Money stuff is brought to you by Wellington Management, one of the world's largest investment management firms. Haven't heard of us? Then your clients may be missing out on almost 100 years of active management experience, differentiated opportunities for diversification, and asset allocation excellence. If you're a financial advisor or registered investment advisor who serves high net worth or ultra high net worth clients, get to know Wellington. Visit us today at Wellington.com/USAWELF. Donald Trump is rewriting the Washington rule book and reshaping the global economy. If you're trying to connect the dots behind the headlines, Bloomberg's Trumponomics podcast is here to help. I'm Stephanie Flanders, head of government and economics at Bloomberg. Every week I'll bring you a smart, focused conversation with reporters and experts from Washington Wall Street and beyond. Listen to new episodes every Wednesday and follow Trumponomics wherever you listen. People who didn't do what John F. Quad wanted them to do, they usually disappeared. John of God was once Brazil's most famous spiritual healer, but in this limited series podcast, we uncover the darker truth behind his global empire of faith and fear. From exactly right and a Donde media, this is Too Faced, John of God. Listen on the iHeartRadio app, Apple podcasts, or wherever you get your podcasts. Bloomberg Audio Studios, podcasts, radio news. Hello and welcome to the Money Stuff podcast. I'm Matt Levine. I'm here with Kitty Grecold and our guest is prize one scene of Sabo Capital Management. I feel like we've fought since the beginning of this podcast, but having you on to talk about closed-end fund activism. But man, closed-end fund activism has, in a new form, God, and really hot. I want to talk about what your trade is. You're out with a tender to buy about 10% of OBDC2, 5% of OBDC2, the Blue Al, private BDC, fat 35-ish percent discount to marked NAV. So what's the trade here? Are you going in the book and doing detailed credit work and being like, we think this stuff is worth $75.00 and we'll pay $65. Are you hedging the credit? Are you trolling? Are you? What's the basic trade here? Why? Matt, do you see it's not all the above? It's just a lot of. Mist start. Mist start with trolling. The reason to assume it's trolling and not all of the above is because I think you mentioned before we started. People's first natural question is, do you think you'll get any? Okay. So I've read some people suggest, oh, this is some sort of PR blitz, like I get to get myself in the story. We actually had the tenders. It worked. Well, we actually had the tenders ready before the Blue Al story became a huge story. The tenders, like for OBDC2, you have 15 of these ready to go. We have a few ready to go. We started with two. So there was. You mentioned one of them. The other is Starwood S-Read. Starwood, when B-Read had its problems and B-Read being an interval fund that a few years ago had very high redemptions and was able to actually cure this problem because it was somewhat in isolation. It was B-Read and S-Read in part because of the rise in interest rates and the real estate portfolio is suffering. They were able to cure it. They did a special transaction with CalSTRS. And the problem. This is basically CalSTRS, like, bought shares at MAV and they used that to cash people out or stuff. They got to earn a very attractive yield for, I think, supplying liquidity as needed and sort of just that there wouldn't be a kind of run on the fund. Calm things down and actually redemptions went below that 5% cap. But S-Read, Starwood, this is for at least four years ago, is still gated. And they had some points suspended and now they're. They allowed out a certain amount of month and that amount was increased. And so four years later, it's still gated. And so the way this all happened, sorry that it's not trolling. Okay, the way it happened was we learned from some RIAs, some private wealth advisors, that there was a block of 20 to 30 million from a single group of advisors of S-Read that just wanted to sell. They wanted out. They didn't want to wait potentially multiple years. And S-Read, actually, we felt like, you know, the Nav's actually probably pretty good. It doesn't have the private credit problems. It's real estate. B-Rit has seen their Nav go up. And we felt like people need liquidity. They've waited now four years. They only gone partial. And so, and the percentage that's in the queue to redeem is very high. And so as that was happening, we also. Did you get the call because like, you do close on fund activism? Like, yes. So they are. They are not close cousins. They're literally like brother and sister. You might even say they're identical twins. But like, there's one thing different about them. You know, the redemption rights. This kind of like history we have in closed-end funds is not just like, tangentially helpful. It is front and center more or less the same. There are 40-act products that manage the SEC to deal with. If they don't treat their investors, properly, we can avail ourselves of the courts as we have in closed-end funds. And so, I had tenders ready for Starwood and for Blue Owl because I was aware of Outflows. Then the Blue Owl story took like three legs worse. And we were. You were in Blue Owl. So you were like aware of Outflows in particular? Yeah. So if they're like, I'm ready for the private credit industry generally. You're like, Blue Owl, particularly, I heard of some RAs who went out. It was both because it was more like where do you start, you know? And prove the concept. And my colleague, my partner, Keir and Goodwin, has been ranting on Twitter in a good way for two and a half years, three years, about how the BDCs and interval funds have over-promised liquidity their investors. You have fire insurance in a sell-off that you can get out. But it doesn't work if there's actually a fire. What is over-promised? Because like, I think a lot of them would say, we promised 5% tenders and we're doing 5% tenders. Yes. Here's what I think over-promised is. And maybe the docs even say this. But to say, in a large sell-off or in some scenarios where there's a lot of fear, it's going to take you potentially years to get your money back. You know, like where we say, you know, you have those long disclaimers and then you actually say, no, insurance can be made that an entire investment won't be lost. And you're like, really? Like, we're going to lose 100? Do we have to say that? I mean, maybe they did. No, I don't have a dog in the fight of like, how good were their disclosures? I might need to remodel my house. I might need to, I might need the money and they say, well, look, for the last 20 quarters, you would have been able to get out of all of it because as long as it's under five, you're good. If it's 10 and that's a lot, you can get out of half, five out of 10. But what happens if it's 40? You know, what happens if you're getting out of an eighth of it? And then, of course, the, you know, I was going to bring my George Saras reflexivity, but because what about the reflexivity, you know, a term that was overused in finance very long ago, but I think it's very apropos here, the reflexivity of falling naves, leading to larger outflows, leading to forstelling, leading to falling naves, and then you're out in three or four years. I don't believe that the retail investor understood that and I wonder if it's even disclosed. Because I assume that roughly none of these redemption are people trying to