Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: I feel like we should address why we were off
Speaker 2: air for three weeks. People asked me about it.
Speaker 1: Really, no one asked me about it. Well, no one
Speaker 1: asked me about it.
Speaker 2: I got questions, Well, you had a vacation, then I
Speaker 2: had a vacation. Then we actually had an episode.
Speaker 1: I think I think everyone in this room would agree
Speaker 1: the greatest episode of the Money Stuff podcast in its history.
Speaker 1: Except when I say we recorded it, I mean we performed.
Speaker 1: We accidentally did not record.
Speaker 2: Yeah, so it will never see the light of day.
Speaker 1: We do, I believe have your side of the audio.
Speaker 1: Where's like I was joking, we should do like a
Speaker 1: space coast coast to coast thing, where like we play
Speaker 1: your audio and I just say non secretaris that set
Speaker 1: you up to say something weird in between your audio.
Speaker 2: But I was a sign that I was also thinking
Speaker 2: like Mystery Science Theater, where like I say something and
Speaker 2: then you, like you offer a snippy little comment, and
Speaker 2: then I say something else and you just respond.
Speaker 1: There are a lot of ways we could go with
Speaker 1: that audio.
Speaker 2: Who has the time.
Speaker 1: Who has the time?
Speaker 2: Not us? No, so we apologize to your listeners.
Speaker 1: You're fine, I'm sure it was.
Speaker 2: I'm sure we all had a great couple of weeks.
Speaker 1: We got a vacation from this. They got a vacation
Speaker 1: from us. Fine. I'm going away on a couple of weeks.
Speaker 2: So I'm going to a conference, and you're going to
Speaker 2: do an I want to say this.
Speaker 1: I'm going to the Tulane m and A conference, which
Speaker 1: is like the Big M and A conference for like
Speaker 1: M and A bankers. The Song Exempt put lawyers to
Speaker 1: a very logic extent. So if you're there, say hi
Speaker 1: and uh, I've never been to this conference everyone, So
Speaker 1: that's fun because it's a New.
Speaker 2: Orleans that does sound really and the weather should be
Speaker 2: nice but not horrible. In March in New Orleans. I'm
Speaker 2: going to Vegas for an ETF conference. I hate Vegas,
Speaker 2: but I'll be there. So if you're there, shout out
Speaker 2: the pod.
Speaker 1: Hello, and welcome to the Money Stuff Podcast. You're a
Speaker 1: weekly podcast, your occasional podcast where we talk about stuff.
Speaker 1: It into money. I'm that Levine and I read the
Speaker 1: Money Stuff column from Bloomberg Opinion.
Speaker 2: And I'm Katie Greifeld, a reporter for Bloomberg News and
Speaker 2: an anchor for Bloomberg Television.
Speaker 1: Where should we start, Katie.
Speaker 2: We could start with Warner Brothers. That happens last week.
Speaker 1: I was still happening.
Speaker 2: But yes, it's still happening. But I was on vacation,
Speaker 2: and I left for vacation thinking that, Okay, Netflix has
Speaker 2: kind of got this in the bag, like they've kind
Speaker 2: of had this in the bag, and they did not
Speaker 2: have it in the bag. They ended up walking away.
Speaker 1: Yeah, it's fascinating, right, Like Paramount had bid thirty dollars
Speaker 1: to buy Warner Brothers. Warner Brothers had said, we'd rather
Speaker 1: take this Netflix bid. It was something more complicated, but whatever,
Speaker 1: it was like worth more than thirty dollars, right to Warner,
Speaker 1: they thought. And then Paramount kept past them. And then
Speaker 1: they eventually raised their bed from thirty to thirty one,
Speaker 1: and Warner was like, well, thirty one is better than
Speaker 1: Netflix's bed, although thirty was not. So they went back
Speaker 1: to Netflix and they said, you have matching rights, would
Speaker 1: you like to raise your bed above thirty one? And
Speaker 1: Netflix said no, thank you, see you later.
Speaker 2: Yeah, And so Netflix.
Speaker 1: Just dropped out and Paramount is buying Warner for a
Speaker 1: thirty one.
Speaker 2: Dollars I could see world in which Paramount does go
Speaker 2: after Netflix next, because this was pretty audacious.
Speaker 1: So you have this dynamic where Paramount thinks that it
Speaker 1: should be combined with Warner Brothers and Warner Brothers kind
Speaker 1: of things. It should be combined with someone like Warner Brothers.
Speaker 1: And so Paramount, which has a young, ambitious, arguably NEPO
Speaker 1: baby ceo.
