"In a given week I probably only do about fifteen minutes of real, actual work." — Peter Gibbons, Office Space
Who here has seen the movie Office Space? It has been a while since I last saw it but there is an iconic scene where Peter Gibbons, one of the main characters, has to go and explain what it is he does to two consultants who are helping the company decide who to lay off and how many. But Peter isn’t a fan of his job and a few days earlier he decided he wasn’t going to care anymore about it. So, when he went in to meet with the two consultants and they asked what he did, he responds “in a given week I probably only do about 15 minutes of real, actual work.”
I thought about that scene as I was reading the bankruptcy filing for a company that received a loan from one of the largest private credit firms in the world. I’m not sure if I can use the real lender’s name so let’s just call them Sapphire Night Bird Capital.
Sapphire Night Bird lent roughly $300 million to a mid-sized home furniture importer. The purpose of the loan was to finance a recapitalization dividend. For those of you who don’t speak Wall Street, that means the money was borrowed specifically so the owners could pay themselves. Which they did. To the tune of over $200 million.
From what I could gather from the bankruptcy filing, the company almost immediately was unable to pay its bills and was in serious cash flow problems. To the owners’ credit they put money back into the business to attempt to save it. But at the end of the day the company was no more. Sapphire Night Bird was left with a shell of a business that they had just lent $300 million to.
So, what are they doing now? Suing the former owners claiming fraud. Which seems to be private credit’s MO these days. We lost money, how? They must have defrauded us.
Fraud is a specific thing. It means someone lied to you. Someone hid information. Someone deceived you into making a decision you wouldn’t have otherwise made.
This is one of the largest private credit firms on the planet. They have armies of analysts, credit committees, legal teams, and risk managers. They had access to the books. They could have kicked every tire on the lot. They could have added covenants as a condition of the loan. They could have restricted how the proceeds were used. They could have done anything.
They knew the money was going to a dividend. That was the stated purpose of the loan.
And they wired the money anyway.
Then when it blew up, they pointed at the borrower and said fraud. That’s not fraud. That’s fifteen minutes of real, actual work on a $300 million loan. I bet they didn’t even inquire about the status of those TPS reports.
I will add I am relying solely on the bankruptcy filing and am not privy to anything other than that.
Now Let Me Show You Something Else
Last week I wrote about how private credit is starting to look a lot like auction rate securities did right before they blew up in 2008. If you missed it, go read “There’s Alcohol in That” first. This is the follow up I promised.
I said I had a story to tell. Here it is.
I spent time reading the prospectus for Blackstone Private Credit Fund. BCRED. (It’s a super fun read and I cannot wait to see how my book club reacts when I pick it for next month’s read.) The largest private credit fund in the world. Over $82 billion in total investments.
The prospectus is 2,014 pages. I am not exaggerating. Two thousand and fourteen pages. Most of it reads the way you’d expect. Hundreds of corporate loans. First lien debt. Companies you’ve never heard of in industries like software, healthcare, and professional services. Standard private credit stuff. This easily topped Peter’s 15 minutes of work.
Then I found something that didn’t look like the rest.
Specialty Lending Company LLC
Buried in the schedule of investments, listed under “Equity and other,” there’s a holding called Specialty Lending Company LLC. It shows up multiple times throughout the document. Always flagged with footnotes. Always pointing back to the same vague description.
Here’s what BCRED has committed to this entity: $405 million. As of year-end they had $372 million invested at cost with a fair value of $381 million.
So, what is Specialty Lending Company LLC? What does it do? Where does the money go? Maybe they make recapitalization dividend loans?
The prospectus gives you exactly two sentences.
“SLC is a specialty finance company focused on investing in consumer credit and is led by a management team with deep expertise in the consumer finance industry. The investment in SLC allows the Company to gain exposure to a different asset class than its core investing focus of senior secured lending to U.S. private companies.”
That’s it. That is the entire description of a $405 million commitment. “Consumer credit.” “Different asset class.” “Deep expertise.” Not vague at all right?
If you’re an investor in BCRED, you can’t see SLC’s financials. The prospectus says, “The Company does not consolidate its equity interest in SLC.” That means whatever SLC is doing with that $372 million, whatever consumer loans they’re making, to whoever they’re making them, at whatever terms, you don’t get to see it. It doesn’t show up in the schedule of investments. It doesn’t show up in the financial statements. It just says “Equity and other” with a footnote.
So, I went looking for information the way any curious person would. I searched everywhere I could think of. Here’s what I found.
SEC Filings: Nothing.
Delaware Secretary of State: The LLC exists. File number 6276129. That’s
all Delaware will tell you.
New York Department of Financial Services: No licensed lender record that
I could find.
Website: There is no website.
LinkedIn: The company page has 11 followers. I found two people associated
with the company. A President and a COO. The company is located at 135 West 50th
Street in New York, which is a Blackstone office address.
Contact information: An info@ email address. That is the only public
contact. I emailed them asking who they are, what type of loans and investments they
have, and any filings I could look at. Still haven’t heard anything back. Maybe that
email box is so busy they just haven’t been able to get to me? Yep, that’s it, that
has to be it.
I’m not saying anything illegal is happening. I’m not saying the investment is going to lose money. I’m not saying Blackstone is doing anything wrong. For all I know SLC is a perfectly fine consumer lending operation run by smart people reading their TPS reports. If you are an investor in BCRED, $372 million of the fund’s money is sitting in an investment that has essentially no public presence, no consolidated financial reporting, no SEC filings, no visible lending license, and a two-sentence description in the prospectus. You have no way of knowing what loans are being made, the quality of those loans, and importantly the performance of SLC. It’s only $372 million, if it were anything meaningful, I would be more concerned, but we are only talking about $372 million here. I bet some people wager that on March Madness.
The Bigger Point
This is what I was talking about last week. The disclosure in private credit is thin to nonexistent. The structures are complex. And the retail investor is the last one to find out what’s actually happening with their money or that they can’t get it because it’s locked up in an illiquid product.
Sapphire Night Bird wired $300 million to finance a dividend and apparently didn’t bother to stress test whether the company could survive it. BCRED has $372 million in an entity with 11 LinkedIn followers and no website. Both are examples of the same thing. The people managing your money aren’t always doing the work you’d expect them to do with it.
Your average investor is never going to spend the time on stuff like this. Your average advisor probably isn’t going to do it either, which is why someone might have the confidence to shift a few hundred million around knowing nobody was going to ask what it was.
My next post is going to be less heavy investment focused and lighter and more fun. Speaking of fun, I have a book club you might be interested in joining…
Chad