Podcast | Episode #8: BDC Tender Offers | John Cox, Founder & CEO of Cox Capital

John Cox (0:02)

It certainly, to your point, wasn't what I thought the holding period was going to be. I thought it would be two to three years, it ended up being six. Not nearly as bad as the people who bought it originally, who thought it would be seven years, and I think they're on year 13 or 14

A change in repurchase policy or elitist anger liquidation is going to have a drastic impact on your return and duration in a way that five percent NAF change wouldn't necessarily. Public theses will show us, one, the implied losses on that portfolio given the leverage. So let's say a 20 percent discount might imply a 10 percent total loss rate on the portfolio. In terms of headlines, I would say that there seems to be like two things being inflated, where private credit and direct lending blowing up versus fund proration.

SPEAKER_2 (0:53)

If you've been following the saga around redemptions from non-traded BDCs, you've definitely come across Cox Capital. The firm has been making tender offers for shares of Blue Owl, Apollo, HPS and other large non-traded BDCs at sizable discounts to NAV. My guest today is John Cox, founder of Cox Capital. I invited John to walk us through the investment thesis behind his tender offers, what makes these opportunities attractive and how he evaluates risks and returns. Before we get to the conversation though, don't forget to subscribe to the free weekly DEBT SERIOUS newsletter, covering the most interesting developments in private, credit and leveraged loans. The link is in the description. With that, enjoy the conversation with John.

So your website says that Cox Capital provides liquidity to the highly fragmented wealth management channel. Can you elaborate on that?

John Cox (1:41)

Sure. The fragmentation we're referring to is at the shareholder level. The ticket sizes for these can be anywhere from $2,500 to $25,000, which is just significantly smaller ticket size than you'd see in institutional secondaries. These funds have tens of thousands of shareholders and they each need to be traded with individually to get these trades done. So that's what we mean when we say highly fragmented, just a dispersion across different firms, wirehouses, broker dealers, RAs.

SPEAKER_2 (2:09)

How big of a difference between your line of business and your approach to liquidity and let's say institutional secondaries?

John Cox (2:19)

I would say that it depends on the structure. So to some extent, it's the same. When we're buying private funds, specifically feeder funds into larger private funds, it's a similar underwriting where we're underwriting the fundamentals of the portfolio and the duration of that. Where I would say it's strategically different is the non-traded BDCs. Say most institutional secondaries are focused on private funds that will liquidate over time, where we're focused on either evergreen BDCs or life cycle BDCs, which will eventually list on an exchange or interval funds, tender offer funds, non-traded REITs.

There's a big structural component to those where the exit can be wildly different depending on the fund and the manager.

SPEAKER_2 (3:03)

And for non-traded BDCs, it's my understanding is you typically buy a discount to NAV and then you just tender them back at NAV. Is it fair?

John Cox (3:12)

I'd say that's fair. For the last six years, the funds that we've traded predominantly have been what we would refer to as life cycle funds where there's an intent to list on an exchange at the end of the period. So we're really underwriting to where the market will be at a future date when that listing happens, what the structure of that listing might be, whether there's going to be liquidity unlocked in tranches, or if it's going to be all at once, maybe it'll be merged with a traded vehicle. And then like you said, there's redemptions that happen in advance of that. So your return ends up being a mix of what you're able to get at NAV, and then where it lists relative to NAV at some point in the future. I'll say that the first non-traded BTC I ever bought six and a half years ago is still non-traded, waiting to list on an exchange, and currently purchasing about 7% to 8% annually. So like, operation can reach pretty extreme levels, and the underwriting metrics can change mid-holding period as manager decisions in the market influence that asset.

SPEAKER_2 (4:11)

For that specific fund, you didn't expect that to take that long, right? Otherwise, you probably wouldn't invest.

John Cox (4:18)

Part of what we do is it's not just making a single investment at a single time. I think we've traded that fund pretty much every month since inception, just because there's so many shareholders that are fatigued. They've been holding it for 10 plus years, and everyone hits their limit at a different time, and looks for liquidity. So I would say that the, it's not that I necessarily wouldn't have bought it, but it certainly to your point wasn't what I thought the holding period was going to be. I thought it would be two to three years, it ended up being six. Not nearly as bad as the people who bought it originally, who thought it would be seven years, and I think they're on year 13 or 14 So yeah, I always draw the contrasts between the non-traded Evergreen BDCs that we're seeing today, where I think that's just the very beginning, not saying it would get worse tomorrow, but I think we've lived through some of these experiences that this market hasn't.