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Private credit’s problems are “multiplying from quarter to quarter,” in part because of “the financial alchemy of promising liquidity that doesn’t exist,” Boaz Weinstein, founder of Saba Capital Management, told Inside Alts this week.
“What’s happening, overall, right now is that, for a number of reasons, in the middle of a bull market, there are cracks, there are problems, there are frauds, there are companies that are doing badly without being frauds,” Weinstein said in an exclusive interview. “It is for these reasons that investors are seeing their dividends decrease. They want their money back, and [on] Wall Street, the No. 1 story at the moment, is where redemption will take place for all these managers. »
Weinstein, of course, is a central character in this story. His company, Saba, alongside Cox Capital Management, has just launched a tender offer to acquire 6.9% of the shares of one of Blue Owl’s non-traded private credit funds at a 34.9% discount.
“Investors in these funds have told us they want their money back,” he said. “They were trying to find someone to take their place, so it happened organically.”
This fund, known as Blue Owl Capital Corp. II, halted quarterly buybacks and sold $1.4 billion in direct loan investments to provide liquidity to its investors. It turned out to be one of the first in a series of non-traded private credit funds to face redemption requests above the usual 5% quarterly cap.
Private wealth flows among products tracked by Jefferies analysts declined 19% in the first quarter compared to the fourth quarter. Analysts said they expected repayment rates for retail credit products to rise.
Saba and Cox see opportunity amid limited investor liquidity. They are launching similar tenders for stakes in several other Blue Owl funds as well as Starwood Real Estate Income Trust. This has led some to wonder whether Weinstein criticized the private credit industry only to scare retail investors into selling their stakes to him at a discount.
In an interview with Inside Alts, Weinstein clarified that he doesn’t actually believe there will be a wave of private credit defaults or fraud, nor does he think people should buy more. (“The buyouts have arrived,” he said.)
In fact, he’s bullish on several of the largest private credit managers. Weinstein said that in recent weeks he has purchased shares in “the most amazing managers,” including Ares, Apollo and Blackstone. He said he even owns “a little bit” of Blue Owl stock.
“We’re long these companies’ stocks with the idea that, in case this is overblown, these are the guys who are going to be the winners in the end when the smoke clears and their shares might represent good value,” Weinstein said.
Weinstein said he believed private credit was trading at pessimistic levels and public credit was trading at “incredibly optimistic levels.” He shorted public credit using credit default swaps and credit derivatives. Weinstein said blocking private credit funds means investors will have to sell more liquid assets to raise cash, which would weigh on the market.
“I think public credit is incredibly mispriced and part of my short-term thinking on this topic is informed by the problems that private credit markets are having,” he said.
Weinstein said it would be “a number of weeks” before they knew what would happen with Blue Owl’s offerings and how much they would end up buying. Weinstein said the tender offers were not “personal” against the manager, but rather, he said, “if we make an offer for something, it’s a sign that we think the manager is good.”
However, Weinstein noted that a company called Cliffwater was one of the private credit companies she was “watching most closely.” He said Cliffwater operates similar to a fund of funds model, where they do not hold the loans directly, but instead invest in other managers. As a result, they have limited control over fulfilling their own buyout requests – what Weinstein describes as a “turducken” (chicken stuffed inside a duck, stuffed inside a turkey).
According to a Securities and Exchange Commission filing, Cliffwater disclosed that at the end of last year, 69% of its corporate loan fund consisted of direct investments in the underlying credit and the remaining 31% had exposure to funds.
Weinstein predicted that when Cliffwater announces its reimbursement rate – expected as early as Tuesday – it could be between 10% and 20%.
“I don’t know their exact cash flow situation, but we think it’s very likely that they will have to start redeeming and will be reduced when they redeem the funds they have invested in,” he said.
Cliffwater declined to comment.
Cliffwater was also the subject of a recent viral letter to investors from hedge fund Rubric Capital, which said the alternatives manager could be “a canary in a coal mine” and “the first domino of the bank run we anticipate,” according to the New York Times, which cited two people who read the private memo.
Asked what would happen to private credit if there was a real credit cycle, Weinstein replied: “It will fall harder than it should.”
He added that “one of the best opportunities” of his career would be to invest in private credit at a massive discount “when the economy slows down.”
“Maybe it’s not for a year, maybe it’s about to happen. Maybe it’ll happen years from now,” Weinstein said. “This is going to get super interesting.”