Question A:
Some major private credit funds - including those offered by BlackRock, Cliffwater and Morgan Stanley - have maintained their redemption limits, not fully filling all investor requests.
The enforcement of restrictions on withdrawals from private credit funds predicts that the funds will substantially underperform indices of liquid high-yield corporate bonds over the next 18 months.
Responses
Responses weighted by each expert's confidence
Question B:
Assets in the private credit funds that are restricting withdrawals are substantially overvalued relative to their true market value.
Responses
Responses weighted by each expert's confidence
Question A Participant Responses
| Participant | University | Vote | Confidence | Bio/Vote History |
|---|---|---|---|---|
 Viral Acharya |
NYU Stern | Bio/Vote History | ||
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Thos was a frothy asset class with all signs of underwriting standards gone awry with easy money, exacerbated by the redemption rights sold to retail investors unlike the traditional form of locked in long-term funds. Resembles bank runs or investment fund runs.
-see background information here |
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 John Campbell |
Harvard | Bio/Vote History | ||
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A high volume of withdrawal requests suggests that some investors believe that current marks are too high and will fall in the future. Withdrawals can also create downward price pressure on funds' asset values as funds try to sell their assets.
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 John Cochrane |
Hoover Institution Stanford | Bio/Vote History | ||
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Predicting returns is an empirical question, I know of no studies on this. Those taking money out think so, but that doesn't mean it's right.
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 Douglas Diamond |
Chicago Booth | Bio/Vote History | ||
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Private credit assets are quite illiquid and suspensions need not indicate that their long-term value is far below par. If enough funds suspend reducing selling pressure, assets may recover. On the other hand, with more bad news or many actual sales, prices will decline.
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 Wenxin Du |
HBS | Bio/Vote History | ||
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 Darrell Duffie |
Stanford | Bio/Vote History | ||
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 Eugene Fama |
Chicago Booth | Bio/Vote History | ||
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There should be an initial underperformance. But thereafter...
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 Xavier Gabaix |
Harvard | Did Not Answer | Bio/Vote History | |
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 Itay Goldstein |
UPenn Wharton | Bio/Vote History | ||
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 John Graham |
Duke Fuqua | Bio/Vote History | ||
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 Campbell R. Harvey |
Duke Fuqua | Bio/Vote History | ||
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There should be an illiquidity premium. Expected returns should be higher. Of course, realized returns can be lower if there is a negative event for some of the companies in the fund.
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 Harrison Hong |
Columbia | Bio/Vote History | ||
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 Wei Jiang |
Emory Goizueta | Bio/Vote History | ||
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 Steven Kaplan |
Chicago Booth | Bio/Vote History | ||
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 Anil Kashyap |
Chicago Booth | Bio/Vote History | ||
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see Matt Levine on the risks
-see background information here |
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 Arvind Krishnamurthy |
Stanford GSB | Bio/Vote History | ||
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The central issue is whether the withdrawals are driven more by liquidity/run dynamics or underlying solvency issues. I lean towards solvency at this point, but given limited data, I am uncertain.
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 Camelia Kuhnen |
UNC Kenan-Flagler | Bio/Vote History | ||
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 Michelle Lowry |
Drexel LeBow | Bio/Vote History | ||
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 Sydney Ludvigson |
NYU | Bio/Vote History | ||
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Much uncertainty due to opacity interacting with behavioral forces. But the fact that public spreads are widening now (albeit while still relatively tight) suggests that private funds will underperform later, when they are eventually forced to mark their loans down
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 Matteo Maggiori |
Stanford GSB | Bio/Vote History | ||
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 Loretta Mester |
UPenn Wharton | Bio/Vote History | ||
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It is a sign that firms do not want to meet liquidity needs by selling assets that at this point would earn less than values on their books.
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 Tobias Moskowitz |
Yale School of Management | Bio/Vote History | ||
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When investors wish to sell but are restricted from doing so, it will temporarily prop up the price, but eventually (over the next 18 months) it will have to fall to market value.
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 Tyler Muir |
UCLA Anderson | Bio/Vote History | ||
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 Stefan Nagel |
Chicago Booth | Bio/Vote History | ||
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Assuming the performance is measured based on reported NAV. At least some of the withdrawals may be based on information about gaps between asset values and NAV. Discounts to NAV of publicly traded BDCs have increased, which points in the same direction.
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 Dimitris Papanikolaou |
Northwestern Kellogg | Bio/Vote History | ||
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private credit assets are illiquid so how they are valued matters. Capping redemptions prevents a bank run, but we do not know if the underlying issue is a liquidity or solvency problem. I suspect the latter but we do not have the underlying data.
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 Jonathan Parker |
MIT Sloan | Bio/Vote History | ||
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The funds have redemption limits because they are investing in projects that are costly to sell. Enforcing limits avoids these expected costs. If these limits were not generally enforced, the funds could not try to get higher returns through making illiquid investments.
