Cipher Cap

Goldman's David Solomon providing some much needed rational thought around private credit: - GFC saw defaults peak at 10% - recoveries were 50% - trough cumulative loss of 5%-6% vs coupons of 9%-10% For context, listed BDCs are currently pricing in defaults of more than 20%

@IlliquidInsight This is easy to say in the moment but it has empirically, unequivocally been the best performing sector the last decade. Why else would it have grown to the scale it has in PE/PC? Facts have just changed on the ground due to a once in a century technology

Software loans are a terrible deal for lenders. They get none of the upside. And if things go bad, the collateral is probably worthless.

See below. Defaults rising is a theoretical boogeyman from AI disruption to SW books. By the way, these are historic lows. No one is saying there won’t be higher defaults in a sub IG asset class. The point is it’s incentivized doomerism perpetrated by clicks, substack and capital sellers, while performance is still better than what you can get in public credit. And the redemptions…they are in a small sliver of the industry (wealth). 90% of the capital is in institutional drawdown funds and SMAs where there is no redemption dynamic to speak of - and interest there isn’t waning

Refi’s a potential issue for PE but not really for PC. They’ll demand more sponsor equity or spreads or walk. Loans are 3 yrs avg remaining and SW retention rates are extremely slow moving even if AI disrupts - plenty of time for PC firms to pivot. So PE has the harder challenge but also has the asymmetry that a few big AI winners that can paper over losses. Overall, no one is saying SW is not going to be tricky - but it’s <10% of these Alts AUM and risks are ridiculously overblown, esp on credit front

@CipherCap @michaeljburry How does refi play into this though? I am just trying to understand the full picture.

Yeah, we know exactly what’s going on, which is this is the silliest, most overblown media driven hysteria yet. Outside the narrow sliver of PC wealth products, which represent <5% of industry AUM, fundraising is accelerating. Even in PC, institutions seem to be leaning IN even more to take advance of already 100-200bps higher spreads. EBITDA is generally accelerating, and defaults are declining as of now, so there’s no imminent cycle. A few loose players like $OWL will weaken but more disciplined players like $ARES and $APO will just massively capture lost share. The theoretical 2029 SW boogeyman will never show up, bc thanks to the fear mongering, everyone’s already proactively washing out SW exposure. I’m very sorry but the private markets freight train is just too institutionalized and powerful for Gundlach or any other share losers to stop

@DarrenWStaley @michaeljburry EBITDA is accelerating and defaults are declining. But you’ll never guess that listening to incentivized doomers

@michaeljburry Is there any facial evidence of large-scale deterioration of credit?

@Richard89022768 @junkbondinvest Have you met any of these managers or looked at the track records? Most put Ares in a league even above KKR, BX on lending chops. Last firm to be worried about

@CipherCap @junkbondinvest Depends what crap is hidden in their books no? Look at ARCC - how much is 1st lien then lets chat again

No major private credit manager has ever reported redemption requests like this. Blue Owl OTIC: 40.7% requested, gated at 5% Blue Owl OCIC: 21.9% requested, gated at 5% $OTF $OBDC $OWL

@west4thstreet Ha totally agree - wouldn’t touch OWL (or FOUR) w a 10 foot pole. For OWL, most of this is self-inflicted and they don’t have longevity w LPs to absorb this easily. I mean ARES KKR etc which are so incredibly much better but like anything get shot without nuance in the ST

@CipherCap (1) happy to be wrong, you’re a lot smarter than I am and probably a better investor (2) OWL is literally a procyclical shitco - it’s the FOUR of alts

The funniest part of all of this is $OWL is worth less, yes… and so are all the asset manager bags… welcome to the thunderdome as a certain guy in a gorilla suit likes to say. Private bags likely worse off than the public ones

Yea I think this is easy to say in the moment but would strongly disagree with this take, at least for the larger Alts. They are so incredibly institutionalized and the whole private markets is so entrenched with incentives up and down, from allocators to advisors to talent, all aligned to continue to power growth, Alts will double, triple AUM again in 5 years. There are so many growth vectors out there, from capital pools to new strategies. Time will tell. Also OWL is...flat on this news - if you're still short, should really pay attention.

