The calculus by Cox Capital Partners was simple enough. With a nearly $15 billion redemption backlog from private credit funds, the firm would offer instant liquidity for some investors by purchasing their shares, up to $90 million worth, at an average 26% discount.
The resounding answer among investors was even simpler: No thanks.
Cox ended up drawing less than $5 million of orders by the proposal’s deadline to buy shares in five non-traded business development companies managed by HPS Investment Partners, Apollo Global Management, Ares Management and Blue Owl Capital, according to people familiar with the matter. The bids — offered at varying discounts — saw mixed success, with some drawing no offers at all, said the people, who asked not to be named because the information isn’t public.
The limited appetite to exit suggests that the angst around private credit — fueled by concerns over asset quality and software exposure — has limits. It also signals that investors may be making peace with lower-than-promised returns, at least when presented with the alternative of an immediate hit to their holdings.
“We obviously hoped the offers would have been more successful, but we’ll keep coming back,” John Cox, chief executive officer of Cox Capital, said in an interview. “I think adoption will just increase as people get more comfortable with the idea.”
The firm could also adjust the offers depending on market conditions, he said.
Representatives for HPS, Apollo, Ares and Blue Owl declined to comment.
The prospect of double-digit returns drove retail investors into BDCs as interest rates rose after the pandemic. That expansion helped transform the structures that pool floating rate loans into a multi-billion-dollar cornerstone of the modern private credit market.
But those higher rates have also pressured corporations, and the US private credit default rate hit a record high in April and has lingered there ever since, according to Fitch Ratings.
Investors began asking to withdraw their money in droves — so much so that for the first time, non-traded private credit funds handed more money back to investors than they raised in the first quarter.
Because BDCs typically cap redemptions at around 5% of the fund’s net asset value, these guardrails have left some investors trapped. Some funds devised novel ways to cover their requests, as executives sought to calm the spreading jitters.
Cue Cox Capital, which made its initial offer in mid-July, before expanding it at the end of that month.
“For me, it comes down to the size of the discount and investors weighing that to redeeming at NAV and the risk of waiting there,” said Michael Covello, an executive managing director at Robert A. Stanger & Co. “I think the investors were more savvy and thought the discount was too great for the price of liquidity.”
Cox Capital is now extending the strategy to interval funds — another type of non-traded structure. The firm is planning to target private credit vehicles managed by Cliffwater LLC and Variant Investments, according to one of the people familiar with the matter.
Last quarter, the Variant Alternative Income fund received requests from investors to pull about 50% of its shares, the person said. Investors in Cliffwater’s flagship interval fund asked to withdraw about 17% in the period.
Representatives for Variant and Cliffwater declined to comment.
Since Cox launched its first offer for non-traded BDC shares, the stock of their publicly traded cousins has climbed around 6%, according to the S&P BDC Index.
That came as the publicly traded BDCs reported second-quarter earnings which suggested the industry had averted the worst fears of a crisis. Their results also showed a renewed focus on getting the house in order, including by trimming bad investments.
And while the net asset value of both types of funds still declined during the second quarter, the metric dropped at a slower rate than the prior quarter, according to data from Raymond James.
One trigger for the broader industry panic was Blue Owl, which has been at the heart of the turmoil that’s rattled the $1.8 trillion market this year. The firm in February told investors in its non-traded Blue Owl Capital Corp II, known as OBDC II, that they would no longer be able to redeem shares on a quarterly basis, deciding instead to return investors capital.
Cox Capital and Saba Capital Management swiftly outlined a plan to buy shares in the fund, betting that investors, who had revolted against a plan to merge the vehicle with one of its publicly traded ones, would want out.
But investors ultimately sold less than 1% of their holdings.
Written by: Olivia Fishlow — With assistance from Rene Ismail @Bloomberg
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