remove all their houses and roughly all of it is like people worried about naves. No, no. For sure, there's just the general people, some people have cash needs, right? And yes, do they have cash needs? And they're like, how should I satisfy it? Okay, there's this thing I'm a little worried about. You know, I mean, some, like, I don't want to answer all of the above to a lot of the either or you ask me. So, but I do think in this case, there's a percentage of people that want their money back because they need the money. I think when you go to like Cliffwater, the shocking number of 14%, which was only 4%, let's say the quarter before, you can easily argue that extra 10 or people worried about their naves or worried that the gate's going to shut. That an interval fund can't actually suspend a BDC can. So the products are not the same, but for sure, they feed into each other and the retail investor, I don't believe, understood that the liquidity of the underlying does not at all match the liquidity of their investment. Well, you mentioned brokers and something that I've been wondering about in all of this. I mean, Matt and I were discussing on a recent pod that like, we live in a disclosure-based society. And I'm sure that these disclaimers were laid out in the perspectives, etc. But I wonder where the failure of communication was, whether it was on the brokers, on the salespeople putting their clients in this. And because it does feel like there's some structural mismatch of liquidity expectations here when it comes to retail investors in these products. Yeah. So one thing is, and it's kind of why I have such a hard time getting the manager sometimes of closed-in funds to do what I think is to do the right thing. It's like, and if I say to them, hey, you should turn this closed-in fund into an open-ended fund. Out of your EU, 95% of it are open-ended products in five or 10 are these closed-ended products, whether they be BDCs or actual closed-in funds, why do they fight me so hard? The C-suite will fight me because the value of the stock market will ascribe to an ETF where in theory you can get your money back tomorrow. And a closed-in fund where in theory you're locked in forever, other than my activism, is so different. And so the lure, the kind of the drug of permanent capital, it sounds so good. Not having to deal with investors. I mean, the Lackman benefited so greatly by this structure where he moved his hedge fund to be a closed-in fund because when he went through his drawdown and he did great since 18, people couldn't leave. And they left the by way of a 25% to 35% discount, which he also stopped up by buying back a quarter of the shares. Something you don't see FS doing with FS
So the thing is, the reason you ask about the disclosures, it's kind of, on the one hand, the sales commissions were so large to draw people to want to sell it, the private wealth, and that, you know, that, I think, is a scandal. It would be nice if the clients know, exposed, what their trusted advisor was paid for putting them into this thing. My grandmother is to call DREC. I don't know if that is a technical term, but if anyone understands the addition, they know what I mean. And so there are going to be those questions. How much were you paid? What were you paid? Oh, you know, and so that's interesting. And then the second part of it, you know, is that maybe there was some like benign, you know, ignorance, but really the seeds of the destruction of these products are really rooted in the desire for the manager to raise retail money, but having to do it in this way, where retail says, am I going to be able to get my money back? And you offer these clauses and these terms to bring them in because you want that permanent capital. Not so permanent. And by the way, it's not so permanent because it's a 40 act product, the board could be replaced and they could fire the manager just like just as we done in closed infest. Yeah, this is what I was going to say. When I first started running about your token, the well, I got emails being like, he's going to take over the fund, replace the manager, get the fees. I feel like with a 5% tender, that's not like top of mind, but are you, is that like a possibility for some of this drawing from the lessons of closed infunds in the same way that retail was in some cases sheepish enough to buy what was sold to them. You know, they didn't call their broker as I've already said in a prior podcast, a famous president of a very large fund said these products are sold not bought. They didn't call their broker to say, get me the latest interval fund as if they even know what that nomenclature means. They were told this, you know, you want yield, you're 73 years old, this is going to be a nice yield, great manager. So they often will even vote in a way that harms themselves as BPR, he just did in December, it just became a stock and they went from being able to get it now to now nursing a live 30% loss, extra loss. So in order to actually take one of these over, you're going to have the manager tell the clients, you shouldn't listen to them. And a lot of them are actually going to not listen to the activist, but imagine this map. No fees for a year. How do you like that client? And then as long as the fund is below a 30% discount, all cash flow, we will buy it back in the open market. Money stuff is brought to you by Wellington Management, one of the world's largest investment managers. You might not know Wellington, but your clients portfolios probably do. We've spent almost 100 years pioneering solutions that aim to diversify and strengthen portfolios. With more than $1.3 trillion in assets under management, and more than 2,500 clients across 60 countries, Wellington has a proven record of active management and asset allocation expertise. If you're a financial advisor or registered investment advisor who serves high net worth or ultra high net worth clients, it's about time we met. Let's know Wellington today at Wellington dot com slash USA wealth. The news doesn't stop on the weekends. Context changes constantly and now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Raffini. We'll bring you the latest headlines in depth analysis and big interviews. All the stories that hit home on your days off. And I'm Lisa Mateo. Welcome to the latest news. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays we speak with journalists, columnists and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg television. Listen on Bloomberg Radio. Find the show live on the Bloomberg Business app or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7am Eastern. Make us part of your weekend routine on Bloomberg television, radio and wherever you get your podcasts. For decades, people traveled across the world to see John of God. Desperate for Cures, no doctor could offer. When they arrived, they saw things they couldn't explain. This is real. This guy's actually doing surgery and it's a miracle. I never believe that miracle's real until that point. But behind those adoring crowds was something much darker. One of the reasons why I never went to the police is because I saw at least five or six men with guns everywhere he went. They were clear to me like close your mouth, they'll open your mouth and say anything. I'm your host, Martina Castro. And in the podcast, Too Faced, John of God will look back on a man who claimed he could perform miracles and got people from all around the world to believe him. From exactly right and a Donde media. This