| I write a lot about private credit, and I talk sometimes with people running private credit at big asset managers, and this is very embarrassing, but I don't know what private credit is? What makes something "private credit," as opposed to, uh, public credit? Here is my best approximation of an answer. [1] - In public credit — the common terms are "the bond market" and "the syndicated loan market" [2] — a company wants to borrow money, so it deals with some intermediary who doesn't have the money yet. You want to borrow money, so you go to a bank and say "can I borrow money," and the bank says "sure, let me go find some investors to lend you the money." The bank is good at that: It has a good sense of the market, it has good relationships with investors, it knows how to structure and market deals. The bank also has money — it's a bank — but it would prefer not to give you any of that money. Maybe a little; maybe the bank will hold on to some portion of a syndicated loan. And often the bank will backstop the deal: The bank might promise you the money, putting itself on the hook to lend you the money if it can't find other buyers. [3] (Thus Elon Musk's Twitter loans.) But for a lot of loans, the bank is in the moving business, not the storage business, and will try to find other people to lend you the money. And the bank will find those people after you call it up looking to borrow money. (Mostly; "reverse inquiry" is also very much a thing.) The bank puts together debt deals between lenders and borrowers, one deal at a time. And the lenders — the investors whom the bank calls up for the deal — get to choose, one deal at a time, which deals they want to invest in. This takes time and creates uncertainty: You negotiate a deal with the bank, and then the bank goes out and tries to sell it to investors.
- In private credit, a company wants to borrow money, so it deals with some intermediary who already has the money. You want to borrow money, so you go to an asset manager — Blackstone or Ares or Apollo or Blue Owl or whoever — and say "can I borrow money," and they say "sure, here you go." They just write you a check. This gives you more speed and certainty — they just wrote you the check — and also more flexibility: If you want to finance some weird complicated thing, you can explain it to them, and they can say "okay sure we'll buy that" and then buy it, whereas if you explain a weird thing to a bank then it might say "okay fine we understand this thing, but we can't possibly explain it to 100 other buyers in a one-day marketing process, so we can't sell it." The people you are talking to, as you negotiate and structure the deal, are also the people who decide whether you get the money.
But even in private credit, you deal with an intermediary. The asset managers are not principals; they don't just have money; the Apollo partner negotiating a deal with you isn't just lending you money from her personal account. [4] The asset managers have control over their clients' money: When they say "okay we'll lend you the money," you are confident that they can actually get the money, but they get it from their clients. The clients are insurance companies, pensions, endowments, rich individuals, etc.; they have agreed to give the asset manager some of their money to invest on their behalf. Sometimes this means giving the manager money upfront; other times it means signing up for a drawdown fund or separately managed account where the client commits to put in money when the manager calls for it. [5] But in any case the client mostly doesn't get to decide what deals to invest in. [6] The manager has discretion to speak for client money. One way to put it is that private credit has a more trusting and permanent relationship with its investors. When you go to a bank for a loan, the bank goes and sells the loan to investors on a deal-by-deal basis, because the investors do not blindly trust the bank. The investors have to decide, for each deal, "is this bank bringing me a good deal?" But when you go to a private credit manager for a loan, the bank goes and sells the loan to investors on a pre-committed basis, because the investors do trust the private credit manager. The investors decide up front, "this asset manager will bring me good deals," and then commit. The private credit manager is a fiduciary for its investors, and can demand their money; the bank is an arm's-length counterparty for its investors, and has to ask them for money. [7] Is this a satisfying distinction between private and public? Eh, I don't know. I am thinking about it today because you could imagine a different distinction, something like: - Public credit — bonds and syndicated loans — trades, these days, in some more or less straightforward, more or less liquid market. If you own a bond or a loan, you can probably sell it, on some electronic trading platform or at least by calling a bank's trading desk. Maybe the bonds don't trade that much, maybe they're limited to institutional investors, maybe the borrower can prevent some investors from buying the loans, maybe there are weird dynamics involving co-op groups, but broadly speaking there is a market for bonds and loans.
- Private credit does not trade: Private credit funds make loans and then hold them to maturity.
