker 3: thinking about that conversation. We're just howling it into Twitter.
Speaker 2: Twitter.
Speaker 1: First, no one is like, no, that eleven sharp is right?
Speaker 3: Yea, yeah, Oka, Well, obviously Cliff Water put it on
Speaker 3: their page.
Speaker 2: You know.
Speaker 3: So all right, I think I've said enough about them.
Speaker 3: But but but the really story is about it.
Speaker 1: You know how much of this there?
Speaker 3: Oh my god, the story is a year. The story
Speaker 3: actually continues to September. September. I'm sitting in the office
Speaker 3: of the CEO of a really venerable insurance company and
Speaker 3: they want to put my closed in fund product on
Speaker 3: their platform. Could look at the ETF on stock ee change.
Speaker 3: Let's say we made twelve percent or something, okay, And
Speaker 3: he says, you know, here's my problem. You want me
Speaker 3: to pay these fees. By the way, they're not two
Speaker 3: and twenty or whatever, but I want a fee discount.
Speaker 3: And I said, well, we're capacity constrained. And he said, well,
Speaker 3: but Apollo is giving us a fee discount. And I said, well,
Speaker 3: but Apollo is basically unlimited capacity to keep making more
Speaker 3: private credit. And he said, but you don't understand. My
Speaker 3: investors for the last three years have received one percent
Speaker 3: a month, like clockwork, one every single month, twelve a year,
Speaker 3: you know, with leverage minus fees. So now they were
Speaker 3: able to get twelve and literally zero marked market volatility
Speaker 3: back to the cliff order sharp of eleven, you and
Speaker 3: the other end have made twelve, and there's plenty of volatility,
Speaker 3: and how can I justify paying your fees when I
Speaker 3: can get the twelve, you know, really easily. Now, I
Speaker 3: had a call with that investor yesterday. Okay, that investor
Speaker 3: is so curious because there are super long lots of
Speaker 3: private credit funds. They are super curious if I'm going
Speaker 3: to get hit. But they're also in super pain because
Speaker 3: they're seeing what's happening to private credit.
Speaker 2: And so you know what.
Speaker 1: Kind of pain are that Are they still getting one
Speaker 1: percent a month?
Speaker 2: Nope?
Speaker 3: Because you know, SOFA went down because you know, some
Speaker 3: loans made it five hundred or now at three fifty.
Speaker 3: So distributions were cut, by the way, what started the
Speaker 3: ball rolling with outflows where distribution cuts and retail investors
Speaker 3: were like, wait a second, we had a deal. You're
Speaker 3: gonna pay me one percent a month. Now you're only
Speaker 3: paying me eighty four basis points, and so that kind
Speaker 3: of started the quote no snowflake ever believes it started
Speaker 3: the avalanche. And so that investor is now facing you know,
Speaker 3: the first brands default, the Tricolor default, and so there's
Speaker 3: there's the problems of defaults, the problems of mark to
Speaker 3: market write downs, the problems of outflows, the problems of
Speaker 3: lower sofur although so far the interest rate market is
Speaker 3: not pricing much lower rates despite the recent market moves,
Speaker 3: and so that thing of volatility laundering, which is like
Speaker 3: just about the best two word quote for to talk
Speaker 3: about wrong with Wall Street, ever, is like that should
Speaker 3: be the title of what's happening here? Is that for
Speaker 3: too long the problems were masked and now they're the
Speaker 3: you know, the curtain gets pulled back. And Cliff was
Speaker 3: absolutely right, and it took a while. And in the meantime,
Speaker 3: because it took a while, the industry is two and
Speaker 3: a f trillion.
Speaker 4: Something I'm curious about is the path forward for you? Because, okay,
Speaker 4: we'll find out in mid April. If you get hit
Speaker 4: at sixty five, maybe you'll get over subscribed, which would
Speaker 4: certainly be informative. But what happens if you don't really
Speaker 4: get any hits, Like do you then raise your bid?
Speaker 4: What is the path forward from there?
Speaker 3: I don't know. Have you not met me before? Do
Speaker 3: I just go Do I just put my bowling ball
Speaker 3: in the bag and go home? No, let me give
Speaker 3: you the answer the instead of trying to be funny
Speaker 3: about it. When I put that bid in the markets
Speaker 3: are in a certain state. Yeah, quarter later, you know,
Speaker 3: are people going to sell to me when redemptions were
Speaker 3: nine percent?
Speaker 2: Maybe? Maybe not.
Speaker 3: If redemptions are twenty percent, it stands to reason they're
Speaker 3: more likely to sell. So I don't give up easily,
Speaker 3: especially if we're doing something you know that we think
Speaker 3: is of value to our clients. But I really think
Speaker 3: if the market gets worse and then our bid probably
Speaker 3: goes lower. But I think it's clear that there's a
Speaker 3: value to provide a bid when people need a bid
Speaker 3: and there isn't one, and if we don't get hit
Speaker 3: on any yes, maybe our bid has to go up.
Speaker 3: Or maybe it's just we were a little early.
Speaker 4: It's interesting that you went to bowling as the example
Speaker 4: of the sport.
Speaker 2: I'm a sub one hundred average bowler.