is Too Faced, John of God. Listen on the I Heart Radio app, Apple podcasts or wherever you get your podcasts. You really want to talk about public list of close-up and fundamentalism, but I want to talk about OBDC. I'll stick with that. I was not even talking about closed-in funds. I was talking about public BDCs. Yeah. Okay, fine. Let's take a look at public BDCs. I might be buying some of them. Yeah, sure. Okay, fine. So let's stick. You're right. The thing we did was. The interesting trade is telling you for the private. Yeah. So, okay. So if we tendered and got more and more and more and more the same thing with the same point would be made. I think in order. I'm sure if you can, they're going to be a private business. Yeah. I haven't really looked into it. So this all started with, let me dip my toe in a space where people want to get out and they don't have a way of getting out in the pace they want to and we'll learn as we go and learn from the lessons of closed-in funds. So yes, we had two of them ready before Blue Alibi came a thing. We have others ready and we on the market are super curious are we actually going to get hit? Then you don't know if you're going to get hit. It's too early because first, it's like this clunky. Processing makes it hard to get it. They have to get it mailed to them and there's a long form to fill out. And the thing that arrives in the mail is a company. It's sent by the manager and it's accompanied by letter from the manager saying don't do, we don't recommend you do this. I thought you had said somewhere that Blue Alibi was supportive of you but like, is there some level of supportive between like saying you should do this and the letter and saying you shouldn't do this and the letter. Okay. So I'll look, I'm on your podcast. I'm all about radical honesty or possible. So when I say that. So first, SRE has already said to their investors, we don't, we recommend against. And so the letter of ours will be accompanied by theirs from them saying don't, we don't think you should do this. What did I mean with Blue Alibi? Well, I know two of the founders pretty well. And so when I did this, I happened to have written to them to say, hey, by the way, as I go into this, I don't have an activist angle. I'm just here to provide a bid. And they wrote me saying, you know, I'm not giving away states here because I'm only saying back saying, you know, let's continue to have a dialogue. You know, we like each other this and that. And so like I didn't get any hate or any anger or anything like that. And so that was, that was my take. Now, as far as I know, they have not commented on whether they can't really recommend. So I can say silent. So I can say five if they're marking it at 100, right? I mean, well, I think someone could say while we think the portfolio is really attractive, we understand the liquidity needs of the clients may require for them to find a way to sell. You know, I think there is many ways to say you like something or you don't like something. And I think there is a world where they could be more neutral than Starwood was. But we'll see what they say. I don't know. I am curious what you make of the marks when it comes to some of these blue alphons that you're tendering for because the fact that you're going through with this trader, you would like to execute it. I mean, does that imply that, you know, you think that the nabs are accurate or is it just maybe there's somewhere between, you know, a 65% discount and 100%. I actually don't think we bid conservatively. I was, I was somewhere in New York last year. You were initially not so it was 20 to 35 and you bid down 35. Well, it's a 20 little concert. Yeah, well, I was capturing Starwood in there too, but Starwood, I think we bid 27. Yeah. So I ran it to somebody who said, you're going to get hit on all of it. You didn't bid low enough because, and he's like, you're focused on nav, but you should be focused on gav and you know, it's really looking like the gross assets. Yeah, you were saying this before, I think we were filming that a 35 discount is not what it sounds like because these are levered funds, right? You want to just be sure. So some funds are very levered, some are 0.75 levered, some are 1.5 levered. That means leverage on top of, you know, a dollar of stuff for the dollar that was given. So let's just say it was, you know, a turn of leverage. If you buy saying a minus 30, it's like you're buying each loan 15 points below, not 30 points below. And to your question, you have the fees and some of them earn fees on like what's distributed. So they could somehow even with all these price declines still earn, still earn fees. Some of them have high water marks that don't have catch ups, some do, but like there's, there's the management fee that comes out of it. I think it's safe to say that we don't think that there's a lot of manager alpha these days in that space. So like those fees are going to be eaten away. Those are not like for their brilliance. And then you have on top of it, you have enough that everyone knows is too high. Okay. So let's leave aside where does blue all rank in that continuum. But I think I think a Apollo is the firm that I, Apollo and Blackstone, the firms that
that I have incredible respect for Blackstone also recently for how they treated their redeeming shareholders. And I have some a bunch of new counter examples. And Apollo, I think, is considered the most conservative on the marks, but the marks are falling as we speak. So if you have knobs that are too high across the board, even if they're more than too high at certain places, you also have to take that out of the discount. So what does it peel? Okay, so now that I've said what's really bad about it, okay, you start with, you have 15, and then after Fees 13, and then you have the markdown is that at least those funds do have the ability to get back 5% per quarter. So if they have only 15 redeem, you're gonna get back a 30 or money in a quarter. But the way it's going, it was one, then it was four, now Clifford is 14. Boy, so much it set up a polymarket for what Clifford or Redemption's are gonna be next quarter. And we are aware, I'm not sure how much detail, it's worthwhile going into in this podcast, but we are aware for some managers of marks on chunky positions of secondly, or other things that are not first lean that are off by compared not to our model, but to compare to other funds, how they mark, as much as 25 points. Between the way Jamie Diamond now has remarked the portfolio is Wells Fargo Far behind, that constrains the manager on their leverage, their inability to leverage, because of the mark to market for the leverage facility, I really think this could be a systemic nightmare. - And it's a sense of how concentrating the markdowns are for the leverage facility. It's like, together these places are run at less leverage than they could be, and have some bedroom there, but maybe that's not true. - Yeah, I think most of them are not near their leverage cap, so you would need a decent decline. But also, just you can see the banks even just pulling back, and why should they continue to land at the same levels or the same terms, just like you saw, and no wait, we're prime brokers pulled back. So you're probably right about that, but at the end of all that, so then why did we bid? Because it was a place to start, we are short at public debt at what I terms, really optimistic level. So buying it at down 35, even with these adjustments, it's probably gonna be