The Private Credit Boom is Over: Redemption Requests Exceed Liquidity | James Elbaor | Marlton LLC

James Elbaor (0:00)

Let's take a quick step back and say one thing that I think is abundantly clear. The private credit boom is over. We all saw in Forbes recently around the Blue Owl founders, other founders of private credit firms becoming billionaires. That's done. There's no new money, no new capital flowing into that strategy right now. Where I think the next leg comes, which will be probably starting next fiscal year, I fully expect to see a lot of merger activity within the BDC space and private credit space.

Jack Farley (0:36)

This episode is brought to you by Plutus. Later on, you'll hear more about how Plutus is bringing model portfolios from research providers like Citrini, HFI Research, Aurelion, Leshrub, AP Research, and Elliant Capital to your self-custody brokerage account. Let's get into today's interview. Welcome to Other People's Money. I'm your host, Max Sweety, and I am joined today by James Elbaor, founder and managing member of Marlton LLC.

James, thank you so much for being here today.

James Elbaor (1:00)

Thanks, Max.

Jack Farley (1:01)

So, you and your firm at Marlton, you're experts on closed-end funds, listed private assets, secondaries, and asset managers, really, and it's a perfect time to have you on because there are a lot of questions about what's happening in private markets, asset management overall, specifically private credit. We've seen private credit gating continue. It's been a story, really, over the last 12 months and the redemption requests just continue to exceed the liquidity. We're seeing that again in Q3 in some funds.

I guess I just want to start. How big of a problem is this and do you see an end in sight?

James Elbaor (1:42)

I think the crutch of the problem is the way that the product was sold, which we'll get into also when we talk about the asset managers and the valuations there. Gating is doing what it was designed to do.

I think the bigger issue is that the product was sold as if the gate did not exist. These are liquid loans in a wrapper that promises periodic liquidity, but can't always deliver periodic liquidity. From academic finance, it's a classic duration risk issue. Similar to like a bank where you're borrowing short, you're lending long, and then when everyone asks for their money back, you have a run. But the gate is there and was always there in these fund documents as a mechanism to allow the fund to continue. I think you're certainly right. The pressure has an ease to, so the big bellwether that myself and others look at is BCRED, which would be Blackstone's Private Credit Fund. It's an $82 billion private credit vehicle. That also includes leverage that they use. Then as you mentioned, they too have capped redemptions again this quarter when redemptions exceeded 5 percent. The gate is at 5 percent. They received requests for 10 percent of the shares outstanding, so about $8 billion. It's not that $82 billion of assets need to be redeemed. In the next, call it, three years.

Allocators are looking for liquidity within the next quarter for over a quarter of their assets. They put in requests for a total of 10 percent.

BlackRock is going to redeem them out over that time. I wouldn't say that there's trouble in the market. There's just a line for those that want out.

Jack Farley (3:52)

That brings up the next question is like, are the loans bad, right?

Is what's happening here, people didn't understand a product, and as you said, there's just a line to get out from people who have buyer's remorse.

Or are people leaving because they believe the assets are impaired, the marks are wrong, and like Jeremy Irons, you can be right or you can be first, and they're trying to be first.

James Elbaor (4:16)

What we can say is, is that at least Prima Facia, looking at this from what we're seeing in the media, AI is certainly eating SaaS's lunch, and I know that from a firm, we are using AI tools more than subscribing to some new SaaS provider.

Jack Farley (4:38)

So you believe that there is, whether it has necessarily showed up in the cash flows of these companies, you believe the disruption story.

James Elbaor (4:47)

Yeah.

Let's talk about what the asset managers can do from here, because I think that that's more helpful. It doesn't, yes, it's important to understand where the NAV marks are, but let's talk about what their choices are, because that's where we make our money, and I think other investors can make money too. One can look at the underlines and have a view as far as NAV, but what's equally as important is the nuance with the wrapper.