Speaker 2: I was going to say, a CEO with a well
Speaker 2: deep pocketed file.
Speaker 1: Yeah, a CEO with let's say, something to prove. He's like,
Speaker 1: I want to buy Warner, and Warner has a CEO
Speaker 1: who has kind of proven itself and you know, wants
Speaker 1: to sell, right, And so it makes sense to combine
Speaker 1: these two companies. I mean, it probably makes sense. They
Speaker 1: think it makes sense. There's there's some synergies, whatever makes
Speaker 1: sense to combine the companies, and it makes sense for
Speaker 1: Paramount's executive team to control the combined company, let's say, right,
Speaker 1: But what doesn't make sense from a corporate finance perspective
Speaker 1: is Paramount, which is teeny, buying Warner, which is big. Yes,
Speaker 1: it sort of straightforward world. You'd be like, well, Warner
Speaker 1: will buy Paramount and then they'll combine them and then yah. Yeah,
Speaker 1: But It just didn't work out that way because of
Speaker 1: the dynamics of how Warner is trying to sell itself
Speaker 1: and bidding against Netflix, and Paramount had offered an all
Speaker 1: stock deal, like, it would not have worked, right, Yeah,
Speaker 1: So they offered it all cash deal, which meant borrowing yeah,
Speaker 1: jillions of.
Speaker 2: Dollars more than twice their market capitalization. Actually, it's pretty fantastic.
Speaker 1: It depends on account, like their market cap right now,
Speaker 1: Paramount's market gap is like thirteen fourteen billion dollars their
Speaker 1: equity market cap and the debt for this deal I think,
Speaker 1: including like everything is like seventy nine billion dollars, so
Speaker 1: it's like six times in their market cap. But that
Speaker 1: math is not quite right because like their market cap
Speaker 1: today is like thirteen billion dollars, but they're getting like
Speaker 1: a forty something billion dollar equity check from Larry Allison Fair.
Speaker 1: They're also doing a rights offering, which I love.
Speaker 2: Explain that and why do you love it? Well?
Speaker 1: I love it because just doesn't make sense for like
Speaker 1: this teeny company to borrow so much money to buy
Speaker 1: this bigger company. You do the reverse, right, and the
Speaker 1: rights offering is a way to like very slightly move
Speaker 1: in the correct direction, which is like, we should have
Speaker 1: more stock outstanding if we're going to swallow this giant company.
Speaker 1: And so they're offering to sell about three billion dollars
Speaker 1: of stock to whoever wants at public investors on the
Speaker 1: same terms that Larry Allison is buying. So Paramount is
Speaker 1: essentially a controlled company like in the personal ownership of
Speaker 1: like the Ellison family, but it has public shareolders and
Speaker 1: they can put in some more money. Basically, if you're
Speaker 1: a public sherelder, you have the right to buy some
Speaker 1: stock at the sixteen bucks that Larry Ellison is playing,
Speaker 1: which like you know, it's three billion of stock, which
Speaker 1: it's three billion less of debt load than you'd otherwise need.
Speaker 1: And like they have a lot of debt.
Speaker 2: They do have a lot of debt, to the point
Speaker 2: where they were downgraded to junk by Fitch in the
Speaker 2: aftermath of this, which I guess isn't that surprising when
Speaker 2: we're talking about some.
Speaker 1: Of these levels I was thinking about, like when they
Speaker 1: were trying to get this deal. So there's a long
Speaker 1: time where Paramount was pestering Warner to take their deal
Speaker 1: instead of Netflix and Warner we're saying no, and it
Speaker 1: was hard for them to say no because a lot
Speaker 1: of sharelders wanted the certainty and cash of the Paramount deal,
Speaker 1: and so the board had to defend their deal. And
Speaker 1: one thing the board said was the paramat deal would
Speaker 1: be the largest leveraged buyotever, and we have doubts that
Speaker 1: they can get it done. And like, in some sense,
Speaker 1: that's like a weird thing to say. Because the Warner
Speaker 1: board represents the Warner shareholders. They have a fiduciary duty
Speaker 1: at this point to get the best price for the
Speaker 1: Warner shaholders. And if you say, well, the paramount deal
Speaker 1: involves borrowing a lot of money, it would be hard
Speaker 1: to pay down all that debt, Like that doesn't matter,
Speaker 1: Like that's not your problem, right, the shoulders are cashed
Speaker 1: out at that point. If it runs into trouble after
Speaker 1: the LBO, that's not the sholder's problem. So it's not
Speaker 1: the boards problem. And the board is defending this as saying, well,
Speaker 1: we don't think they could even raise the financing to
Speaker 1: do this albo, which is kind of a weird thing
Speaker 1: to think because it's like Larry Ellison, It's like it's
Speaker 1: people who can raise the financing yeah, but now that
Speaker 1: they've signed the Paramount deal, I'm like, oh, yeah, this
Speaker 1: is the largest LBO ever And like I can see
Speaker 1: why someone with ties to Warner Brothers would be nervous
Speaker 1: about that. There's going to be a lot of job cuts.