an okay investment. - You say you're short public debt, like, - Can you? - There's a match like how you'll debt against getting long this stuff, or like is it, I'm missing something? - Yeah, a huge part of our capital is to provide investors tail protection. And so we, our domain expertise is credit derivatives, and so the liquidity in high yields credit derivatives is such where you can put on tens of billions. And so I have that as a short, in some sense, this discount fits as a long, because if we're right, and if these buys at minus 27 or minus 35 are bad buys, you know, look out below, and I point you to, when the Cliffwater News came out, since that minute, high yield has been suffering compared to that. - Yeah, I see how you say look out below, like, is there like a scenario where like, the stuff you can be short in high yields, totally diverges from like, PTC software loans? - You're bringing up a good point about basis risk, right? - This is not a match trade. And the average company in the high yield index is quite a bit bigger and even better than a private credit portfolio. So leave it to the ingenuity of Goldman Sachs. Now they're pitching total return swaps on private credit portfolios. People want more of a one to one. - And they're pitching it to you? - No, to everyone, to everyone. - Yeah, but you might need it. - But also, you know what, as I saw in COVID, sometimes people who can't sell the thing, they can't sell, will sell what they can sell. And so private credit can certainly infect public credit when I say what I saw in COVID. I often say like, my imagination and the markets is not great enough. First of all, I don't think people's imagination here is great enough because so many people think we're gonna buy none. - I think that when you say like, people think you're gonna buy none. Like, it's really, it's like such a classic, like market maker adverse election question, like you're either gonna buy none or you're gonna get filled and you're gonna probably immediately regret getting filled. - Probably if we get filled and over subscribed our next bid is decidedly lower. - Sure. - I've never been in a spot where like that information, that alternative data set, if you will, is so desired by the market. 'Cause it's, actually I'd be curious about a polymarket on that too. - It will all learn something if you get filled. - Yeah, and it's not so April by the way. - Yeah. - But like if we get filled, I mean, there's a lot of people that think we're gonna get none. So as you said, so what does it mean? I don't even necessarily, I like buy none. - I think it's the thing that you get none because of like the experience, and this is now a long time here, but was a tragic convert OBDC to a public BDC, which was like the public BDC was trading like down 20%, 20% something and the shareholders are vaulted. So extrapolate from that to like the shareholders certainly don't want to sell to you down 35%. But that was months ago and that was months ago. And I think the difference is the collective will of those shareholders versus the individual action. 'Cause again, you know, - You can do 50% of vote for it, but can like a 10% to sell to you. - Yeah, like there are gonna be some people that actually think our bid is high and will sell to us. And there are some people that think that they actually really need the money or they're afraid of marks coming down or getting gated worse. So I would say, I don't know, like I don't know like you, you know, I'm gonna wait. It also the form in which it occurs, it makes it hard to get filled, but I'd be surprised we didn't get some. - Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by 200 person global squad of sector specialists, analysts and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com/audio. That's vanguard.com/audio. All investing in subject to risk Vanguard Marketing Corporation distributor. - I'm Carol Masser. - And I'm Tim Steneveck, inviting you to join us for the Bloomberg Business Week Daily Podcast. - Now every day we are bringing you reporting from the magazine that helps global leaders stay ahead. - We've got insight on the people, the companies and trends that are shaping today's complex economy. - That's right, Tim, we're all over global business, finance, tech news, all as it is happening in real time and we've got complete coverage of the US market clothes. Gotta say basically, if it impacts financial markets, if it impacts companies, if it's impacting trends and narratives that are out there, we are on it. - We also have a lot of fun. - We do. - We do. - Bloomberg Business Week also brings you the analysis behind the headlines through conversations with our expert guests. - And we are doing this all live each weekday. And then we bring you the best analysis in our daily podcast. - Search for Bloomberg Business Week on YouTube, Apple Spotify or anywhere else you listen. - Check it out on your way home from work to catch up on the conversations that you missed during the business day. - And on the weekend, check it out for a complete wrap up of your business week. - That's the Bloomberg Business Week Daily Podcast. I'm Carol Masser. - And I'm Tim Steneveck, subscribe today wherever you get your podcasts. - For decades, people traveled across the world to see John of God. And when they arrived, they saw things they couldn't explain. - This is real. I never believe that miracles were real until that point. - But behind those adoring crowds was something much darker. They were clear to me, like close your mouth, they'll open your mouth and say anything. - I'm your host, Martina Castro. And in the podcast, Too Faced, John of God, will look back on a man who claimed he could perform miracles and got people from all around the world to believe him. Listen on the I Heart Radio app, Apple podcasts, or wherever you get your podcasts. (upbeat music) - I'm curious, I mean, this is something that we were talking about and that makes the good point. We're all gonna learn a lot if you do get filled. But is this the cleanest trade that you could have put on? Because you mentioned that you're short public credit. You've said elsewhere that you're long blue al stock. It's a clunky process, it involves mail, there's scary letters being tossed about. And this isn't happening until April. So would there have been a cleaner, more efficient way to sort of go about this trade? Why specifically like this? - Right, so what you could do is just try to buy individual loans that you like because they're for sale. The thing is that kind of secondary market for loans. In some sense, it's very competitive because the loans that they're gonna be willing to sell to you at 88 instead of 98, maybe you're not the ones. So first, it doesn't play to our strength as like we're not a deep distressed shop. And it's better than buying a thing at 88 that someone wants to sell to you at 88 and out of their whole portfolio is buying the whole thing at 65. And probably. So I think it is pretty clean if we get it. The mess is in doing something new for the first time. This will be really the first time this has happened. And operationally, you're writing thousands of tickets. Are there pretty some of them really small size if it happens? So I think the danger is we're early. We're gonna lose money on this first trade. - If you get it, how do you get out of the trade? Is it like you put in your 5% every quarter or is it like you call them up and cut a deal or is it you just hold it until 20 years? - I will be in line.
