Veteran credit trader Kieran Goodwin expresses a bearish outlook on the private credit market, highlighting significant risks in structures like non-traded BDCs and interval funds.
The core concern is a classic asset-liability mismatch, where illiquid private loans are held in vehicles offering quarterly liquidity, creating vulnerability to redemption-driven liquidity crunches.
Goodwin points to inconsistent valuation marks, the risk of forced selling due to investor redemptions (especially after dividend cuts), and poor risk-reward in certain loan types (e.g., ARR-based SaaS loans) as key areas of weakness.
Saba Capital is positioning to capitalize on these expected dislocations, for instance, by launching tender offers for fund shares to provide liquidity to trapped investors at a discount.
8 quotes
Concerns Raised
Systemic risk from asset-liability mismatches in non-traded BDCs and interval funds.
Inconsistent and potentially aggressive marking of illiquid private loans across managers.
A potential negative feedback loop where dividend cuts trigger redemptions, forcing asset sales and further NAV declines.
Poor risk-reward profiles in specific sectors, such as ARR-based loans to unprofitable software companies.
Opportunities Identified
Capitalizing on market dislocations caused by forced selling from liquidity-constrained funds.
Providing liquidity to trapped investors at a discount, as seen in Saba's tender offer for a Blue Owl fund.
Exploiting mispricings that arise when a loss of confidence spreads through the credit markets.