Speaker 1: There's going to be probably a lot of cuts in production,
Speaker 1: although there's debate about that. But like, to service all
Speaker 1: of this debt, it's going to be difficult and it's
Speaker 1: going to lead to like hard business treses at Paramount
Speaker 1: Warner And if you sold to Netflix, which has plenty
Speaker 1: of money, you wouldn't have those pressures made a lot
Speaker 1: of pressures, right, Like Netflix is not not necessarily a
Speaker 1: lavish benign over alert for movie companies, but like having
Speaker 1: that much debt like makes it harder to run the business.
Speaker 2: Yeah, I mean there were questions about theatrical releases, et cetera.
Speaker 2: When it came to the Netflix bid.
Speaker 1: Netflix is like, you can have your theory of mind
Speaker 1: of Netflix, but they have plenty of money.
Speaker 2: Yeah. Yeah, it's funny. I mean, taking a look at
Speaker 2: our reporting, both Ted Sarandos and David Ellison had spent
Speaker 2: a lot of time in DC sort of pitching for
Speaker 2: this deal. And it seems like one of the factors though,
Speaker 2: was the idea that when it came to the regulatory
Speaker 2: side of things, that it would be a quicker experience
Speaker 2: going with the Paramount bid than with Netflix that probably
Speaker 2: would have lasted well into twenty twenty seven.
Speaker 1: A lot of people think that, Yeah, Paramount definitely pushed
Speaker 1: that narrative. Ted Sarandas is going around saying no, no, it's fine,
Speaker 1: we have no problem. We would have got improved quickly.
Speaker 1: So I don't know the answer, but like, yes, certainly
Speaker 1: people were nervous about the Netflix regulatory approval process, and
Speaker 1: you know, this is on the backdrop of everything is
Speaker 1: about Donald Trump's personal whim but anyway, so there's a
Speaker 1: sense that like Netflix is politically on the outs and
Speaker 1: Paramount is politically on the end. But like the Netflix
Speaker 1: very consistently said no, no, it's no problem, more fine,
Speaker 1: We're doing great.
Speaker 2: So I don't know, Yeah, I mean, Netflix, in walking
Speaker 2: away said that this was solely about price, that they
Speaker 2: were confident they would get it.
Speaker 1: Fascinating, Yeah, you've come this far, You've had this much
Speaker 1: time and money on this deal, and they're like, could
Speaker 1: you pay one more dollar and you're like, no, it's amazing.
Speaker 1: It's an amazing display of disciplined No, by the way,
Speaker 1: it's one more dollar. But it's also they get a
Speaker 1: big breakup fee for walking away.
Speaker 2: Yay, Paramount is paying.
Speaker 1: There's been a lot of talk about paramount of grain
Speaker 1: to pay that breakup fee, and like, I've always found
Speaker 1: that talk very perplexing because obviously, if you've been thirty
Speaker 1: one dollars per share in cash to buy a company,
Speaker 1: the incidence of the breakup fee is on you, Like
Speaker 1: nobody could possibly pay it other than paramount, and it's
Speaker 1: just like sort of smoking mirrors that. Wheer was like, oh,
Speaker 1: they have to pay the breakup fee anyway, Yeah, they're
Speaker 1: paying it far.
Speaker 2: Yeah. Well. Also, just to the point on the DC relationship,
Speaker 2: apparently President Trump told Sorrando's at some visit not to
Speaker 2: overpay for the company. So apparently he took his advice.
Speaker 1: I don't know, No, he was he was going to overpay.
Speaker 1: The Trump gave him some business advices.
Speaker 2: I've never mind if the President tells you that, I
Speaker 2: mean kind of feels like the writing's on the wall,
Speaker 2: like this is all okay.
Speaker 1: I don't think that's Like if you overpay, we'll want
Speaker 1: to approved. I think that's just used to be in business.
Speaker 2: Yeah, yeah, yeah, I mean I wasn't actually in the room,
Speaker 2: So yeah.
