The market barely had time to process news that alternative investing giant, Aresm had joined the private credit "gate parade" - where fund after multi-billion fund informed investors they would get only a fraction of their requested redemption from money invested in Software "not so perfectly money good" private credit loans - before finding out that the same Ares private credit fund, posted its steepest monthly loss on record in February, providing further evidence of the rapid decompression in the $1.8 trillion private credit market (which Goldman valiantly defended overnight, in what may prove very quickly to have been a futile endeavor).

The Ares Strategic Income Fund, a non-traded business development company launched in December 2022, lost 0.68% in February, according to Bloomberg calculations based on the fund’s regulatory filings.

February was the worst month for the broader leveraged loan market since September 2022, as the private credit shoes started to fall one after the other. Just this weekend we reported that "Blackstone's Flagship Private Credit Fund, World's Largest, Posts First Monthly Loss Since 2022." And suddenly everyone is rushing to remark their fund from myth to something resembling a market (of course it will take them months to get there). 

Including a small loss in January, the Ares fund, which manages nearly $23 billion of assets, is down 0.7% so far this year.

The fund’s decline reflects the broader selloff in public debt markets, which Ares uses to assign prices to its assets, rather than losses on any specific investments, Bloomberg sources said, although if its software investments are even in the remotely same ballpark as other funds, watch out below.

Ares - aptly named after the ancient Greek god of war - officially launched ASIF on its wealth management platform and through investment advisers in April 2023 as part of a move to broaden its reach among individual investors (read: to get retail suckers in)..

As noted above, the Ares "performance issue" is not an isolated case. A similar fund managed by Blackstone also just recorded its worst monthly performance in over three years in February, which Blackstone attributed to wider spreads across public and private markets, as well as unrealized losses on individual names.

Both funds are still outperforming the leveraged loan market, which has delivered returns of -0.82% in February and -1.08% for the year through February, according to the S&P UBS Leveraged Loan Index. However, their outperrformance won't last if the pressure is finally one to admit the truth about the rather sordid affair taking place with cash flows in a world of AI disruption and ahead of what may be a brutal stagflationary recession which could lead to default as high as 15% across the Private Credit space according to UBS. 

Meanwhile, as reported last night, amid mounting panic over the entire industry's long-term viability which has led to a surge in individual investor redemptions from private credit, Ares followed in the footsteps of many of its rivals and decided to cap withdrawals from ASIF at 5% of the fund’s net assets, after investors asked to pull out 11.2%. In other words more than half of the redemption requests were gated. 

In a letter to investors announcing its decision, Ares pointed out the fund has delivered annualized returns of 10.6% since inception through the end of January and affirmed its dividend through June. Unfortunately, what investors were much more focused on is that the fund has pre-gated future redemptions as well, indicating it will only allow 5% redemptions max next quarter, when the cumulative "bank run" is already well over 10%.

Yet even now, greater fools are in abundance, and Blackstone's attempt to repackage its loans as bonds in hopes of finding a new batch of gullible investors has worked: Bloomberg reports that not only did the world's largest private credit fund successfully find enough investor demand to plug a $400 million hole, it even managed to upsize the new collateralized loan obligation deal, finding enough demand for the debt to boost its size by $50 million to $450 million from $400 million. 

The largest portion of the offering, rated AAA, was sold to investors at a premium of 1.28 percentage point over a floating interest-rate benchmark. That’s a similar risk premium to previous CLOs issued by BCRED. 

The increase in the size of the offering by the firm that shook down its employees a few weeks ago to fund the redemption shortfall from the very same fund, indicates that despite concerns about the risks in private credit, institutional investors are still happy to invest in deals backed by pools of those loans confident that a bottom has finally been found. 

Or maybe not.

According to former Goldman Sachs CEO, Lloyd Blankfein, the accumulation of unsold private assets on investors’ balance sheets is a warning that some may be overvalued — and a spark could trigger a widespread markdown 

“At some point there needs to be a forcing function or a reckoning that causes you to come to grips with what your balance sheet really is worth,” Blankfein said in a Bloomberg Television interview with Francine Lacqua.

The former Wall Street chief, who spent much of his career as a trader before leading Goldman during the financial crisis, when he was pitching subprime-backed RMBS deals to some investors while also pitching ways how to short those same subprime-backed RMBS to other investors (all of which culminated in a very theatrical congressional hearing), made his comments as the disruption caused by artificial intelligence and pockets of alleged fraud have caused jitters in private markets. The CEO also warned that the likelihood of a larger blowup has risen with the length of time since previous crises.

“The analogy I like to give is you accumulate tinder on the floor of the forest and eventually a spark will come,” Blankfein said. “But the longer between intervals where there’s a spark that sets it on fire, the more that accumulates.”

Maybe we should call what comes next a fire...sale. In which case, don't worry Lloyd: it already started.

The former Goldman CEO has also voiced concerns about the growth of private credit in the portfolios of individual investors. “When you lose money for individual consumers — i.e. taxpayers and citizens — people in government get very, very upset,” he said earlier this month, sensing with delightful accuracy what comes next...