Understand that buying into a portfolio of loans is almost the definition of stupid. Here is why. To create cash for redemption, you must actually sell more units which is neutral or seel an asset which is typically catastrophic in terms of future returns.
Recall it takes one ten banger to pay for ten losers. And losers are difficult to sell. how can this plan work/ It does not.
Public debt has a high level of scrutiny which is sustained and public. private debt has a fraction of that. worse, private debt is peddled by salesmen and the bauyer participates in commissions. how is this going to work out.
All such portfolois need to become close ended and age through liquidation Most should work out.
Private credit
https://www.linkedin.com/posts/jason-lemire-00a61810_if-i-had-to-summarize-in-one-single-post-activity-7436784123240886272-7qli/
If I had to summarize in one single post what's happening right now in Private Credit, here's what it would look like 👇 I know there are quite a few posts about PC these days, but I feel most are either from Alt apologists or what I call "Alt-Schadenfreude people". Few have given a balanced view of what's happening (my buddy Steven Adang, CFA, CAIA is one of them!). Regardless, it's very true that the industry (in the semi-liquid structures, at least) is facing a reckoning.
Investors are realizing that:
1. Liquidity is far from a guarantee (contrary to how they were "sold")
2. NAVs may not always be trustworthy. Loan valuation practices are subjective --> More and more cases of loans going from 100 to 0 in a matter of days!
3. PC may actually have a risk level in line with its returns! Loans to highly leveraged Software firms are proving dangerous, and lenders are seeing higher PIKs and default rates.
4. The loan origination discipline might have eroded as the industry exploded in size. We've seen several cases now where collateral has been double-pledged (or worse).
5. PC is very opaque. Investors are finding it difficult to know exactly what their exposures are, and how they are performing. 6. Because of 1 through 5, investors are also realizing they're caught in a "Prisoner's dilemma", *regardless of how well their fund is faring*. If you don't entirely trust the NAV, are unsure of what the loan book looks like, think defaults may rise, and fear that the actions of other fundholders eill adversely affect your returns, why would you *not* try to be 1st in line to get your money back?! The *regardless of how well the fund is doing* part is also extremely important. Asking to redeem shares of a perfectly healthy PC fund may actually be the rational thing to do, because of the one variable you do NOT control: the behavior of other investors. If others start heading for the exits (as in a typical bank run), even good funds can turn bad. For example, by: 1. Eating up liquidity stores to pay early redemptions --> less buffer for non-redeeming investors ↓ 2. Selling off some assets (maybe prioritizing the most liquid, "best" loans) --> deteriorating loan book portrait for remaining investors ↓ 3. If loan book deteriorates, performance may suffer --> more investors may start worrying and ask to redeem. ↓ 4. And this can create a vicious negative cycle. Facing this predicament, PC managers are caught between a rock and a hard place. They can either: 1. Try to bolster confidence by meeting all redemption requests (as BCRED did), or 2. Limit cash outflows by gating (as HLEND did). Both have negative consequences (1. deteriorating portrait for non-redeeming investors, and for 2. gating can cause panic and more redemptions). So that's what's happening, IMHO. Unfortunately, I expect things to get worse before they get better. - Follow me, Jason Lemire, for more content, and ♻️ repost if you found this post insightful! ✌
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