Boaz Weinstein of Saba Capital warns of growing private credit problems

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Boaz Weinstein, founder of Saba Capital Management, told Inside Alts this week that problems in private credit are “doubling every quarter,” in part because of “the financial alchemy of promising liquidity that is not available.”

“What’s happening, the big picture, now is that, for a number of reasons, in the middle of a bull market, there are cracks, there are problems, there are scams, there are companies that go bad without being scammers,” Weinstein said in an exclusive interview. “For these reasons, investors are seeing their dividends cut. They want their money back [on] The No. 1 story on Wall Street is now where salvation will be for all these managers.

Weinstein, of course, is a central figure in that story. His company Saba, in collaboration with Cox Capital Management, has launched an offer to buy 6.9% of the shares in one of Blue Owl’s non-traded private credit funds at a 34.9% discount.

“We have heard from investors in these funds that they want their money back,” he said. “They were trying to find someone to replace them, so it happened organically.”

That fund, known as Blue Owl Capital Corp., was discontinued. II, made quarterly redemptions and sold $1.4 billion of direct lending investments to provide liquidity to its investors. It turned out to be among the first in a series of non-traded private credit funds to receive redemption requests above the usual 5% quarterly cap.

Private wealth flows across products tracked by analysts at Jefferies fell 19% in the first quarter compared to the fourth quarter. Analysts said they expect redemption rates across retail credit products to increase.

Saba and Cox see an opportunity in light of investors’ limited liquidity. They are launching similar bids for stakes in several other Blue Owl funds as well as Starwood Real Estate Income Trust. This has led some to wonder whether Weinstein was criticizing the private credit industry just to scare individual investors into selling their shares to him at a discount.

While speaking with Inside Alts, Weinstein explained that he doesn’t actually think there will be a wave of private credit defaults or scams, nor does he think people should take back more. (He said: “The ransoms have arrived.”)

In fact, he’s already bullish on several of the largest private credit managers. Over the past few weeks, Weinstein said, he has bought shares in “the most amazing management companies,” including Ares, Apollo and Blackstone. He said he’s even long “a little bit” of Blue Owl stock.

“We bought shares of these companies on the idea that if they were overpriced, these were the people who would be the winners in the end, when the smoke cleared and their shares might represent good value,” Weinstein said.

Weinstein said he believes private credit is trading at pessimistic levels and public credit is trading at “incredibly optimistic levels.” It shorted public credit through credit default swaps and credit derivatives. The closure of private credit funds means investors will have to sell more liquid assets to raise money, which could impact the market, Weinstein said.

“I think public credit is incredibly mispriced, and part of my short-term thinking about it is informed by the issues that private credit markets face,” he said.

Weinstein said it will take “several weeks” before they know what’s happening with Blue Owl’s offers, and how much they’ll end up buying. Weinstein said the tender offers were not “personal” against the manager. Rather, he said, “If we go out to bid for something, that’s a sign that we think the manager is good.”

However, Weinstein noted that a company called Cliffwater is one company in the private credit space that he is “watching closely.” Cliffwater operates similar to a fund-of-funds model, in that they don’t own the loans directly, but rather invest in other managers, he said. As a result, they have limited control over fulfilling their redemption requests – what Weinstein describes as “turducken” (a chicken stuffed inside a duck, stuffed inside a turkey).

According to a Securities and Exchange Commission filing, Cliffwater disclosed that as of the end of last year, 69% of its corporate lending fund consisted of direct investments in core credit, while the remaining 31% had exposure to funds.

Weinstein predicted that when Cliffwater announces the recovery rate — expected as early as Tuesday — it could be between 10% and 20%.

“I don’t know exactly what their cash position is, but we think it’s very likely that they will have to start redeeming and will be reduced when they get back this money that they invested in,” he said.

Cliffwater declined to comment.

Cliffwater was also the subject of a recent viral investor letter from hedge fund Rubric Capital, which said the alternatives manager could be a “canary in the coal mine” and “the first domino in the bank we expect,” according to the New York Times, which cited two people who read the private memo.

When asked what happens to private credit if there is a true credit cycle, Weinstein said: “The decline will be harder than it should be.”

He added that “one of the best opportunities” in his career would be to invest in private credit at a deep discount “when the economy slows down.”

“Maybe it won’t happen for a year, maybe it’s about to happen. Maybe it will happen years from now,” Weinstein said. “It’s about to get very interesting.”