Speaker 1: We're speculating a little bit about what that conversation.
Speaker 2: I don't know what room it was. Wasn't the Oval office,
Speaker 2: It could be any room, yeah, perhaps a ballroom. Just
Speaker 2: from a human level, I mean, just reading this, I
Speaker 2: feel like I was getting my feelings hurt, like the
Speaker 2: fact that it took so many months, Paramount was rebuffed
Speaker 2: at so many turns. It feels like Warner Brothers the
Speaker 2: board really didn't want to do this and then found
Speaker 2: themselves in a position where they sort of couldn't say no.
Speaker 2: I feel like if I was in Paramount shoes, I
Speaker 2: would just feel really bad all the time.
Speaker 1: But interesting, I don't know.
Speaker 2: I mean, maybe I just don't have the bullheaded confidence.
Speaker 1: You know, Warner would never say we really don't want
Speaker 1: to sell the I mean, they're a boardive competent directers
Speaker 1: that have a fiducial duty to get the best price
Speaker 1: for their shareholders. I think that they liked the Netflix deal.
Speaker 1: For whatever reason, they liked the Netflix deal. You know,
Speaker 1: they'll tell you deal certainty and the value of the
Speaker 1: cable stub and whatever. But there was always some price.
Speaker 1: I mean, there had to have always been some price
Speaker 1: that paramount could pay that would be enough for them,
Speaker 1: And it turned that price was one dollar more, which
Speaker 1: is funny. The other thing that happened that it's so
Speaker 1: strange is that Netflix, you know, was like, we'll pay
Speaker 1: the complicated package they would pay, and this is our
Speaker 1: best and final offer. And Paamans said, we offer thirty
Speaker 1: dollars and it is not our best and final offer.
Speaker 1: And so it would like Warner could not accept that deal.
Speaker 1: It would be just absolute malpractice to be like, we'll
Speaker 1: take your not best offer. So they had to hold
Speaker 1: out for something more, And everything else is in the
Speaker 1: background of like, oh, we had to hold out for more,
Speaker 1: and like I don't know if they explicitly said thirty
Speaker 1: one best and final effort, but like thirty one was enough.
Speaker 2: Yeah, Well, it'll be interesting to see how long this
Speaker 2: actually does take to get through.
Speaker 1: The Other thing is but I don't think I think
Speaker 1: they've already gotten some of their clarents. There's like European
Speaker 1: there's a locking still happen. But the other interesting thing
Speaker 1: is like if your model of this is they have
Speaker 1: taken on crippling dat and won't be able to service it,
Speaker 1: like you read some people being like Netflix's plan here
Speaker 1: is to buy the whole thing in three years when
Speaker 1: it falls apart, which is one one way to put
Speaker 1: Private credit has been a thing.
Speaker 2: Oh my gosh, GOSHBDC.
Speaker 1: All these things.
Speaker 2: Yeah, b CRED Blackstone stepping up to meet these redemptions personally, right.
Speaker 1: Be cred the Blackstone non traded private credit business development
Speaker 1: company that's not as name, that's just what it is.
Speaker 1: Its name is b Credit. All these non traded BBCs,
Speaker 1: they call them like semi liquid vehicles. Every quarter they
Speaker 1: offered a redeem up to five percent of the stock
Speaker 1: a tender offer. So if you are invested in this fund,
Speaker 1: you can't sell it on the stock exchange. There's no
Speaker 1: way to get liquidity except every quarter they will buy
Speaker 1: back your shares if you want, if you want out,
Speaker 1: but only up to five percent. So last quarter they
Speaker 1: got seven point nine percent of the fund in redemption requests,
Speaker 1: which is a record, as we reported. And so they
Speaker 1: had to scrape to do those redemptions, not because they
Speaker 1: didn't have the money. They have like bank credit facilities.
Speaker 1: They can do the money, but because like the way
Speaker 1: the tender offer works, they can't. It's boring, but like
Speaker 1: they couldn't actually meet all those redemptions. And rather than
Speaker 1: say no, which is not quite the same thing as gating,
Speaker 1: the fund quotes but like yeah, like look like gating,
Speaker 1: and people get mad and upset. So rather than say
Speaker 1: know it anyone right out, they let everyone get out.
Speaker 1: And to do that, they paid about seven percent of
Speaker 1: them out with Pea Creds money and they paid their
Speaker 1: remaining zero point nine percent out with money from Blackstone
Speaker 1: the firm and from the personal accounts of some Blackstone employees. Yeah, here,
Speaker 1: you know, get into the fund. It's like meant to
Speaker 1: be a show of confidence. It's like we will cash
Speaker 1: you out at par and we will pay par with
Speaker 1: our own money because we really believe in these credits.
