Kieran Goodwin – Private Credit Concerns
Capital Allocators – Inside the Institutional Investment Industry Podcast Recap
Published:
Duration: 48 min
Guests: Kieran Goodwin
Summary
Kieran Goodwin from Saba Capital discusses the complexities and risks in the rapidly growing private credit market. Key concerns include asset liability mismatches, liquidity issues, and the reliability of pricing marks.
What Happened
Kieran Goodwin, a partner at Saba Capital, brings his extensive background in credit trading to discuss the private credit market's challenges. He notes the rapid growth of non-traded Business Development Companies (BDCs), which now hold about $350 billion in assets since 2018. This growth has not been without issues, particularly concerning liquidity and asset liability mismatches.
Goodwin highlights that private credit managers need strong risk management practices, including maintaining liquidity sleeves, minimizing unfunded commitments, and ensuring transparency in portfolio holdings. He points out that there is a significant variance in how different BDCs mark the same loans, leading to potential discrepancies in net asset values (NAV), sometimes as much as 4-6%.
The episode underscores the potential for a liquidity crunch in private credit due to asset liability mismatches. Goodwin explains that redemption requests have increased, particularly after dividend cuts by major players like Blackstone, Golub, and Oak Tree, which has implications for financial advisors who often exit investments following dividend cuts.
Goodwin touches upon the unique nature of defaults in private credit, where managers can defer or extend loans, contrasting with more traditional credit cycles. He expresses concern over sectors like SaaS, which might face increased defaults due to overinvestment, as indicated by JP Morgan's markdowns of some software loans.
Secondary trading in private credit is beginning to emerge, with some of the best credits trading at par. Goodwin stresses the importance of understanding the capital structure and leverage of BDCs for opportunistic investments.
Despite the challenges, Goodwin sees opportunities in private credit but warns of potential forced selling and liquidity issues if confidence wanes. He also notes that AI could contribute to increased volatility in credit markets, adding another layer of complexity.
The conversation reflects on the cyclical nature of credit markets, with Goodwin arguing that cycles are essential for capitalism. He also touches on the potential for private equity to face challenges, although it may offer more upside than credit in a default cycle.
Kieran Goodwin shares his enjoyment of tackling market puzzles and solving problems, which has been a consistent theme throughout his career. His background in computer science and early inspiration from 'Liar's Poker' by Michael Lewis shaped his approach to risk and investment.
Key Insights
- The private credit market has seen rapid growth, with non-traded BDCs expanding to $350 billion in assets since 2018. This growth raises concerns about liquidity and asset liability mismatches, which can lead to credit crunches.
- Significant discrepancies in loan pricing among BDCs can result in a 4-6% difference in net asset values. This variance poses risks for investors relying on accurate marks for investment decisions.
- Redemption requests have increased following dividend cuts by major non-traded BDCs. Financial advisors often use dividend cuts as a trigger to exit investments, heightening liquidity risks.
- AI might increase volatility in credit markets, adding complexity to risk assessments. Understanding the capital structure and leverage of BDCs is crucial for identifying investment opportunities in this evolving landscape.
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