This distinction has some intuitive appeal — it makes "public" sound public and "private" sound private; it sort of tracks the distinction between public and private equity markets — and it is my stylized story of the origins of private credit. But it is incredibly unstable. Things happen; stuff wants to trade. If a private credit fund makes a loan, planning to hold it to maturity and build a long-term relationship, and then the market changes, it might want to sell the loan. Someone might want to buy it. The idea that every private credit loan would be held to maturity just does not seem all that plausible. Eventually there will be trading. I wrote in 2023: My vague sense is that we are at the beginning of another long convergence, and that sometime within the next, like, three years, I am going to be writing about a story like "Company X is launching a marketplace to allow private credit lenders to trade loans."
Well it's been about 15 months and Bloomberg's Laura Benitez reports: Apollo Global Management Inc. is seeking to build a marketplace that would allow investors to buy and sell high-grade private assets more easily, while encroaching further into terrain once dominated by the biggest Wall Street firms. The alternative asset manager is in discussions to partner with banks, exchanges and fintech firms to deliver real-time information and intraday prices for private credit deals, according to Eric Needleman, head of Apollo Capital Solutions. Such a marketplace would allow Apollo to trade and syndicate the debt it originates on a bigger scale and be the first of its kind in modern-day private markets, where assets are typically held with the buyers and prices are rarely disclosed publicly. … "We're focused on building a true marketplace — open architecture, collaborative, and built for scale," Needleman said. So far, the firm has traded about $2 billion of products it originated and has a growing list of about 60 active clients. Sure right it would be weird if this didn't happen. It undermines my other distinction a little too: In five years, if Apollo is syndicating most of its private credit deals to other investors, what will make those deals "private"? Also Apollo is apparently putting private credit on the blockchain.  | | | Most big US companies are incorporated in Delaware, and Delaware corporate law is tough on controlling shareholders. If you are the controlling shareholder of a company — like Mark Zuckerberg is at Meta Platforms Inc., or like Elon Musk arguably is at Tesla Inc. [8] — then you have to treat the minority shareholders "entirely fairly." [9] If you do a transaction with the company — like taking the company private, or giving yourself a big pay package, or merging the company with another company that you also control — then shareholders can sue, arguing that it wasn't fair to them, and a Delaware court will review the transaction and, maybe, agree with the shareholders. (Shareholders can sue even if a majority of outside shareholders voted to approve the transaction: The vote helps, but it does not completely eliminate the problem of unfairness.) If the court agrees with the shareholders, it can stop your deal, or make you pay more for it. There is a popular theory that other states' corporate laws are less tough on controlling shareholders. Sometimes this theory is straightforwardly true: Nevada corporate law really does have a less demanding standard for controlling shareholder transactions, and Nevada sort of advertises itself to companies with controlling shareholders as a more pleasant place to do business. Other times it's just a guess: Most states have fewer corporations and fewer corporate law cases than Delaware, and when people assume that Texas will be less tough on controlling shareholders than Delaware, it's based more on vibes than on statutes or legal precedents. Still, there is a widespread sense that Delaware is quite tough, that it goes a bit overboard, and that a randomly selected other state would be less tough. So big Delaware public companies with controlling shareholders have, in recent years, considered moving to other states. Tesla left Delaware for Texas last year, and we talked this week about rumors that Meta might do so as well. There is a little theoretical problem, though. Let's say you are the controlling shareholder of a Delaware public company. "I hate this," you say to your board; "let's move to Nevada, where life is more pleasant." "Sure thing, boss," your board says, and it votes to move to Nevada. There is a shareholder vote, which you win. [10] The lawyers get ready to file the paperwork. But then, before the papers are filed, a single disgruntled shareholder sues. She sues in Delaware, because you are, for the moment, incorporated in Delaware. Her theory is simple. You are the controlling shareholder of a Delaware corporation. You want the company to do a transaction (reincorporating in Nevada). This transaction would benefit you: Nevada is less tough on controlling shareholders, so you will have more freedom to do what you want with the company, and less risk of being sued. Therefore, this transaction is subject to review by Delaware courts: It has to be "entirely fair" to the other shareholders, and if it isn't — if you get a benefit that they don't get — then the court can stop