Speaker 2: Specifically, it was more than twenty five senior leaders from
Speaker 2: sure across Blackstone. We reported. Yeah, I've heard that too.
Speaker 2: I was talking to someone about this on bloomber TV
Speaker 2: yesterday and they were like, I take this as a
Speaker 2: very bullish sign. It's a kin to share buybacks or
Speaker 2: insider buying or something like that.
Speaker 1: So that is the honestly what it's meant to be.
Speaker 2: That's the optimistic angle. But the headlines keep coming, and I.
Speaker 1: Mean like the angle is like some retail investors in
Speaker 1: this private fund, having read bad headlines, wanted to take
Speaker 1: their money out, and there are offsetting inflows from experienced
Speaker 1: private credit professionals who work at Blackstone and know the portfolio. Right,
Speaker 1: that's a good story. Yeah, you have to like, you know,
Speaker 1: you have to like twist the arms of the employees
Speaker 1: to yeah, how do you say no?
Speaker 2: That's what I would love to know, Like, Okay, more
Speaker 2: than twenty five or about twenty five said yes. Did
Speaker 2: anyone say no? Did anyone feel like they could? I
Speaker 2: want to talk to that person.
Speaker 1: The other thing that bothered me about this is like
Speaker 1: if you came to me and I was like a
Speaker 1: sharp Elbo private.
Speaker 2: Credit professional and you really I can see it.
Speaker 1: You're like all of our retail not all seven of
Speaker 1: our retail investers are panicking in one out of our
Speaker 1: lovely fund, which has great credits, and I live in
Speaker 1: the portfolio. Would you like in? I'd be like, sure,
Speaker 1: that sounds like a firesal. I'd be happy to get
Speaker 1: in when these people are panicking, and then my bosses
Speaker 1: would be like, great, you're buying it one hundred cents
Speaker 1: on the like, no, that's nothing. I don't want to. Like,
Speaker 1: if I think they're worth one hundred cents on the
Speaker 1: dollar and everyone's panicking, I want to buy a ninety.
Speaker 1: They should get a discount. You know, when you think
Speaker 1: about like the professionals at the firm using their own
Speaker 1: money to buy the controversial assets. The classic story is
Speaker 1: in like I don't know, I like twenty eleven or something.
Speaker 1: Sometime shortly after the financial crisis, Credit Sueez had this
Speaker 1: like giant pile of what people call the toxic assets,
Speaker 1: like yeah, the mortgage derivatives and just do your weird
Speaker 1: stuff from the crisis, and they were like, we can't
Speaker 1: sell this. It has a huge capital hit. So we're
Speaker 1: going to package it into a box and give shares
Speaker 1: of the box to our like managing directors. And so
Speaker 1: they've just paid bonuses one year in toxic assets. Love it,
Speaker 1: and like those people all got rich, like they'd like
Speaker 1: immediately recovered, and they did so well because like they
Speaker 1: got these toxic assets at the marks they were at,
Speaker 1: which was a distress mark. But here everything's in par
Speaker 1: you know their distress marks. You're getting a price that
Speaker 1: does not reflect necessarily the level of nervousness that your
Speaker 1: retail investors are showing they try to redeem.
Speaker 2: Yeah, and that's the thing. I mean, we heard from
Speaker 2: Blackstones Global head of private credit Strategies at Bloomberg and
Speaker 2: Bust this week saying that the noise that you're seeing
Speaker 2: doesn't match the solid credit fundamentals of the fund's assets.
Speaker 2: It almost feels like the conversation has sort of moved
Speaker 2: beyond that when it comes to the redemption request that
Speaker 2: you're seeing. And even if it's not headlines about Blackstone specifically,
Speaker 2: there's a lot of stories. I mean, there was one
Speaker 2: on Thursday about Blackrock what marking a private loan they
Speaker 2: hadn't made to zero.
Speaker 1: Me some markdan on some lens.
Speaker 2: Yeah.