everyone else and I will get my 5% a quarter. Which would you do that? Because like clearly you think value is somewhere between 55 and 100. Yeah. 95 and 95. Yeah. Now by the way, one one thing I learned my first year at Goldman Sachs as a summer intern is because I didn't know much. I knew that like if you have a coupon of eight at a par and the price goes down the eight goes up your yield goes up. So now let's think about it in the context of this fund. Your yield instead of getting 7% at 100 you're getting 11% or 10.5% at 65. Your checks from blue. Yeah. You're getting an enhanced coupon. Let's hope the Navs don't come down so quickly that you have principle losses. So there are people, there are dentists returning it out who are very bearish on this. There are you who are a bitter at 65 but like sound pretty bearish on like probably speaking the portfolio is a private credit. And then there's the people on these funds who say they're pretty bullish and that this is all over blum and they're still getting institutional inflows and everything's marked at par and whatever. I have written if I were running like say blackstone and I were putting in my own money to cash people out when they were asked and redeem. I would be pretty annoyed that I was doing it at par and not at 80 or 90. You were offering at 65 and like blackstone can't really do that because like they have 40 out of the allegations and like the marketing disaster. But like I was thinking they should be like a round robin where like blackstone is bidding 80 for like HPS as loans and HPS is bidding 80 for like blue owls loans and everyone's bidding 80 for each other's loans because like you the publicly traded BDCs are like close on funds right? Which is like trading like 80 you can you can go do a tender if you want right. But like then you have these private funds where you could you were doing a tender at 65 and you might get filled like why aren't the managers trying to buy back their own stuff at 65 when they think it's worth 100. So without trying to flatter the the interlocutor I read what you said and I thought that's so interesting. Why don't they just each buy their own stuff at 80 if I'm paying 65. Here's the problem with it. This is the irony of it to pay 80 when their own BDCs are at 60 only make sense if they're going to redeem. Why does 80 make sense 80 make sense only if you can get back a hundred sooner why would you not want to buy more or less the same portfolio at 60. People are selling Fsk at 48% today. Why not buy that back because they don't want to buy it's public BDC. Yeah, you don't because the public BDC doesn't have the 5% a quarter put. So so if someone's going to pay 80 they're going to pay 80. The whole basis of it is so you can redeem manager A is going to redeem from manager B and manager B and you're going to redeem from manager A. Well, okay, but so maybe that's a good trade in some ways it's almost scary like that. It's just they don't even believe in the in the value of it. They believe in the structure giving the 5% a quarter and that would be much less bullish signal. But yes, if they did that they would have a higher bid than me. They also have their their GP stakes to justify you know overpaying if you will. But I think when you see all these BDCs at really big discounts public BDCs, it's really hard to justify private BDCs at much smaller discounts. And that's what you're talking about here. Yeah. I guess that's right. When it comes to this trade, I also wanted to ask in both the example of blue out and with Starwood you partnered with Cox. I believe I had never heard of them. They're based in Philly. They were founded in 2020. Why go the partnership route? How did that come together like did they approach you? Did you approach them? How did it happen? From just our activity and closed-end funds, we developed a following of you know, there's people that appreciate what we're doing in closed-end funds. And John Cox was one of them and so we developed a relationship and he has his expertise with the private BDC market and he'd been doing in small size these kinds of transactions. And so it's something where we felt since he was aware of the flows in that market better certainly way better than us. It would be a very nice partnership. And that's one also that was forged through through Twitter. Like you know, he replied to a message I wrote many years ago. And so I actually have to say like in these last two weeks, I've learned so much about private BDCs thanks to people coming out of the woodwork to send us their analysis. Do you think of private credit? There's like a big institutional drawdown fund SMA business and then there's like the sort of retailish BDC stuff. Like do you have a sense of what the institutional funds take? You're trying to do a trade at like a 35% discount. Like is there an equivalent mark in like the institutional market? Like is there a, are there comps in that market? Yeah, you might imagine that aside from our phone ringing from reporters, it's all. Considering my institutions are on the streets. Institutions that are very curious because they have these same kind of positions marked at par. And you'll ask if you'll buy at 65. No, no, no, they're they're they're like wondering, are we going to get hit at 65? And and if the answer is yes, and you're that institution, do you not redeem some at 100 the way you can and then go by this at 65? Because again, I think there's a huge reflexivity here that, you know, and even if even if I can't, okay, even if I can't, I may get it on little to none. The existence of these portfolios in public BDCs at 60 cents in the dollar. Forget about 25 cents discounts, 40, 50 cents discounts. You know, maybe those were the more extreme, but at least 30% discounts for really great names is a huge stain on the manager's ability with a sophisticated investor to get them to buy new things at 100. And in fact, if anything, not a lot of these institutions are not really trader, you know, Joe trader, like they're going to sell and buy. They are thinking about relationships and also long term movements, but it is hard to understand why they're their clients are not well served by redeeming a fund at 100 and buying that same manager's fund at 70. Even, for example, I've said some great things about Apollo. I've known Jim's altar since I was a kid. He's such a good guy and runs credit there and I've learned so much from him. But even like an Apollo BDC is at a 30 discount. So, so like that trade of in the in the vehicles that allow navvardemption, like it, like a private BDC, but lots of other kinds of things. How do you not, in a sense, sell managerate 100 and buy managerate at 70? Because you keep reading though, they're continued to be institutional inflows on to be like the draw. No, not only that, I'm shocked. Like I keep coming back to how beautifully Blackstone has handled this and treated their investors. We saw, for example, I believe it's HPS, which kind of top tick to sale to BlackRock when you look at the GP stakes of all their peers and each lend. So, one of their funds had a lot of inflows and they had more than 5% outflows and they chose to only pay out 5%. But they could have paid out more than five and they had enough coming in that like, unless the logic it's like perverse that you say, well, if I pay out more than I'm telling people they should redeem more, I don't know if it's game theory, but like if I got 6% inflows and I had 6% outflows, you know, I mean, I work in a hedge fund. We have investors who want their money back