it, or make you pay damages. And you do get a benefit that the other shareholders don't get — more control, fewer lawsuits — so it's not fair. This theory might suggest that Delaware companies with controlling shareholders can never leave Delaware for another state, because leaving Delaware would give the controlling shareholders a benefit that other shareholders don't get and so would be unfair to the other shareholders. Or, more plausibly, it might suggest that the controlling shareholders should have to pay the other shareholders to leave — in cash, or by giving up some voting control, etc. — or at least that the company should have to prove that the move benefits the other shareholders at least as much as it does the controlling one. That would be kind of a weird result, but the theory makes sense. If Delaware controlled company transactions have to be entirely fair, then surely this transaction — exiting the entire fairness regime — also has to be entirely fair? And how can it be? Anyway that's the theory, and it had some oomph, but yesterday the Delaware Supreme Court rejected it. Bloomberg Law reports: TripAdvisor Inc.'s senior leaders succeeded Tuesday in overturning a landmark court decision that had raised the specter of money damages against companies moving away from Delaware. The state's top court reversed a ruling that said TripAdvisor's controlling stockholder, chairman Greg Maffei, might be on the hook to pay shareholders if the relocation reduced its corporate value. Although the decision allowed the reincorporation, it was one of several rulings and statutory changes that raised eyebrows last year over how Delaware's courts scrutinize corporate control. ... Justice Karen L. Valihura said Tuesday that Vice Chancellor J. Travis Laster was wrong to conclude that TripAdvisor's reincorporation created the type of conflict of interest that calls for heightened court scrutiny. Despite the move to a jurisdiction with fewer protections for shareholders, the allegations fell short of showing that Maffei extracted a "material" benefit from the transaction at the expense of public investors, Valihura said. Here is the opinion. Much of it turns on the fact that, while Nevada law might be generally less tough on Maffei, he is not currently in any particular legal trouble in Delaware (other than this case), so there's no particular benefit to him from the move: We hold that the absence of any allegations that any particular litigation claims will be impaired or that any particular transaction will be consummated post-conversion, weighs heavily against finding that the alleged reduction in liability exposure under Nevada's corporate law regime is material. ... In the opinion below in this case, the Court of Chancery cited several cases to support the principle that "[u]nder Delaware law, a controller or other fiduciary obtains a non-ratable benefit when a transaction materially reduces or eliminates the fiduciary's risk of liability." However, we note that these cases all involved existing potential liabilities from past conduct that the litigated transactions may have extinguished. Therefore, we read these cases as supporting the principle that limiting liability for existing potential liabilities stemming from past conduct may convey a non-ratable benefit on fiduciaries. Taken together, these cases suggest that the hypothetical and contingent impact of Nevada law on unspecified corporate actions that may or may not occur in the future is too speculative to constitute a material, non-ratable benefit triggering entire fairness review. If, in addition to moving to Nevada, Maffei was trying to do some other transaction where he'd extract a lot of value for himself, then the shareholders might have a case to keep him in Delaware. (Or, at least, to get damages; even the lower court didn't try to stop Tripadvisor's move.) But as long as the risk of him taking value from shareholders is purely hypothetical, he can go ahead and move. Man here's a law review article topic for you: UnitedHealth Group Inc. said it contacted the US Securities and Exchange Commission with concerns about investor Bill Ackman's since-deleted post on X suggesting that the company overstated profits. UnitedHealth shares slipped as much as 4.3% Wednesday after Ackman's post suggested shorting the health insurer's stock while questioning the firm's profitability. "I would not be surprised to find that the company's profitability is massively overstated due to its denial of medically necessary procedures and patient care," Ackman wrote Tuesday in the post. A UnitedHealth spokesperson said the company reached out to regulators about Ackman's post. "Health insurance has long been subject to significant regulatory oversight and earnings caps," the company said in a statement, adding that claims that insurers "can somehow over-earn are grossly uninformed." One possibility here is that Ackman is right, in which case pestering the SEC about it is a bad idea for the company, but let's just assume that he's wrong. Should the SEC care? Some things to consider: - He didn't actually say that UnitedHealth is doing anything wrong; he said he "would not be surprised" if it was. Just asking questions! No factual assertions here, so how can he be wrong? It's not fraud if you don't make any claims.