Speaker 1: I don't know that it'll be universal across all these
Speaker 1: these funds, but like all these all these people, all
Speaker 1: the all these like senior private credit people are going
Speaker 1: around expressing conference in their portfolios, which one might be
Speaker 1: true and two they have to say. But then, like
Speaker 1: there's the separate question of if everyone is panicking and
Speaker 1: you are confident in the portfolio, Like, yeah, you should
Speaker 1: step in and buy, but it's weird to have to
Speaker 1: buy out one hundred cents on the dollars. Yeah, and
Speaker 1: this is why I of the trade that Boas Weinstein
Speaker 1: is doing. So we're recording this. On Thursday, he announced
Speaker 1: one I think today or yesterday for the star woud
Speaker 1: A private read Yeah, and two weeks ago he announced
Speaker 1: one for these blue Owl private BDCs, where basically he's
Speaker 1: going around tendering to buy shares of these non traded,
Speaker 1: semi liquid vehicles that people are nervous about, and he's
Speaker 1: offering to buy them, like, you know, he's seventy five
Speaker 1: sons on the dollar. Presumably he's more skeptical than like
Speaker 1: Blackstone is, but like less skeptical than these retail investors. Right,
Speaker 1: he thinks these credits are fine or he's heading the
Speaker 1: credit I don't know, but like he's getting these credits
Speaker 1: at a discount because retail investors are I don't want
Speaker 1: to say panicking, but they're nervous.
Speaker 2: Well, that's what I wanted to ask you, was what
Speaker 2: is the trade here for Boas?
Speaker 1: The trade is like the value of liquidity in these
Speaker 1: vehicles has gone up enormously in the last month. People
Speaker 1: now want this liquidity, and if people really want liquidity,
Speaker 1: they should pay for liquidity, and bo As will be
Speaker 1: the one to get paid.
Speaker 2: Yeah, in theory, I'm wondering.
Speaker 1: Tender like this might just be trolling. Yeah, nothing forces
Speaker 1: anyone to tender, because these vehicles all have mechanisms to
Speaker 1: cash you at a one hundred cents on the dollar. Like, yeah,
Speaker 1: not perfect, there's gates whatever. But because like you sort
Speaker 1: of expect to get cashed out one hundred cents on
Speaker 1: a dollar, you might not want a tender to Boaz
Speaker 1: at seventy five, but you might.
Speaker 2: Yeah, to the point, he could be trolling. I was
Speaker 2: looking at some of his tweets, including the one he
Speaker 2: announced this, and someone commented something like, you're a hilarious man.
Speaker 2: It is pretty funny.
Speaker 1: Funny trade. Yeah, it's a funny trade because like there's
Speaker 1: all these headlines that, oh, private credit liquidity, and then
Speaker 1: like there's all these private credit people going around on
Speaker 1: TV being like it's fine, our portfolios are good. And
Speaker 1: then because like I'll pay seventy five, like it's great,
Speaker 1: it's a good trade. Well, it was like a little
Speaker 1: bit pouring fuel on the fire, Like.
Speaker 2: How it works out for him? Like is he he
Speaker 2: might get zero shares?
Speaker 1: I don't know, but.
Speaker 2: I mean it would be nice to ask the man himself.
Speaker 2: But like, is this him calling the bottom and hoping,
Speaker 2: like how it's being traded in the market, that it
Speaker 2: will go back to one hundred cents or is he
Speaker 2: just hoping that he will get cash out at one
Speaker 2: hundred cent?
Speaker 1: There could be all sorts of trades. Yeah, he could
Speaker 1: be short what the credits a right? But like, yeah,
Speaker 1: to me, like the obvious trade is like the il
Speaker 1: liquidity premium of these funds has gone way up and
Speaker 1: he can capture that.
Speaker 2: Yeah, well, Boas come on the podcast. Just the point
Speaker 2: I wanted to I wanted to make when it comes
Speaker 2: to like the fundamentals almost not mattering. I do just
Speaker 2: wonder about the psychological aspect of it all. The fact
Speaker 2: that over the past several years, all these private asset,
Speaker 2: private credit folks have been pushing so hard into the
Speaker 2: retail market. Whether this experience overall, even if the fundamentals
Speaker 2: are fine, will just dent demand going forward from retail.
Speaker 1: My bet is always on people having short memories. But
Speaker 1: right now, yeah, it's like no, one's like, oh, we
Speaker 1: really need to do our retail private credit pressure right,
Speaker 1: like not this week.
Speaker 2: Not this week. I don't know. There's a lot of
Speaker 2: planned there's like a lot of like interval fund type
Speaker 2: things that are supposed to push out in the next
Speaker 2: couple of months. So yeah, we'll see, we'll see, we'll see.
Speaker 2: Speaking of private assets, you about thanks over, Let's talk
Speaker 2: about what's going on in the ETF space. Why not
Speaker 2: you know, all the while we're here, So we're talking
Speaker 2: specifically about private companies because there's this fascinating ETF. The
Speaker 2: government name is the er Shares Private Public Crossover ETF.