quarterly and we just handed to them. But this idea of like, no, I'm going to gate you, I'm going to suspend you. I really think the managers that do that stuff and especially the ones that convert to a closed-in fund, like BlueRock did, they are destroying the value of their brand. And if they don't think they are because their investors are too unsophisticated to understand it, they might be right for a little while. But I am surprised that more funds are not acting like Blackstone and paying out extra exemptions to say, come on guys, we're going to actually treat you really well. Yeah, I'm sympathetic to what HPS said is, you know. We promised five. No, but also like spreads are why so we're going to put money to work, right? Like we're in the business making loans, like we have inflows to make loans and we're going to make loans are inflows and there's a reason that there's a reason there's limited liquidity here, which is that the underlying product has limited liquidity and like we're not going to just like shut down our business to give you money back. But they wouldn't have had to. They had more inflows than outflows. They could have paid for it. That's not true. But what I believe is they had like something like 9% requested outflows and like they had more inflows than the 5% so I say that more than 9%. Right. So I'm used to funds shrinking and rising. I launched in a very hard time in '09, went up to 5.4 billion. We then was low as one and a quarter billion. We paid out every outflow and we didn't, we were like, here's your money. I hope you come back. But this like kind of we only owe you five. Yeah. But the manager does have an ability to go to seven. And so you could and when Blackstone had more than seven, they actually solved it through this like extreme action of paying 100 as you know you were saying why didn't they pay 80. So you're right. The HPS is well within its rights to do it. And I think really well them as a manager. But I think I would have done it differently. And I think these BDCs are giant discounts. That's these public BDC. That's a whole other topic that has some interesting nuance that I'd love to talk a bit more about. Yeah. Yeah. So I'm not only making the news in this blue out of thing, but I'm also watching the news and I watched this conference call and you know FSK has run in part by somebody that I think very well. It works well with Deutsche Bank Dan Peters. And I really liked Dan and I don't know whose voice was on the call. I saw this on Twitter. But basically this analyst from another fund asked so gently a question where I would you know in my my sharp elbows from closing funds. I would have been a little bit less you know it'd have been polite but like he was super polite he's like so your fund is trading at a 50% discount to book. I'm going to paraphrase you have some ones that came to you that you got paid your money back you got some coupons in. Why do you continue to make new investments when you can buy back your portfolio at a 50%.
percent discount. Now I'm going to paraphrase. If the nav is right, that's a hundred percent guaranteed return. If the nav is wrong and it's not should be a hundred, it should be an 80, it's a 60 percent guaranteed return. So any kind of like, wow, I can make a new loan at 500 over and I can make an 11 percent awesome loan or a 13 percent awesome loan. So what's really going on is you don't want your fund, which has a nav of 5.6 billion, but it's trading at 2.8 billion. You don't want that 5.6 to shrink because your paid fees, by either their paid fees on nav. You know, you invest in these funds at this discount. They're paid their fee on basically twice the price. You don't want to shrink. And so when they don't go into the market and buy back shares at a 50 percent discount, which is a hundred percent to the upside because they want to make a new loan at 12 percent, greed is laid bare. Yeah, I get that. I feel like the last six months until the last two weeks has been a lot of talking about like, retailizing private credit. And if I were a big manager, I might think I want to have a big listed retail private credit permanent capital vehicle for the long haul to put into 401Ks to like be my flagship public vehicle and earning a hundred percent return by shrinking that down to nothing. Yeah. It's short-sighted. We're in a tough optical period for retail private credit. But like if your long-term vision is you want to have a huge permanent retail private credit vehicle, then like buying back shares handover fist is the wrong way. Now I take your point that maybe it's the right move because it's like shareholder friendly and well, you know, creative. Handover fist doesn't mean buying back 100 percent of the shares. If you said I'm going to have a fee holiday because we're so sorry that your stocks gone from, you know, X to, you know, 0.4X. We're not going to charge fees for a year. And we're going to take all cash flow and buy back stock as long as the stock is at least a 30% discount. And we're going to do that for a year and at least up to 25%. Okay. Then they know they have 75% left. Okay. But in doing so, they would be raising the nav point by point by point, which would make the discount even bigger if the stock didn't go up. Okay. Because the nav would be going up. And so the discount would be, so they actually for buying back 25% of the shares may only shrink in my view 10% or 15% but they would have been a manager that did the right thing. They raised the nav up, which had raised the price up. So this is where my history with closing funds is so useful. I saw my friend who runs Newberger, Burman do that for a high-yield fund and that fund after they did a tender with us, which was very hard to get them to do, that fund was able to issue equity and all of the buybacks they did, they were able to raise even more money in the secondary market issuing at a premium high-yield fund. And so I think it so behooves. Managers not to pick one name. Managers of BDCs trading at more than 30% discount to shrink, to grow their nav, but to show their shareholders that they care about them. This is Tom Keane inviting you to join us for the Bloomberg Surveillance Podcast. It's about making you smarter every business day. I'm Paul Swini. We bring you complete coverage of the U.S. Market Open. We cover stocks, bonds, commodities, even crypto, all the information you need to excel. And I'm Alexis Christoffer. Bloomberg Surveillance also brings you the analysis behind the headlines. We do that through conversations with the smartest names and economics, finance, investment and international relations. We do all this live each and every weekday that bring you the best analysis in our daily podcast. Search for Bloomberg Surveillance on Apple, Spotify, YouTube or anywhere else you listen. On the East Coast, listen at lunch. And on the West Coast, listen as soon as you wake up. That's the Bloomberg Surveillance Podcast with Tom Keane, Paul Swini and me, Alexis Christofferus. Subscribe today wherever you get your podcasts. Bloomberg Surveillance essential listening each and every business day. This is real. They was clear to me like close your mouth, they'll open your mouth and say anything. And in the podcast, Too Faced, John of God, we'll look back on a man who claimed he could perform miracles and got people from all around the world to believe him. Listen on the iHeartRadio app, Apple podcasts or wherever you get your podcasts. What do you think they'll do? We're sort of, I don't know, halfway through this quarter is like