00:00Oaktree saying it will meet all redemption requests in full for a $7.7 billion private credit fund aimed at
00:07retail investors.
00:08The firm saying it has been mindful of the need to preserve liquidity, setting itself apart from some of its
00:14peers that have capped withdrawals.
00:15So it's interesting, I mean, how these different managers are, you know, handling withdrawals, some capping at 5%, some trying
00:21to go a little bit more than that.
00:24But the point remains that they're getting a lot of withdrawal requests right here.
00:28And I wonder, you know, in your view, how much of this is just human psychology, a sort of feedback
00:34loop, all these different headlines versus, you know, something is maybe seriously wrong with these portfolios?
00:41And you'd have to imagine a good bunch of this is going to be sentiment driven.
00:45If you look at even though these private credit markets have limited transparency, there are public signals that we can
00:52gauge what sentiment feels like.
00:56And with BDC equities trading about 20% below the NAV and a wide dispersion around that as well, BDC
01:04corporate bonds are trading to, you know, wider spreads than they did at the depths of the Liberation Day.
01:11It seems like it's very natural to see these sort of redemptions just given that you could redeem an NAV,
01:16whereas the other marks in the public market are telling you that that's not the case.
01:22And as far as the 5% gates, you know, managers are trying to balance the interests of people looking,
01:29investors that are looking for liquidity.
01:31So they want to meet that 5%, you know, commitment that they made.
01:36Some managers have gone above 5%, maybe the parent or the management team employees have chipped in to go above
01:43that.
01:43But ultimately, that's just one part of the equation.
01:46The other part of the equation is you've got to make sure that the investors that are left in the
01:50portfolio are not disadvantaged by having a lower quality portfolio left.
01:57Well, Michael, that's exactly where I wanted to go because, you know, you recently spoke to some of my colleagues
02:01over at Bloomberg News and gave this quote that you have the remaining investors and those trying to access liquidity.
02:08And managers have to balance the needs of both constituents.
02:11If you start meeting redemptions that are too large, what does the surviving portfolio start to look like?
02:17And I find that really interesting because let's say you are capping withdrawals at 5% for this quarter, but
02:24you continue to get that.
02:26You know, what does that mean for the surviving portfolio?
02:29Because I have to imagine that, you know, you're selling the more liquid and thus high quality assets off first.
02:38Yeah, I mean, so these are quarterly redemptions and three months, as we know, is a lifetime in markets.
02:45So we'll see what happens in three months.
02:47But I think you raise a good question, and that is if you get these repeated 5% redemptions and
02:51if maybe you're meeting a larger redemption.
02:54Because one thing about the loan market is that they're without any call protection, and a lot of these are
02:59sponsor-backed companies.
03:01And so these sponsors are buying and selling.
03:03They may be going to other markets.
03:04So there always is some level of turnover.
03:07There's always some level of loans getting paid back.
03:10But if the loans that are getting paid back are probably higher quality loans.
03:14So there is a bit of a negative survivorship bias in terms of what loans have alternative sources, whether it's
03:22another company buying that company or maybe going into another market.
03:26So, yeah, it's definitely a very big consideration.
03:29And I do wonder, you know, what this episode means for future fundraising, because, I mean, maybe this all blows
03:36over.
03:37But, you know, the point has been raised that just this episode alone, the experience of being gated and, you
03:43know, maybe these self-directed individual-type investors experiencing that for the first time,
03:49it could dampen enthusiasm for retail investors to come into these products into the future.
03:54If you have a situation where you are getting these withdrawals, I mean, the question is out there, are they
04:00going to get enough inflows to sort of offset that and balance it out?
04:06Well, yeah, I mean, well, to date, you know, some of the managers are boasting of strong institutional inflows.
04:13But the retail side could be a little bit once bitten, twice shy.
04:17You know, you have, you know, you're always looking for mismatches in our market, whether it's liquidity mismatch or credit
04:23mismatch.
04:24And number one, these very large redemptions tell you that there probably was a little bit of a liquidity mismatch
04:30in terms of what investors expected liquidity provisions to be.
04:34But also on the credit side, I mean, these were loans, secured loans, first lien loans generally.
04:40And you usually feel pretty good if those loans start to experience some stress.
04:47But if you're dealing with a secular issue or a potential secular issue like software, well, then you start to
04:52question, well, what are my recoveries really like?
04:55Are they going to be similar to, say, a cyclical company that stubs its toe and has to restructure?
04:59The secular story can be a lot more of a challenge for, you know, for the lenders and then for
05:07the investors.
05:07So I think it's a really good point that maybe this will help, you know, correct that, those mismatches in
05:13liquidity and credit expectations.
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