Speaker 2: It's xover Crossover XOVR. It owns SpaceX, not outright, but
Speaker 2: through a special purpose vehicle. And the SEC has a
Speaker 2: cap on how much of an ETF, any open ended
Speaker 2: fund can have in a liquid asset. It's fifteen percent.
Speaker 2: The problem is that the CTF keeps running into is
Speaker 2: that it keeps getting out flows, so it stake as
Speaker 2: a percentage of the portfolio keeps going up. It hit
Speaker 2: like forty four percent or somewhere close to it in
Speaker 2: the past couple of weeks.
Speaker 1: SpaceX's evaluation is like a quintuple the last years.
Speaker 2: Yeah, morning Star has been very vocal on this, specifically
Speaker 2: this man named Jeffrey Prattack. I hope that's I'm saying
Speaker 2: his last name, right, that if you take a look
Speaker 2: at the performance of the ETF, it doesn't necessarily reflect
Speaker 2: the fact that SpaceX's valuation has quintupled, which is also
Speaker 2: a big question mark.
Speaker 1: Right, this is like the opposite of private credit. Like
Speaker 1: private credit, everyone's like, oh, the marks are fine, everyone
Speaker 1: like about these marks, and then this one. Yeah, like
Speaker 1: those marks should be much higher. Yeah, which is weird
Speaker 1: to me that people wouldn't usually people of marketings up.
Speaker 2: Yeah, Well that's the big question there, like why, like
Speaker 2: you would think that this fund is absolutely crushing it.
Speaker 2: But morning Star has made the case that if you
Speaker 2: take a look at the performance of this ETF, its
Speaker 2: performance can be almost entirely explained by its public holdings
Speaker 2: rather than it's SpaceX holdings, which again it's a it's
Speaker 2: a question mark, why is that happening? Sure, that's that's
Speaker 2: the big one.
Speaker 1: I mean the answer, I mean, I don't know the answer.
Speaker 2: I don't know the answer either.
Speaker 1: We've looked at the SPV and the shares aren't there
Speaker 1: and like oops, and they close up and forget about.
Speaker 2: Well, that's one of the theories, right, is that the SPV, well,
Speaker 2: the SPV that's like a very well, it could partly
Speaker 2: be explained by SPV costs. There was a filing this
Speaker 2: week where the firm said that in the prior period,
Speaker 2: the funds like total expense ratio was one point one
Speaker 2: eight percent, even though the management fee is only seventy
Speaker 2: five bases points. And they said that they've since switched
Speaker 2: to an SPV that has no management fee and no
Speaker 2: carried interest, so this isn't going to be a problem anymore.
Speaker 2: So it's going to be interesting to see how that
Speaker 2: shakes out. But what we do know is that you
Speaker 2: take a look at the this share of SpaceX, that
Speaker 2: is this portfolio, and it is wildly above the SEC's
Speaker 2: limit on how much you can actually hold liquid securities.
Speaker 2: So the point being, this is a story that's developing
Speaker 2: right now and it's going to be interesting to see
Speaker 2: how it shakes out. And it sort of puts the
Speaker 2: whole push on putting private assets, or at least private
Speaker 2: companies in an open ended vehicle. Kind of takes the
Speaker 2: shine off because with an ETF, you can take your
Speaker 2: money out at any time. These funds ETFs aren't gated,
Speaker 2: and that can cause your portfolio to do really funky
Speaker 2: things if you have to sell your liquid assets and
Speaker 2: it's not as easy to sell.
Speaker 1: An SPV, I mean counterplant it's SpaceX. Yeah, right, this
Speaker 1: is not a very good counterplint, right because like three
Speaker 1: months ago, I won't want to be in croit credit
Speaker 1: and now they don't. But like it is a counterplint,
Speaker 1: which is that Yeah, people are like ooh, they're surprised
Speaker 1: of having outfuds because people like you want to own
Speaker 1: SpaceX and if their performance reflected that SpaceX shares, people.
Speaker 2: Would want that flows follow performance. This is probably more
Speaker 2: conversation around like SPVs, because there is an ETF that
Speaker 2: does hold SpaceX outright. The ticker is ron B. It's
Speaker 2: the Barren First Principles ETF. But they've also classified their
Speaker 2: SpaceX holdings not as ill liquid but as less liquid,
Speaker 2: which is something that I didn't actually really appreciate until
Speaker 2: I started looking into the ron B ETF, that you,
Speaker 2: as the portfolio manager, classified the liquidity of your holdings
Speaker 2: to the SEC rather than the other way around.
