A wave of redemptions and gating in evergreen credit funds has spooked many investors, but Partners Capital CEO Arjun Raghavan is looking to buy fundamentally solid loans being sold off because managers need liquidity.
Private credit managers have been enforcing the gates to their funds as retail investors pull their capital. But Raghavan says this is “merely the prudent thing to do” and not a fundamental issue.
“If people thought they were investing in a fully liquid asset, which these are not, then this is the appropriate thing to do,” Raghavan told Institutional Investor of managers like Blackstone and BlackRock enforcing their 5 percent quarterly redemption limits. “The more fundamental issue is the quality of the credit. There are going to be some problems.”
For the $70 billion global OCIO, which manages money for endowments, foundations, and families, those problems are concentrated in three areas: Loans originated in 2019 to 2021, exposure to software companies, and large-cap sponsor-backed lending with weak covenant packages. “The 2019 to 2021 vintage is going to be bad,” Raghavan said. “A lot of large-cap lending was done on pretty loose covenants.”
The firm estimates over 30 percent of private corporate credit is exposed to software borrowers, many underwritten against equity valuations that have since declined sharply. Loans to public software companies are down nearly 7 percent year-to-date, reflecting investor concerns that AI will pressure their business models, even if it is unclear which borrowers will emerge as winners.
A client note obtained by II shows the firm has positioned itself defensively against these risks by carrying materially lower exposure to software, large-cap lending, and the most vulnerable vintages. Instead, it holds meaningful positions in investments with little sensitivity to the credit cycle: Litigation finance, insurance-linked strategies, and music royalties along with uncalled commitments to opportunistic public credit managers.
As Raghavan explained, with litigation funding, “You’re providing funding where [the return] depends on the outcome of the funded cases. If you select the right player to partner with, you’ll get good double digit return uncorrelated to the market.” Likewise, while investing in music carries its own risk, backing a specific like a catalog creates a potential return stream that isn’t correlated to inflation or the Middle East.
The firm expects defaults to rise and dislocation to create entry points that did not exist during the peak competition of recent years. Partners is “rotating capital toward opportunities where dislocation is creating entry points that were unavailable during the period of peak competition,” according to the note.
“When there’s distress, it’s a great opportunity to play offense if you have liquidity,” Raghavan said, adding: “During periods of dislocation we could also have opportunities to acquire public market assets at a steep discount so we’re looking at that as well.”
For example: “The need for restructuring and rescue capital will rise in software and other sectors where permissive lending has left borrowers with more debt than their capital structure and operating performance can support.”
Redemption pressure is also generating opportunities within secondaries to acquire performing loans at material discounts, a supply that Partners expects to grow as gating continues. Investors facing liquidity challenges may also seek to exit private credit fund interests at material discounts to raise liquidity.
And as managers seek to deploy into an improving opportunity set with wider pricing while facing capital outflows, co-investment flow is likely to increase, offering access to attractive credits at lower fees and with greater transparency.
