"The First Major Test For Private Credit"

Making my usual rounds on Thursday, I stumbled into this item.

Yikes! Here the two Cliffwater funds I've heard of.

Here's me in May, 2005;

Here's more from the New York Times posted on Tuesday. The title for this post came from the NYT article. The Times really hit on the idea of a potential "mismatch between assets and liabilities" as more people would want to get out than there would be money coming in. The interval fund concept works in part because money comes in at some rate that might generally balance out redemption requests. The risk is that the money in/money out dynamic is at immediate risk of unraveling. Someone was quoted saying "no one wants to be the last one out."

To my excerpt, is something going horribly wrong? Obviously there is no way to know. We've repeatedly looked at companies like Blackstone (BX) and the rest as being proxies for whatever is going on in the private asset space. The stocks are collectively down a ton from their highs. They appear to be capturing something going on with private assets and these various anecdotes from Blue Owl and any others out there could very well be the canary in the coalmine as alleged by David Rosen in the above Tweet. 

Navigating various types of adverse market events, I guess this one is a credit event, is difficult enough, putting yourself into a position of not being able to sell due to structural reasons would seem to make matters far worse. 

As we have seen in previous events, it's not realistic to count on completely avoid the thing, exposure to credit in this instance, but it can be realistic to effectively limit the amount of exposure. Clients own Blackrock whose alternative division swims in these waters so the stock is feeling it some but that division isn't very big, it's not insignificant but retail products are far larger. I have a bank loan fund and short term high yield fund in my ownership universe and they are pretty much flat on the year for now. 

If you know my style of portfolio construction, you know the allocations are very small, like 8-10% of the fixed income sleeve when the client has a "normal" allocation to equities. So 10% of 40%. I certainly would never want to explain to a client why some fund that was 4-5% of their account imploded but that would be nowhere near as bad as to trying explain why 1/4 of their account vaporized.

Repeated for emphasis from hundreds of previous posts, keep allocations small and don't load up on the same type of risk. Putting your 40% fixed income allocation into ten different funds that are all vulnerable to the same risk is not diversification. 

I doubt this event is in the first inning but it's probably not in the 8th or 9th inning either.  

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