Speaker 1: Right, And by the way, like obviously they are incentives
Speaker 1: the game that but like I kind of see why
Speaker 1: someone would say SpaceX is kind of liquid, right, like, yeah,
Speaker 1: it's a two trillion dollar company or whatever.
Speaker 2: Really theoretically going public in the next couple of months.
Speaker 1: Yeah, but like also there's secondary trading. That's there's jillions
Speaker 1: of best pieces. Like if you were like gone to
Speaker 1: your head, you have to liquid out your SpaceX shares,
Speaker 1: and we like you could do it at like today's prices,
Speaker 1: you could, yeah, for hundreds of millions of dollars of size, right,
Speaker 1: not for tens of billions of dollars. So I don't know,
Speaker 1: I don't I don't have that. Like I keep saying
Speaker 1: private markets and then in public markets, right, like the
Speaker 1: there's a continuum of liquidity, and like SpaceX is more
Speaker 1: liquid than a lot of publics.
Speaker 2: Then yeah, well it's interesting. I mean, as far as
Speaker 2: I can tell, this ETF hasn't liquidated any of its
Speaker 2: SpaceX SPV holdings, right.
Speaker 1: Also, why would it. Yeah, it's a marketing matter.
Speaker 2: Well, probably to get below the fifteen per sure, fair fair.
Speaker 1: But once you once you solve that problem by saying
Speaker 1: it's liquid, then as a marketing matter, it's really better
Speaker 1: to be like, hey, I'm an ATF that's full of
Speaker 1: SpaceX than to be like, hey, I'm an ETF with
Speaker 1: a little bit of SpaceX and all other stuff.
Speaker 2: Barn for example, is somewhat of a special case. People
Speaker 2: familiar with the matter have run this plan by the SEC.
Speaker 2: Part of their reported logic in why they classified it
Speaker 2: this way is that they've been investing in SpaceX since
Speaker 2: twenty seventeen, and they have like an established and good
Speaker 2: relationship with the company that it seems like they would
Speaker 2: have an easier time getting their hands on more SpaceX
Speaker 2: than maybe other firms and funds out there. I don't know,
Speaker 2: like if any issuer could go to the SEC and
Speaker 2: be like, actually, this private company, we think it's lost liquid.
Speaker 2: It's not you liquid.
Speaker 1: I don't know. I could sell SpaceX shares. This doesn't
Speaker 1: seem like a big problem. The only thing I think
Speaker 1: is interesting to these funds is I just said, like,
Speaker 1: you'd rather be like, hey, this is an ATF with
Speaker 1: SpaceX than like than cats and dogs in SpaceX. Yeah, Like,
Speaker 1: there's obviously a demand very publicly traded a SpaceX proxy.
Speaker 1: Despite how liquid SpaceX is, right And one thing I've
Speaker 1: heard is that people talk about the ETFs as like
Speaker 1: a trade where the trade is you buy the EHF
Speaker 1: and like with with with exover, there's like a they
Speaker 1: have like a sort of indexy mechanistic list of their
Speaker 1: other public stocks. You buy the ETF, you short the
Speaker 1: other public stocks, and what you're left with is a
Speaker 1: trade that's just long ETF, short public stocks and the ETF,
Speaker 1: so you're left with just long SpaceX. And I think
Speaker 1: that that's like kind of a marketed trade of like
Speaker 1: this is how you get your SpaceX exposure. You buy
Speaker 1: this ETF and you hedge out in the public stocks.
Speaker 1: Which reminds me a little bit of the trades you
Speaker 1: talked about with with Arc of Hollywood's rc ETFs, where
Speaker 1: those ETFs looked like they might get allocations and hot
Speaker 1: IPOs and so people would heartbeat into the ETFs to.
Speaker 2: Get some.
Speaker 1: But this is like this is like a sort of
Speaker 1: you know, way to isolate SpaceX exposure, if that's the
Speaker 1: sort of thing you're looking for, which I feel like
Speaker 1: a lot of public market investors are.
Speaker 2: Yeah, perhaps this fund did run up quite a bit.
Speaker 2: I mean it grew to like one point eight billion
Speaker 2: dollars in assets at one point, and I have to
Speaker 2: imagine that was entirely because it was marketed as having
Speaker 2: SpaceX exposure. But it's since seen pretty significant outfloads.
Speaker 1: Yeah, so it doesn't go up allow SpaceX shows that
Speaker 1: it's not a very good SpaceX proxy. And that was
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