- Even if he was making false factual assertions, he "did not take an actual short position," since he doesn't do that anymore. If he wasn't saying this to make money, is it manipulative? If I just went around saying mean false things about UnitedHealth, they might get mad and sue me for defamation, but I don't think they'd have a case for securities fraud, because I'm not trading the stock. Is he different because he's a hedge fund manager, even if he's not trading the stock?
- Even if he was making false factual assertions, were they material? Or did the stock fall, not because people read the tweet and thought "ahh Bill Ackman might be onto something here," but rather because they thought "ahh Bill Ackman has his finger on the nation's pulse, and if he's mad at UnitedHealth then that is a bad sign for UnitedHealth's political and public standing"? Or: "Bill Ackman is popular on X and probably has friends in Trump world, so he can make things bad for UnitedHealth, and here he's implying that he will"? That is, did the stock react not to Ackman's factual assertions but to the fact that he was tweeting? (Like if Donald Trump had posted that, obviously the stock would have dropped, even if everyone immediately understood that the factual assertions were false, because Trump has the power to create trouble based on false factual premises; he is not quite alone in that.) I wrote yesterday that "if you are buying stocks for reasons of fun or values or social affinity, (1) lying to you about a company's financial results won't have much effect but (2) lying to you about something else might," and this is a variation on that theme.
- What is the SEC going to get up to over the next four years? Is it this? Is it the opposite of this? Is it nothing? "A prominent Trump-friendly hedge fund manager on X is saying mean things about a big health insurance company and telling people to short it": Is that the sort of situation where the SEC will now side with the hedge fund manager, or with the health insurance company, or will it just say "ehh this is between them" and not get involved?
We have talked a couple of times about the relaunch of Enron. Some guy bought the Enron trademarks for, one assumes, not very much money, [11] and then put out various social-media stunts teasing it as some sort of new business and/or comedy project. I wrote: "The information on the website is First Amendment protected parody," says a disclaimer, "represents performance art, and is for entertainment purposes only," but these days you'd say that even if you actually were launching a crypto token, or a meme stock, or for that matter an energy company.
And then we talked last week about Enron's supposed plan to actually sell retail electricity in Texas, which (1) is funny but (2) could also be real? Sure why not. But obviously the smart money was always on "crypto token," because that is the most efficient way to convert attention into money. "We are launching a new retail electricity venture under the name Enron" is very funny, but if you're serious about it it's kind of a drag. Even if retail electric customers are like "that's cool sign me up," you have to do a lot of work to provide them with electricity, and most of your revenue will go toward paying for the electricity. Whereas if you say "we are launching a new retail electricity venture under the name Enron" and then sell crypto tokens, crypto markets at this point have a low-cost well-oiled machine for signing up people who might find that funny, and you get to keep pretty much all the money they give you without giving them anything in return except, you know, tokens. The tokens, unlike electricity, cost you nothing. Joking about providing retail electricity in Texas is a much better business than providing retail electricity in Texas. Anyway right it's crypto: A new memecoin on Solana, ENRON, is under the spotlight following a massive surge in market cap post-launch, followed by a significant crash that affected regular investors. Yesterday, Enron, a company of renewable energy, announced the launch of their coin, ENRON, on Solana, promising to be the fuel to power their journey. Instead, it turned out to be something else. It turned out to be crypto! Morgan Stanley Boosts X Debt Sale as Investors Embrace Musk Bet. Honda-Nissan Deal Thrown Into Doubt Weeks After Talks Began. US gold rush drives up borrowing costs for precious metal in London. The $80 Billion Diamond Market Crash Leaves De Beers Reeling. MicroStrategy's Financial Gambit Hits a Bump With New Stock Deal. The MicroStrategy copycats: companies turn to bitcoin to boost share price. KKR Raises Its Direct Stakes in Three Companies. Equinor scales back renewables push 7 years after ditching 'oil' from its name. Trader Who Made $1 Billion in Single Bet Sues Deutsche Bank. "Gemini, a cryptocurrency exchange, has announced it will not hire graduates from the Massachusetts Institute of Technology (MIT) as long as the university continues to employ Gary Gensler." MicroStrategy is Now Strategy. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! |
No comments:
Post a Comment