If there was a quality bubble then it sure as hell was there for RIA and alt asset manager multiples - I think people are going to learn about how people businesses rarely have lots of terminal value

@BullandBaird Stock being flat is really something

This negative catalyst is not getting better

@zerohedge $OWL is...flat on this. If you are still short Alts, should really pay attention imo

BLUE OWL CREDIT INCOME FUND RECEIVED WITHDRAWAL REQUESTS ESTIMATED AT 21.9% OF THE FUND SHARES IN Q1 BLUE OWL OTIC FUND RECEIVED WITHDRAWAL REQUESTS ESTIMATED AT 40.7% OF THE FUND SHARES IN Q1

@shortbus_ace $OWL is...flat on this. If you are still short Alts, should really pay attention imo

Shouldn't the bigger managers be a massive beneficiary of this, especially someone like $ARES and maybe $APO? Top (especially loose) competitor out of the market so you capture their AUM flows and less competition for deals. Spreads are already wider by 100-200bps. What are we missing?

Blue Owl Technology Income Corp. redemption requests come in at 40.7% -- while the credit fund sees 21.9%. They're keeping to the 5%. To put into perspective, the 40.7% is almost 4x most of the other largest private BDCs, and the 21.9% is roughly double. The second largest wave of requests was at 14% at Cliffwater.

Shouldn't the bigger managers be a massive beneficiary of this, especially someone like $ARES and maybe $APO? Top (especially loose) competitor out of the market so you capture their AUM flows and less competition for deals. Spreads are already wider by 100-200bps. What am I missing?

$OWL Saba / Cox odds of changing the manager way higher now. 40%+ withdrawal requests for the tech fund (21.9% for the flagship) might be the ball game. They need 50.1% of all shares to change manager. If they win, $OWL goes well under $4 per share and you likely see a process to monetize Dyal. $OCIC $OTIF. Math in the note below. $OWL has been funding its dividend with debt and the two founders are already partially margined on their holdings (will likely need to post more after this week). open.substack.com/pub/lakecornel…

@PerceptionMoney @BoringBiz_ No one is saying AI doesn’t have the potential to be disruptive. They are the first ones to admit it. The good managers will just be on top of it. Anyway good luck to you

@CipherCap @BoringBiz_ I encourage you to talk to more people whose careers started MORE than 15 years ago What blew up in 08/09 were trades that had been perfect for 10+ years. Models didn't even include the 'old' data (e.g. the S&L Bust) Debt Portfolio discipline after long gains is paramount.

Incredible article on WSJ today detailing how private credit funds misreport their software exposure Good examples might be Industrial or Healthcare SaaS companies being labeled as their end market, rather than being tagged as software or technology Real exposure to software is higher underneath vs the marketed number

I encourage you to meet with them. No one is giving ‘shitty’ answers or minimizing sw exposure. They over indexed on SW bc it was the right thing to do for 15 years. Would you rather have been in public loan funds with 15% O&G and 15% shitty cyclical industrials instead? Sorry for the money left on the table not being in PC. Now things have changed due to a once in a century technology, and they have plenty of time to pivot. 3-4 yr loans and retention isn’t falling off a cliff overnight. There is just no ‘there there’ man. I get it ppl need to sell clicks and substacks though

@CipherCap @BoringBiz_ Somewhere in that pitch deck is a slide showing portfolio diversity, and it looks as much like this pic as possible. 5% matters. Transparency on concentration leads to good questions. Good questions lead to shitty answers, and that leads to a lack of investors

Yes I know but putting aside OWL which has idiosyncratic issues, there’s no material difference between 25 and 30% in terms of concentration. Especially in a sector that was considered attractive. That’s why this seems like clerical stuff and there’s no reason to believe they were ‘hiding’ SW on purpose. They’re not idiots that piled into a sector, but sophisticated liars at the same time - can’t have it both ways

@CipherCap @BoringBiz_ Credit funds don't want to show concentration risk. Unlike equity investing, there is limited upside to concentrating a debt portfolio and a ton of downside.

@JackFarley96 But conversely they mentioned they think institutional flows will accelerate off this - as spreads expand and they look to take advantage of dislocations. Did you catch that part?

Good episode from Goldman on private credit. They forecast outflows from retail channel for direct lending into 2027

This is just not the nefarious take you’re making it out to be. Plz remember a short 6 months ago, having software exposure was a very good thing. They had every incentive to classify more things as software. This is just a reporting artifact. I get it, need to sell clicks and doomerism though

Private Credit is misclassifying and making up new entities to obscure exposures even more. And your financial advisor says it’s overblown. Fiduciary war crimes. Great job @WSJ