Cox Capital Partners said on July 14 that it has initiated tender offers to buy the shares of non-traded business development companies Apollo Debt Solutions, Ares Strategic Income and HPS Corporate Lending Fund.
The offers, which are being sent to the BDC investors directly, amount to about $31 million combined. They represent discounts of 15% to 30% to each fund's net asset value as of May 31.
Redemptions are rising as investors seek exits
Redemption requests at non-traded business development companies, or BDCs, are rising because of nagging fears that developments in artificial intelligence will hurt software companies and impede their ability to repay loans. Credit scorer Fitch Ratings reported last week that exodus efforts increased at 10 of the 16 non-traded BDCs it tracks during the second quarter, reaching 10.3% of shares outstanding, on average, up slightly from 9.7% in the prior three months.
These vehicles pay out investors at par, but typically cap withdrawals at 5% of NAV per quarter. When requests exceed limits, redemptions are prorated.
Fulfilling them all may take a while, and there’s value in getting money back sooner. Perhaps as importantly, listed BDCs trade at deep discounts, of 75 cents on the dollar on average, according to Raymond James analysts. Some firms run both non-traded and public vehicles that closely mirror each other, like Blue Owl’s OWL.N private Credit Income Corporation and public Blue Owl Capital Corporation. Holdings increasingly overlap, according to investment goliath PIMCO, and implied dividend yields on public companies are up.
Private credit funds face tender-offer discounts
Private credit gadflies are buzzing again. Cox Capital, a small money manager that specializes in secondhand trading of such funds, is offering to buy shares in non-traded loan vehicles run by Apollo Global Management APO.N, Ares Management ARES.N and BlackRock's BLK.N HPS Investment Partners at 15% to 30% discounts to their respective net asset values. With exit queues growing and valuations sagging for publicly traded counterparts, the pressure to cash out will keep building. At the right price, some crafty arbitrage might be available.
Cox Capital targets early exits with tender offers
Investors frustrated with redemption processes could therefore be tempted to accept discounts, harvest tax losses and reinvest the proceeds into even more deeply discounted public BDCs. The question is how hard a bargain to strike. Cox is offering 70 cents on the dollar to Apollo fund holders, 75 cents to those in HPS, and 85 cents for Ares shares. It has also contacted Blue Owl about potential tenders for its Credit Income Corporation and Technology Finance Corporation funds.
Pricing discrepancies could be determinant. Apollo’s ADS does not have a public twin, while the listed Ares sibling is trading at a razor-thin discount of 94 cents. Cox is counting on the allure of an early exit, but is implicitly charging a hefty toll for the service. It largely failed, alongside Boaz Weinstein's Saba Capital earlier this year, to persuade investors in Blue Owl and Starwood Capital funds of the idea at the height of private credit dismay in March. The gap between panic and opportunity may yet be too far apart.
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