Speaker 3: My best sport and is not saying much is tennis,
Speaker 3: and I'm like a three and a half usta. So
Speaker 3: it's you know, unless you want to call chess a sport.
Speaker 3: I guess yeah, oh yeah, I put my chess pieces
Speaker 3: in the bag and went home. Yes, you got me.
Speaker 3: I stunned to you stun silence for the first moment.
Speaker 4: I do want to ask about dats, but.
Speaker 1: Yeah, we're running up on times. Let's talk about debts.
Speaker 4: Okay, oh my god, that's digital assets.
Speaker 2: I talk about a car crash.
Speaker 4: Well, let's talk about the car crash. There's a bunch
Speaker 4: of dbts digital acid treasury companies that are trading at
Speaker 4: discounts to NAV right now, would.
Speaker 2: That entice you?
Speaker 4: You seem like a busy man.
Speaker 3: But well, look, there are a couple of things that
Speaker 3: no one would disagree with about the crypto market. One
Speaker 3: is that various less than white shoe characters are present
Speaker 3: in it, you know, as evidenced by the number of
Speaker 3: that have gone to jail to release from jail thanks
Speaker 3: to some donations or otherwise. And so that world, it
Speaker 3: has some really ethical, awesome people. And then it and
Speaker 3: as some others, and I think one of the issues
Speaker 3: for us with debts which we don't have with closed
Speaker 3: end funds. And you know, again, if someone can educate
Speaker 3: us or BDCs. I was going to say, you're always
Speaker 3: worried about as an activist, if you wanted to actually
Speaker 3: be an activist, that they're going to do something really deluded,
Speaker 3: you know, like effectively a poison pill. And I don't
Speaker 3: believe that it is impossible. It may not be easy.
Speaker 3: I don't believe it's impossible for a DAT to issue
Speaker 3: shares way below nav maybe even you know, well below
Speaker 3: the share the price that's trading at, to a select
Speaker 3: group of investors. And now if they issued it to everyone,
Speaker 3: you'd say, okay, I can get my Proada portion, but
Speaker 3: I would hate to buy something at a thirty five
Speaker 3: percent discount. TOV find that they issue a lot of
Speaker 3: shares at fifty to a select group, and now I've
Speaker 3: been diluted. We saw the threat of a poison pill
Speaker 3: on a closed in fund that we owned.
Speaker 2: We went to court.
Speaker 3: Court sided with us, but the manager did it for
Speaker 3: four straight quarters, and that was a closed in fund.
Speaker 1: Is just because like a DAT is not a forty
Speaker 1: fund line.
Speaker 3: I don't I'm not sure, but I believe they can.
Speaker 3: Because it's not a closed in fund close in funds,
Speaker 3: they cannot do dilutive offerings without offering them to everyone.
Speaker 3: And then the second thing is like, all right, it's
Speaker 3: one thing for Elon Musk wanting to pay himself a
Speaker 3: trillion dollars. But you know, I think a DAT can
Speaker 3: decide it wants to pay its CEO a lot of money,
Speaker 3: and I have a handpick board and basically take money
Speaker 3: out that way. One of the cool things I think
Speaker 3: about your jobs you can always go to where it's
Speaker 3: hot and interesting. And I would say that's also one
Speaker 3: of the cool things about my job is I'm supposed
Speaker 3: to stay in my sandbox. But my sandbox of RV
Speaker 3: and mispricings, you know, it doesn't include what was that
Speaker 3: company called movie pay or movie phone or whatever movie past, like,
Speaker 3: you know, like that that was a fun one that
Speaker 3: I just was a reader about, Like, but like, what's
Speaker 3: I think one neat thing about this space is the
Speaker 3: ability to break new ground or do something new in
Speaker 3: a space that's central to a lot of investors, as
Speaker 3: evidenced by the size of the market. So I am
Speaker 3: really enjoying, like kind of exploring the creative side of
Speaker 3: trying something new. I'm hoping that it doesn't lead to nothing,
Speaker 3: but if it does and we don't get hit, it's
Speaker 3: not the end of the world. But I'm really enjoying
Speaker 3: rolling in my sleeves and learning about this space even
Speaker 3: more deeply.
Speaker 1: If you do get head, you'll be a little more nervous.
Speaker 1: It's not that big. Yeah.
Speaker 3: By the way, if I get hit and things change
Speaker 3: a lot, I'm happy to come back on or whatever,
Speaker 3: you know like that. I think what's neat about this
Speaker 3: is this story will continue to be a story. I
Speaker 3: don't mean my part of it, but the private credit market.
Speaker 1: This is the story.
Speaker 2: You're going to keep rowling, keep playing chess.
Speaker 4: My big takeaway I want to launch a shop called
Speaker 4: black Owl. I feel like that's the only iteration.
Speaker 1: Only Whita, only blue space. That was the Money Stuff Podcast.
Speaker 1: Thanks to pous Winston for coming up.
Speaker 2: Thanks to both here all right, rock and roll?
Speaker 4: Did you enjoy that?
Speaker 2: I talk about this in my house when no one's there.
Speaker 2: I just talk to the law.
Speaker 4: I talk to the mirror.
Speaker 1: Yeah, And that was the Money Stuff Podcast.
Speaker 4: I'm Matt Levine and I'm Katie Greifeld.
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