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Problems in private credit are “multiplying by quarter,” due to the “financial alchemy of promised liquidity that isn’t there,” Boz Weinstein, founder of Saba Capital Management, told Inside Alts this week.
“What’s happening, the big picture, right now, for a number of reasons, in the midst of a bull market, there are cracks, there are problems, there are frauds, there are companies that are doing badly without being fraudulent,” Weinstein said in an exclusive interview. “So for those reasons, investors are looking at their dividends being cut. They want their money back, and (on) Wall Street right now the No. 1 story is redemption for all these managers.”
Weinstein, of course, is the central figure in that story. His firm, Saba, along with Cox Capital Management, launched a tender offer to buy 6.9% stake in Blue Owl’s non-traded private credit funds at a 34.9% discount.
“We are asking investors in these funds to return their money,” he said. “They were trying to find someone to step into their shoes, so it happened in an organic way.”
That fund, called Blue Owl Capital Corp. II, stopped quarterly redemptions and sold $1.4 billion in direct debt investments to provide liquidity to its investors. It was the first of the non-traded, private credit funds to be hit with redemption requests above the typical 5% quarterly cap.
Private wealth flows across products tracked by analysts at Jefferies fell 19% in the first quarter compared to Q4. Analysts said redemption rates are expected to increase across retail credit products.
Saba and Cox see opportunity amid limited investor liquidity. He is launching similar tenders for shares in Blue Owl and Starwood Real Estate Income Trust, among several other funds. This has led some to question whether Weinstein is criticizing the private debt industry for selling his stake at a discount to scare off retail investors.
Speaking to Inside Alts, Weinstein made it clear that he doesn’t actually believe there will be a wave of private credit defaults or frauds, nor does he think people should be bailing out. (“Liberations have come,” he said.)
In fact, they are really bullish on several large private credit managers. In the past few weeks, Weinstein said he has bought shares in “the most amazing managers,” including Ares, Apollo and Blackstone. He said he was also long “a little bit” of Blue Owl Equity.
“We’re long in the stocks of these companies, and these are the guys who are going to be the winners in the end when this overshoot, when the smoke clears and their stocks represent good value,” Weinstein said.
Weinstein said he thinks private credit is trading at pessimistic levels and public debt is trading at “incredibly optimistic levels.” They have reduced public debt through credit default swaps and credit derivatives. The gating of private credit funds means investors have to sell more liquid assets to raise money, weighing on the market, Weinstein said.
“I think public debt is incredibly wrong, and part of my short-term thinking about it is informed by the problems that private credit markets have,” he said.
Weinstein said it will be a “number of weeks” before he knows what happens with the Blue Owl bids and how much they will buy. Weinstein said the tender offers are not “personal” against the manager, but rather, “if we’re going to bid on something, it’s a signal that we think the manager is good.”
However, Weinstein noted that Cliffwater, a firm in the private credit space, is being “watched very closely.” Cliffwater operates like a fund-of-funds model, where they don’t own loans directly, but invest them in other managers, he said. As a result, they have limited control over fulfilling their own emancipatory requests — what Weinstein describes as “turdukan” (chicken stuffed inside a duck, stuffed inside a turkey).
According to a Securities and Exchange Commission filing, Cliffwater disclosed that as of the end of last year, 69% of its corporate lending fund consisted of direct investments in underlying credit and the remaining 31% was exposed to funds.
When Cliffwater announces its redemption rate — expected as early as Tuesday — Weinstein predicted it could be between 10% and 20%.
“I don’t know their exact cash position, but we think it’s likely they’ll start redeeming and they’ll take a cut when they redeem this money they’ve invested,” he said.
Cliffwater declined to comment.
Cliffwater was the subject of a recent viral investor letter from Rubrik Capital, which said alternative managers could be a “canary in the coal mine” and “the first domino in the bank run we expect,” The New York Times reported, citing two people who read the private note.
Asked what would happen to private credit if there was a real credit cycle, Weinstein said, “It’s going to be a lot tougher than it is.”
Investing in private debt at a huge discount was “one of the best opportunities” in his career, he said, “when the economy slowed down.”
“Maybe it won’t be a year, maybe it will happen. Maybe it will happen years from now,” Weinstein said. “It’s going to be super interesting.”
(tags to translate)Invesco Senior Loan ETF
