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Boaz Weinstein, founder of Saba Capital Management, told Inside Arts this week that private credit problems are “doubling every quarter” because of the “financial alchemy of promising liquidity that doesn’t exist.”
“What’s happening now is that the big picture is that for a variety of reasons, there are cracks in the middle of the bull market, there are problems, there is fraud, there are companies that are not fraudulent but are badly run,” Weinstein said in an exclusive interview. “For these reasons, investors are seeing their dividends cut. They want their money back. And the No. 1 story on Wall Street right now is a place of redemption for all of these executives.”
Weinstein, of course, is the central figure in that story. His company, Saba, has just launched a tender offer with Cox Capital Management to buy 6.9% of Blue Owl’s non-traded private credit fund at a 34.9% discount.
“We were hearing from investors in these funds that they wanted their money back,” he said. “They were looking for someone to fill their position, so it just happened naturally.”
The fund, known as Blue Owl Capital Corp. II, suspended quarterly redemptions and sold $1.4 billion of direct loan investments to provide liquidity to investors. The fund turned out to be one of the first of a number of non-traded private credit funds to be hit with redemption demands above the normal quarterly limit of 5%.
Personal wealth flows across products tracked by Jefferies analysts fell 19% in the first quarter compared to the fourth quarter. Analysts said they expect redemption rates across retail credit products to rise.
Saba and Cox see opportunity amid limited investor liquidity. They have launched similar bids for shares in several of Blue Owl’s other funds, as well as Starwood Real Estate Income Trust. This has led some to question whether Mr. Weinstein’s criticism of the private credit industry is merely an attempt to scare individual investors into selling their stocks to Mr. Weinstein at a discount.
In a conversation with Inside Alts, Mr. Weinstein clarified that he doesn’t actually believe there will be a spate of private credit defaults or fraud, nor that he thinks people should make more redemptions. (“Salvation has come,” he said.)
In fact, he has a bullish view on several large private credit management companies. Mr. Weinstein said he had bought shares in “some of the most amazing executives” over the past few weeks, including Mr. Ares, Mr. Apollo and Mr. Blackstone. He also said he owns a “small amount” of Blue Owl stock.
“We’ve been holding shares in these companies for a long time, and in case things go too far, these are the companies that will end up being the winners. When the smoke clears, the stock could be worth a lot,” Weinstein said.
Weinstein said he believes private credit is trading at pessimistic levels and public credit is trading at “incredibly optimistic levels.” He has been shorting public credit through credit default swaps and credit derivatives. Weinstein said the gate closure of private credit funds means investors will have to sell more liquid assets to raise cash, which will weigh on the market.
“I think the pricing of public credit is incredibly wrong, and some of my short-term thinking about it is influenced by the problems that the private credit market is having,” he said.
Weinstein said it will be “a few weeks” before he knows what the bidding will be for Blue Owl and how much it will ultimately fetch. Weinstein said the tender offer was not “personal” to the director, but rather that “when we bid on something, it shows that we think the director is good.”
But Mr. Weinstein singled out Cliffwater as the company he is “watching most closely” in the private credit space. He said Cliffwater operates similar to a fund of funds model, investing in other managers rather than owning loans directly. As a result, they have limited control over meeting their redemption demands — what Mr. Weinstein describes as a “turducken” (chicken stuffed inside a duck, stuffed inside a turkey).
As of the end of last year, Cliffwater disclosed that 69% of its corporate loan fund consisted of direct investments in underlying credit, with the remaining 31% exposed to the fund, according to a filing with the Securities and Exchange Commission.
Weinstein predicted that when Cliffwater releases its redemption rate, expected as early as Tuesday, it could be between 10% and 20%.
“We don’t know their exact financial position, but it’s very likely that they will have to start redemptions, and as they redeem the money they invested, their funding will be reduced,” he said.
Cliffwater declined to comment.
Cliffwater was also the topic of a recent letter to investors from hedge fund Rubrik Capital, which described the alternative manager as a “canary in the coal mine” and could be “the first domino of what we expect to be a run-in,” according to two people who have read the private memo.
Asked what would happen to private credit if a credit cycle were to actually occur, Mr. Weinstein said, “It would be lower than it needs to be.”
He added that “one of the best opportunities” in his career would be to invest in private credit at a deep discount “when the economy slows down.”
“Maybe it’s not going to happen in a year, it’s going to happen soon. It’s probably going to happen years from now,” Weinstein said. “It’s going to be very interesting.”