BBC, private BBC, redemption across. We have all these stories about public BBC's trading and discount. There's going to be next quarter, you know, who knows, right? Like, how's it going to shake out? Is it all going to be you tendering for stuff? Or is like no, someone going to find all me? This whole space is like 700 billion. I think that there isn't uniform everyone on the same day votes. So Blackstone, maybe because they were the best manager, we're able to give or one of the best managers are able to give their investors the least amount of time. And so the investors had to notify the Q1 redemption at the earliest date. So Blackstone was the first two announced because they have that brand. I think if Blackstone had not announced 7.9, there would have been less redemption with everyone else. And yeah, and yeah, so I think it's clearly like everyone sees the last one. All right. And now people saw Cliffwater and Blue, I will still open for ademptions. We'll see. You know, and once you go to like, yeah, then like, what are they do? Like you get 15, yeah, like what do you do? Well, so let me argue against those, there's the HPS example, which like, yeah, you like people in the private credit space, we're like, that's they did the right thing for you and the liquid product. I know you disagree. Well, look, no one made me the head of these firms. So like, like, that's just my opinion. If they're just going to pay out 5% of quarter and those redemptions are going to keep rising as they did for, for example, Starwood, they're going to have a multi year problem where it's also going to be hard to raise new funds. And then they're going to be exposed to what's happening in private credit. And again, I don't have to be a Merlin to know that the Navs are too high at all of these funds. And they're not only too high because it's too hard for them to mark them down. They'll mark down what they observe and then they'll do some like matrix pricing. But JP Morgan just marked everything down. So it doesn't everything then have to come down. So I think that really, if the idea is just pay out the five, okay, so there's going to be this huge queue. And let's hope things stabilize, you know, Blackstone was able to stabilize Be read beautifully. And maybe it doesn't become as bad a thing. But at the same time, you see all these forces together from the default rate rising to the kind of nav recalibration. It's not hard to see it getting really bad. And so I wanted to at least say like on the one hand, when finally the bottom comes in, this product will be really attractive, just like in a way, closing funds got destroyed. But in 09, when it was time to buy, you're like, wait, I get to buy the high old market at the lows. And I get another 30 points discount on top. Like this will be a great long at some point. I think I'm early with this first tender. But I think where we priced it will probably do. Okay. They're talking about like how's it going to shake out? How the manager going to do it? And you mentioned Be read as a shining star of what you should do. Like, is there a play like that here? Is there like getting institutions to sign up to do something like what you're doing, you know, like to provide liquidity? Again, like the thing that troubles me is like, the talk is the institutional market is still pretty good, right? And that's it's like a strange disconnect from like the dentists redeeming. Yeah. I mean, if only there wasn't that pesky thing called public BDCs. And we could we could wonder about the thought experiment of Saba bidding 65 cents when there's the real world examples of tons of stuff at 60, 55 or 65, 70. So like, yes, you can you can have this kind of cognitive dissonance where the manager can still raise new money at now while their old money is at from smart investors while their old money is at 70 because someone has a bucket to make new private credit investments. But they don't have a bucket to do BDCs because they don't do tickers. They don't do market. You know, that gets to do another thing back to one of your recent guests, okay, who I have like huge admiration for like I think if I had to be like on a desert island of somebody, I think it's cliffassness, okay? And and not just because I get to put, you know, sunscreen on his bald head to protect him. But but also we were just by the way, coincidentally, in Milan during the US hockey game was just an amazing he's a huge hockey fan and I'm aspiring. But when he talked about volatility laundering, he's really like the father, the soul like the bug becomes the feature. I want to just tell you really I put that all the time like I was at the cause point that like people want it liquidity and like arguably, yeah, you know, probably BDCs trade at 70 per cent. It was trade at 30 per cent discount because they tell you that and private credit brought on funds and don't trade a discount because they don't tell you them. So there's a moment in April 2023 when I kind of howl at the moon because I saw one page from Cliffwater that professed an 11 sharp in their fund. And you know, we all know 11 sharp takes you back to like the land of the dinosaurs when when you would have had a big drawdown. But this thing where private credit gets marked every month the same. So I kind of howled at the moon, Kear and Goodwin howled at the moon and Cliff jumped in in that debate. You know, and I was thinking about that conversation. I'm going to be there.
We're just howling it in the Twitter. Twitter, Twitter, Twitter first. Just the boy one is like, no, that 11-chub is right. Okay, yeah. Well, obviously Cliffwater put it on their page. So, I'll tell you what else. Like I said enough about them. But the really story is about, you know, how much of this is going on there? Oh my God. The story actually continues to September. September I'm sitting in the office of the CEO of a really venerable insurance company. And they want to put my closed-in fund product on their platform. You could look at the ETF on Stock Exchange. Let's say we made 12% or something, okay? And he says, you know, here's my problem. You want me to pay these fees. By the way, they're not doing 20 or whatever. But I want a fee discount. And I said, well, we're a capacity constraint. And he said, well, but Apollo is giving us a fee discount. And I said, well, but Apollo is basically unlimited capacity to keep making more private credit. And he said, but you don't understand. My investors for the last three years have received 1% a month, like clockwork, won every single month, 12 a year, you know, with leverage minus fees. So now they were able to get 12 and literally zero market market volatility back to the cliff quarter sharp of 11. You in the other end have made 12 and there's plenty of volatility. And how can I justify paying your fees when I can get the 12, you know, really easily? Now, I had a call with that investor yesterday, okay? That investor is so curious because there are super long lots of private credit funds. They're super curious about me to get hit. But they're also in super pain because they're seeing what's happening to private credit. And so, you know, what kind of pain are they? I'm just looking at one percent a month. Nope, because, you know, so far went down because, you know, some loans made at 500 and are now at 350. So distributions were cut. By the way, what started the ball rolling with outflows were distribution cuts. And retail investors were like, wait a second, we had to deal. You're going to pay me one percent a month. Now you're only paying me 84 