Boaz Weinstein

Matt Levine and co-host Katie Greifold engage with Boaz Weinstein from Saba Capital Management, discussing the rising trend of closed-end fund activism. Boaz is executing a tender offer to acquire 5-10% of OBDC2, a Blue Owl private BDC, which is trading at a significant discount to its marked NAV of about 35%. He incorporates various strategies, including some level of trolling, and notes that the tender offers were prepared before increased attention on Blue Owl.

The conversation shifts to the Starwood S-REIT, which has faced gating for nearly four years due to high redemption requests. Boaz highlights a special transaction with CalSTRS that helped manage liquidity issues, indicating strong demand for liquidity. He believes the NAV for Starwood S-REIT is likely stable, as it does not encounter the same private credit challenges as other funds, presenting a potential liquidity opportunity.

The discussion emphasizes the critical role of redemption rights in closed-end funds for investor protection, comparing them to other investment products. Concerns arise regarding the private credit industry, particularly Blue Owl's outflows, with commentary on BDCs and interval funds over-promising liquidity. The term "over-promising" is explored, highlighting the disconnect between promised redemption percentages and the reality during market downturns, which may not be clearly communicated to investors.

Skepticism about retail investors' understanding of liquidity risks and NAV fluctuations is noted, with a statistic indicating a notable rise in redemption requests. The mismatch between the liquidity of underlying assets and the investments raises questions about the effectiveness of brokers and salespeople in disclosing these risks. One speaker expresses frustration with closed-end fund managers, advocating for a transition to open-ended fund structures to better meet investor needs.

The conversation also touches on the challenges faced by fund managers in differentiating between ETFs and closed-end funds, focusing on the appeal of permanent capital. Bill Ackman's successful shift from a hedge fund to a closed-end fund is noted as a strategy to manage drawdowns without investor exits. Concerns are raised about large sales commissions incentivizing advisors to promote certain products, potentially leaving clients unaware of the motivations behind these recommendations.

The dialogue concludes with reflections on retail investors' lack of knowledge, which can lead to poor decision-making, and the potential for clients to vote against their own interests. A hypothetical scenario is proposed regarding waiving fees for a year and committing to buy back shares if the fund trades below a 30% discount, illustrating the complexities of fund management and investor engagement.

The conversation begins with a divergence in focus, as one participant is interested in publicly listed closed-end fund activism while the other prefers discussing private BDCs. The discussion shifts to the tendering process for private BDCs, highlighting uncertainties regarding the feasibility of takeovers in this space. Challenges in the tendering process are noted, including cumbersome procedures involving mailed forms and managerial advisories against participation.

Concerns about the accuracy of Net Asset Values (NAVs) and the reflection of true asset values in bids are raised. The impact of leverage on funds is discussed, with a 35% discount potentially not representing true value due to leveraged assets. Skepticism about manager alpha in the current market is expressed, suggesting that management fees may erode returns. The speaker shows respect for firms like Apollo and Blackstone, discussing Blackstone's treatment of redeeming shareholders and its implications for NAVs.

The conversation also addresses redemption rates, with uncertainty surrounding them. Discrepancies in marks for second lien positions compared to other funds are acknowledged, with differences of up to 25 points. Systemic risks due to markdowns affecting leverage facilities are a concern, although most managers are not near their leverage caps. The potential for banks to tighten lending terms is also discussed.

The discussion includes strategies for shorting public debt at optimistic levels and the potential for investment despite necessary adjustments. Emphasis is placed on providing investors with tail protection through credit derivatives, with mention of basis risk and the differences between high yield and private credit portfolios. Market expectations and the potential for oversubscription in upcoming bids are speculated upon, with shareholders previously revolting against selling when down 35%.

The exit strategy for trades involves aiming for a 5% quarterly return, with yields increasing as prices drop. Differing views on the health of private credit portfolios among investors are noted, alongside concerns about redeeming at par versus lower prices. A suggestion for a round robin bidding system among funds to optimize loan purchases is proposed.

Managers are hesitant to buy back their own assets at perceived undervalued prices, raising questions about why they do not opt to buy back assets at significant discounts. The conversation also touches on the partnership with Cox, a firm specializing in private BDCs, and the implications of redeeming at par. The management practices of firms like HPS are critiqued, particularly their decision to limit payouts despite having more inflows than outflows.

There is a critique of BDCs trading at significant discounts to NAV, questioning why funds continue to make new investments instead of buying back shares at a discount. The potential guaranteed returns from share buybacks are highlighted, suggesting that funds may avoid this strategy to maintain higher NAV for fee calculations. The trend of retailizing private credit is discussed, with a desire for managers to create long-term public vehicles for investment.

The conversation emphasizes that aggressive share buybacks may not be the best strategy, proposing a fee holiday for shareholders to compensate for stock declines. The dynamics of BDC redemption requests and market trends are discussed, noting that Blackstone's early announcement impacted redemption trends. Concerns about the sustainability of payouts and rising redemption requests are raised, with an example of Starwood facing multi-year problems due to increasing redemptions.

Boaz Weinstein discusses the potential for a significant queue and stabilization in the market, referencing Blackstone's success with B-REIT. He expresses concerns about rising default rates and NAV recalibration, which could lead to a market downturn. Weinstein anticipates that once the market bottoms out, certain products will become attractive, reminiscent of the 2008-2009 situation.

The conversation touches on public BDCs and their influence on market perceptions and valuations, with a reference to Cliff Asness's concept of "volatility laundering." Weinstein shares insights from a conversation with a CEO of an insurance company, who expressed concerns about justifying fees for a closed-end fund product when investors have received consistent returns with lower volatility from other funds. The discussion highlights the impact of distribution cuts on investor confidence, noting that initial outflows were triggered by cuts in distributions.

The term "volatility laundering" encapsulates the current issues facing Wall Street, with previously masked problems now becoming apparent. Weinstein expresses uncertainty about future investment paths, particularly regarding market conditions and potential oversubscription, while emphasizing the importance of seeking value for clients. The conversation also covers Digital Asset Treasuries (DATs), which are trading at discounts to NAV, raising ethical concerns in the crypto market.

Weinstein expresses excitement about exploring new areas in his job, particularly in the RV and mispricings sector, and mentions MoviePass as an interesting case study for innovation in the private credit market. He acknowledges the risks involved but remains optimistic about the journey and proposes launching a shop called Black Owl to explore new opportunities.