00:00I want to start with you, Ellen. Talk to us about Cliffwater, who they are, what's been their
00:05approach, and why we're talking about them, why you guys did a deep dive. Yeah, so Cliffwater is
00:10a sort of pioneer in private credit, really. They started out as a consultant to allocators like
00:16pension funds, and then they created their own asset management business, which has grown
00:22exponentially over the last 10 or so years. What they do is essentially partner with other direct
00:28lenders and take a slice of each of those loans, and that's allowed them to grow very quickly and
00:33become hyper-diversified compared to other platforms that are just single manager. It worked out for a
00:40while, and it made the founders incredibly wealthy. Olivia, come on in here, because then redemptions
00:48started. What can you tell us about why the redemption started and what investors wanted?
00:53Yeah, definitely. So like Ellen's saying, the Cliffwater model is sort of a fund that allows
00:57investors to access private credit writ large. So they're not actually doing loans. They are
01:03investing in other funds that are. They're buying loans from other managers, so it's like a multi-lender
01:08model. So when stress started to come to private credit and investors started to one out, Cliffwater
01:14was a big place where now anyone worried about private credit that's invested in the fund maybe
01:19decided to pull capital, and that's why we saw record redemptions from the fund this quarter.
01:24We have a great chart, and I want to bring it up. It's in this story, and Tim and I
01:27were
01:27kind of blown away about some of the graphics that really helped tell the story, because
01:30we talk about this kind of fund of funds approach, if you will. It's a circular chart, but what
01:35it basically is showing, and it's hard for those folks, obviously, if you're listening
01:39on radio, you can't see it, but typical too on TV. But what it's basically showing is that
01:45they owned, what, about a third of Barings Private Credit Corp at the end of 2025, but they also
01:53were involved with ARIES, right? Blackstone. I mean, walk us through that circle and what
01:58it tells us.
01:59Sure. So the way that they've been able to partner with so many managers is by investing
02:03directly in the funds, and then they set up agreements to be able to be in the underlying
02:07loans as well. So they are invested in, I think, more than 50 direct lenders. They are
02:13invested in many. This is one chunk of sort of those types of fund investments. This is the
02:19non-traded BDCs and the investment partnerships specifically, but they have a large holding in
02:24Barings, ARIES, KKR, you name it, like all the big names.
02:28Blackstone.
02:28Blackstone.
02:29Kind of a who's who, right?
02:30It really is, yeah.
02:31I think the question that a lot of people have, and we're going to be speaking about this a
02:34little later in our program to Olivia, is this question of to what extent are the challenges
02:40at Cliffwater or a single firm contained versus are they part of a bigger picture when it comes
02:45to private credit and this idea of so-called contagion? What did you find in your reporting?
02:49So I think that we've seen recently that firms are expecting this concern among investors
02:54to continue. We saw some lenders that capped redemptions signal that they're going to do
02:59the same thing next quarter. So I think we've definitely seen any stress at one fund. Managers
03:05are expecting it to kind of spill over to their fund as well.
03:09That's what I was curious about. When, you know, the stories kind of pitch as one of the biggest
03:12question marks in the private credit industry, is it because they are so vulnerable or that if
03:18they start to come undone, then you've got to assume that there is that contagion or systemic
03:24impact?
03:25I think people were pointing to Cliffwater in particular because of this fund of private
03:29credit funds aspect that's very unique to them. And then also, I mean, they're just really big.
03:36How big?
03:37$33 billion, which is quite large. I think they're second only to B-Cred. So that's pretty
03:44large in this market. They're touching a lot of different direct lenders. They're in a lot of
03:48loans. Everybody's worried about software and AI disruption. They're in a lot of software.
03:54So there's a couple of reasons people are focused.
03:56So is that why, Ellen, it didn't work? It worked until it didn't work. Was it software? What was sort
04:01of the straw that broke the camel's back with this?
04:04I think a lot of this comes down to sentiment around software, personally. We saw people start
04:10to get nervous. And we've reported previously that software is the single largest sector exposure in
04:18private credit. It's about 20%, which is sizable. So we're starting to see people get their money out
04:25or try to, and we're starting to see gating happen. So a lot of this stems from that.
04:29I will point out, Carol, software companies taking a hit today. The latest example of volatility in
04:35the sector, the information reporting that Amazon Web Services is developing AI tools designed to
04:40automate functions and sales and biz dev.
04:42Yeah. We continue to see this on a daily basis, kind of questioning some of the existing models
04:46or companies and whether or not we're going to see more problems going forward. I guess time will
04:51tell. Olivia, I want to bring you back in because you've got another story in the Bloomberg that's
04:56about Aries Management and Apollo Global capping private credit fund withdrawals as clients want
05:01to redeem more. We kind of remind everybody, private credit, not so liquid, folks. You're
05:06going to have to park your money for a while. But that's not to, you know, investors are pushing
05:11back. So tell us a little bit more about this.
05:13Right. Yeah. So I think, like we're saying, there's all these fears around private credit,
05:17around software, right? But I think a big issue for these lenders is that they went really
05:21aggressive into the retail space and that helped grow their firms a lot. It let them bring in a lot
05:26of money, but maybe they weren't prepared for that retail space to sort of turn. And now we're sort
05:31of dealing with the first wave of all of these funds having to cap redemptions.
05:35Who's at fault, though? Like when you think about that, and we've had folks on around this table who
05:39said, read the fine print. And sometimes that fine print is pretty early in.
05:42Yeah. James Crombie talks about that all the time. You know, your colleague on the team.
05:46And he says, this is like literally what it says in the prospectuses. So, you know,
05:52read the fine print here. I think that is true. But what is hard is that we've seen some lenders
05:57actually decide not to cap redemptions and they took special measures to return all of investors
06:02capital. So it sort of set this not uniform pace where maybe some investors felt like, wait,
06:08I thought I could get all my money back. Yeah. I mean, okay. So what are we watching? Let's go
06:13back
06:14to Cliffwater. So what do we need to watch? What are you guys watching? That is an indication that,
06:19all right, this storm, it's not just a short storm. It's something much bigger.
06:24Yeah. I think we're going to continue to watch for redemptions. You know, if they stay elevated,
06:29we're going to watch Cliffwater's liquidity levels. We reported that they'll be able to manage this,
06:36like max redemptions for at least a year without having to sell any assets or sell any fund stakes or
06:41anything like that, any extreme measures. So we'll be waiting to see if they can maintain that
06:47liquidity and maybe investors will get more comfortable again and stop redeeming. Maybe
06:52they won't. Right. Time will tell.
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