00:00These are not necessarily bank runs. This is very different. So this is only available to the
00:06semi-liquid funds, which is a small portion of the private credit that the managers operate.
00:11The largest eight managers operate almost a trillion dollars of private credit. Half of
00:15it is actually the insurance money. So these funds, and we published a note on this about a week ago,
00:22are only about 5% of their private credit business, less than 3% of their overall total.
00:28So that's where the clients, this is more retail products designed for family offices and smaller
00:34investors where clients can take out the money. So that's only the portion.
00:39Do we know who exactly is requesting these redemptions? I mean, you talk about family
00:44offices and retail investors, but are retail investors that big a client base of some of
00:49these private credit funds? It is a big client base. It's also approaching a trillion dollars,
00:53but it's spread out over different products, not just private credit, it's private equity,
00:58real estate, there are many different products. We're hearing anecdotally something, some very
01:04small investors. Yes, we've heard from Aries this morning that supposedly those are some of the
01:10family offices, a handful of them. These are sophisticated investors who understood that
01:16there was a lockup, right? Absolutely. Absolutely. They should have. I think a lot of people say,
01:23look at the small print that you can only take out 5% per quarter. I just printed out the
01:27Aries
01:27strategic fund, just for a fact sheet. It's one of the bullets on the front page in bold. So these
01:35people should understand it. See, we all saw this coming. He said, once you let retail in, that's fine.
01:41It's a great new pool of money for the private equity, private credit managers to tap. But
01:48now you've got to deal with retail mom and pop, and that's going to be a hassle. And boom, here
01:51we go.
01:52It is very true. And it's kind of a self-fulfilling prophecy. If you know exactly that you can only
01:57take 5% and you're going to be prorated based on what the fund requests are, and you're in three
02:02or
02:02four different funds, you're going to request from all of them, regardless what's in them.
02:06All right. So bigger picture, do you feel like there's a credit quality concern in private
02:14credit broadly defined, whether it's limited to software companies or other areas?
02:20I believe there is some. Well, there is obviously some to a large extent, but not very much different
02:27necessarily what could be done by the banks. There is some concern that there is less transparency
02:34in the private credit, although these kind of BDC companies that we've seen, those semi-liquid
02:40funds, they actually do monthly mark-to-market. So we've seen areas, we've seen B-Cred, the
02:45big Blackstone fund, they were down, they already reported to be down several percent on the mark-to-market.
02:51So there is some transparency. Certain areas have more exposure to software, like the BDC companies,
02:58where some of them go up to 20 plus percent in the software segment. But if you look at the
03:03overall
03:03manager, that's typically in single digits.
03:07What's the best way to respond to these redemption requests? I mean, some of these firms have
03:13limited or capped their withdrawal at exactly what the preset level was. Others have, you know,
03:19basically allowed for more redemptions than what they had set out to do. I mean, does one engender
03:25more confidence or, you know, generate more concern than the other? What's a preferred response?
03:31I think it's a little bit hard to define. We've seen three firms like Blackstone, Blue Owl,
03:36and Cliffwater paying out a little bit more than 5%. The bulk of the other firms have capped in
03:42their redemptions at 5%. I don't think it's necessarily about the sentiment, but I think
03:47that those that are staying within 5% are probably playing it safer. Because if we remember several
03:53years ago when there was a lot of redemption requests from a B-REIT, the real estate fund that
03:57Blackstone operates, it took several quarters for the redemption to balance out. So you kind of
04:04suggested one quarter, the next quarter it's going to be much more difficult to do.
04:08If I went to go out and raise a private credit fund today, can I do that?
04:12You probably can. You can go to institutional investors. And when the company is going to report
04:19next month, we're probably still going to see some private credit money coming in, but it's
04:23definitely going to be a lot more difficult. How about a more retail-oriented BDC? Remind
04:28me what that stands for again? Business development? Business development. Okay. BDC. Can I do a
04:33big BDC? Well, BDCs are sold. If you are publicly traded, you trade it on the market. If you're
04:39private, you are distributed through the financial advisors. You're a financial advisor and calling
04:44your client who's seen all these headlines, it's going to be very hard to sell something right now.
04:48So, Paul, you don't sound very worried. You sound pretty calm about this. What would make you worry?
04:53More systemic issues. And the systemic issues, I'm talking about a real credit cycle, which
04:58we haven't probably seen in almost 20 years. Yeah. It feels like it's been, what is a private,
05:03what is a credit cycle at this point? I mean, you do see delinquencies increasing and it's
05:08been happening for a number of quarters now, not just in the BDCs, but also we've seen a little
05:13bit from the banks. But nothing that's changed the overall tenor and overall demand for a credit.
05:17So we, the economy is doing okay. The GDP is doing okay. The unemployment is doing okay.
05:21The major drivers of the serious credit cycle is there and the liquidity is there. A lot
05:26of the credit cycles are started through the liquidity problems. Liquidity is still there.
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