basis points. And so that kind of started the quote, no snowflake ever believes it started the avalanche. And so that investor is now facing, you know, the first brands default, the tri-color default. And so there's the problems of defaults, the problems of market write downs, the problems of outflows, the problems of lower sofa, although so far the industry market is not pricing much lower rates despite the recent market moves. And so that thing of volatility laundering, which is like just about the best two word quote for it to talk about what's wrong with Wall Street ever, is like, that should be the title of what's happening here is that for too long the problems were masked and now they're, now they're, you know, the curtain gets pulled back and Cliff was absolutely right. And it took a while. And in the meantime, because it took a while, the industry is two and a half trillion. Something I'm curious about is the path forward for you because, okay, we'll find out in mid-April if you get hit at 65, maybe you'll get oversubscribed, which would certainly be informative. But what happens if you don't really get any hits? Like, do you then raise your bid? What is the path forward from there? I don't know. Have you not met me before? Do you do? I just put my bowling ball in the bag and go home. No, let me give you the answer. Instead of trying to be funny about it, when I put that bid in, the markets are in a certain state. Yeah. You know, are people going to sell to me when redemptions were 9%, maybe, maybe not. If redemptions are 20%, it stands to reason. They're more likely to sell. So I don't give up easily, especially if we're doing something that we think is a value to our clients. But I really think if the market gets worse and then our bid probably goes lower. Right. But I think it's clear that there's a value to provide a bid when people need a bid and there isn't one. And if we don't get hit on any, yes, maybe our bid has to go up or maybe it just, we were a little early. It's interesting that you went to bowling as the example of the sport. I'm a sub 100 average boulder. My best sport is not saying much is tennis. And I'm like a three and a half USTA. So it's, you know, unless you want to call chess a sport, I guess. Yeah, yeah, I put my chess pieces in the bag and went home. Yes, you got me. I stunned you. Stun silence for the first moment. I do want to ask about that. Yeah, we're running up on time. So let's talk about that. Okay. Oh my god. That's digital asset. Talk about a car crash. Oh, well, let's talk about the car crash. There's a bunch of debts, digital asset treasury companies that are trading at discounts to nav right now. Would that entice you? You seem like a busy man, but. Well, look, there are a couple of things that no one would disagree with about the crypto market. One is that various less than white shoe characters are present in it, you know, as evidenced by the number of that have gone to jail, going to release from jail, thanks to some donations or otherwise. And so that world, it has some really ethical, awesome people and then it has some others. And I think one of the issues for us with debts, which we don't have with closed-end funds. And, you know, again, if someone can educate us or BDCs, I was going to say, you're always worried about as an activist, if you wanted to actually be an activist that they're going to do something really dilutive, you know, like effectively a poison pill. And I don't believe that it is impossible, may not be easy. I don't believe it's impossible for a debt to issue shares way below nav, maybe even, you know, well below the price it's trading at to a select group of investors. Now, if they issued it to everyone, you'd say, okay, I can get my prorada portion, but I would hate to buy something at a 35% discount to nav, find that the issue a lot of shares at 50 to a select group. And now I've been diluted. We saw the threat of a poison pill on a closed-end fund that we owned. We went to court, court sided with us, but the manager did it for four straight quarters. And that was a closed-end fund. Is that just because a dad is not afforded at fund? I'm not sure, but I believe they can, because it's not a closed-end fund, closed-end funds, they cannot do dilutive offerings without offering them to everyone. And then the second thing is like, all right, it's one thing for Elon Musk wanting to pay himself a trillion dollars. But I think a dad can decide it wants to pay its CEO a lot of money and have a hand-picked board and basically take money out that way. One of the cool things I think about your job is you can always go to where it's hot and interesting. And I would say that's also one of the cool things about my job is I'm supposed to stay in my sandbox, but my sandbox of RV and misprice things. It doesn't include what was that company called Movie Pay or Movie Phone or whatever. Movie Pass. Movie Pass. I think that was a fun one that I just was a reader about. But I think one neat thing about this space is the ability to break new ground or do something new in a space that's central to a lot of investors as evidence by the size of the market. So I am really enjoying exploring the creative side of trying something new. I'm hoping that it doesn't lead to nothing, but if it does and we don't get hit, it's not the end of the world, but I'm really enjoying, it takes me rolling to my sleeves and learning about this space even more deeply. If you do get hit, you'll be a little more nervous for that big. Yeah, by the way, if I get hit and things change a lot, I'm happy to come back on or whatever, you know, like that. I think what's neat about this is this story will continue to be a story. I don't mean my part of it, but the private credit market, this is the story. You're going to keep rolling. Keep playing chess. My big takeaway, I want to launch a shop called Black Owl. I feel like that's the only iteration on the West face. I'm going to keep only loose face. That was the Money Stop Podcast. Thanks to Buzz Watson for coming up. Thanks to both of you. All right, rock and roll. Did you enjoy that? I talk about this in my house when no one's there. I just talked to the wall. I talked to the mirror. Yeah. And that was the Money Stop Podcast. I'm Matt Levine. And I'm Katie Greifeld. You can find my work by subscribing to the Money Stop newsletter on Bloomberg.com. And you can find me on Bloomberg TV every day on the clothes between 3 and 5 p.m. Eastern. We'd love to hear from you. You can send an email to
[email protected]. Ask us a question and we might answer it on the air. You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show. The Money Stop Podcast is produced by Moses Andam and Alexes Hott. The Music was composed by Blake Mables. Amy Keane is our executive producer. Thanks for listening to The Money Stop Podcast. We'll be back next week with more stuff. Bloomberg Daybreak is your best way to get informed first thing in the morning right in your podcast feed. Hi, I'm Karen Moscow. And I'm Nathan Hager. Such morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations. Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need. Find us on Apple, Spotify, or anywhere you listen. People who didn't do what John Offguard wanted them to do, they usually disappeared. John Of God was once Brazil's most famous spiritual healer. But in this limited series podcast, we uncover the darker truth behind his global empire of faith and fear. Find us on the iHeartRadio app, Apple Podcasts or wherever you get your podcasts.
PodcastTranscript AI