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 Christine Parlour |
Berkeley Haas | Did Not Answer | Bio/Vote History | |
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 Thomas Philippon |
NYU Stern | Bio/Vote History | ||
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 Manju Puri |
Duke Fuqua | Bio/Vote History | ||
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 Michael R. Roberts |
UPenn Wharton | Bio/Vote History | ||
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 Paola Sapienza |
Hoover Institution Stanford | Did Not Answer | Bio/Vote History | |
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 Amit Seru |
Stanford GSB | Bio/Vote History | ||
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Composition of assets and other aspects matter. See here:
-see background information here |
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 Robert Stambaugh |
UPenn Wharton | Bio/Vote History | ||
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 Laura Starks |
UT Austin McCombs | Did Not Answer | Bio/Vote History | |
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 Jeremy Stein |
Harvard | Bio/Vote History | ||
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 Johannes Stroebel |
NYU Stern | Did Not Answer | Bio/Vote History | |
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 David Thesmar |
MIT Sloan | Bio/Vote History | ||
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For banks, large withdrawals/funding dry-ups tend to predict future performance. The same logic may apply here. The difference is: it's not systemic.
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 Sheridan Titman |
UT Austin McCombs | Bio/Vote History | ||
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 Stijn Van Nieuwerburgh |
Columbia Business School | Bio/Vote History | ||
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the example of non-traded REITs comes to mind - they did not mark down their assets at the onset of covid, had NAVs that were far above the publicly-traded REITs at the time, and underperformed those publicly traded REITs in the year that followed.
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 Nancy Wallace |
Berkeley Haas | Bio/Vote History | ||
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My research on the PE funding of AI Centers that are using opaque off-balance sheet ABS collateralized by construction projects that are years away from delivering lease payments.
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 Toni Whited |
UMich Ross School | Bio/Vote History | ||
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 Haoxiang Zhu |
MIT Sloan | Bio/Vote History | ||
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Question B Participant Responses
| Participant | University | Vote | Confidence | Bio/Vote History |
|---|---|---|---|---|
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Viral Acharya |
NYU Stern | Bio/Vote History | ||
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Amend and extend has taken the form now of extend and pretend, which won't work given the retail funds raised with redemption rights ... they will be forced to mark down,either by liquidating assets or raising new equity.
-see background information here |
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John Campbell |
Harvard | Bio/Vote History | ||
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This is quite likely true both for the reasons given in the last answer, and because the latest economic news is worrying and probably not yet fully reflected in the marks
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John Cochrane |
Hoover Institution Stanford | Bio/Vote History | ||
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The whole point of private credit and other illiquid investments is that there is no true market value.
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Douglas Diamond |
Chicago Booth | Bio/Vote History | ||
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This is uncertain for the same reason that asset underperformance is uncertain. True market value has multiple meanings for illiquid assets when selling is endogenous.
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Wenxin Du |
HBS | Bio/Vote History | ||
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Darrell Duffie |
Stanford | Bio/Vote History | ||
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I assume the question addresses whether the accounting value is probably higher than the market value. Probably, that’s true.
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Eugene Fama |
Chicago Booth | Bio/Vote History | ||
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Are prices easily available?
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Xavier Gabaix |
Harvard | Did Not Answer | Bio/Vote History | |
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Itay Goldstein |
UPenn Wharton | Bio/Vote History | ||
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John Graham |
Duke Fuqua | Bio/Vote History | ||
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Campbell R. Harvey |
Duke Fuqua | Bio/Vote History | ||
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If the marks are stale, there could be over or undervaluation. OBDC and OBDC II are in the news because OBDC trades at 20% discount to OBDC II with same assets. I believe that some of the difference is due to marks-but these are different wrappers and some diff is due to wrappers
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Harrison Hong |
Columbia | Bio/Vote History | ||
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Wei Jiang |
Emory Goizueta | Bio/Vote History | ||
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Steven Kaplan |
Chicago Booth | Bio/Vote History | ||
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Anil Kashyap |
Chicago Booth | Bio/Vote History | ||
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Arvind Krishnamurthy |
Stanford GSB | Bio/Vote History | ||
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This is true almost by definition. The challenging issue is what is "true market value" and how one should factor in illiquidity or risk premia in the valuation.
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Camelia Kuhnen |
UNC Kenan-Flagler | Bio/Vote History | ||
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Michelle Lowry |
Drexel LeBow | Bio/Vote History | ||
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Sydney Ludvigson |
NYU | Bio/Vote History | ||
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they weren't designed to be liquid funds so this is ambiguous
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Matteo Maggiori |
Stanford GSB | Bio/Vote History | ||
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A bit like in a bank run the market value of the assets might be very different in a fast fire sale versus an orderly sale over some period of time
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Loretta Mester |
UPenn Wharton | Bio/Vote History | ||
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Tobias Moskowitz |
Yale School of Management | Bio/Vote History | ||
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Generally agree, but it will only be "substantial" if market values have fallen recently. Also, unconditionally it is not clear if there is a liquidity premium or discount. A lot of allocators like the lack of mark-to-market and might be willing to pay for it.
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Tyler Muir |
UCLA Anderson | Bio/Vote History | ||
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Likely to some degree, unsure on how substantially
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Stefan Nagel |
Chicago Booth | Bio/Vote History | ||
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Assuming the performance is measured based on reported NAV. At least some of the withdrawals may be based on information about gaps between asset values and NAV. Discounts to NAV of publicly traded BDCs have increased, which points in the same direction.
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Dimitris Papanikolaou |
Northwestern Kellogg | Bio/Vote History | ||
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Assuming the definition of market value includes the illiquidity discount, then the statement is probably true: if funds could sell the assets close to their internal valuations then there would be no need to cap redemptions.
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Jonathan Parker |
MIT Sloan | Bio/Vote History | ||
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The market prices of illiquid investments do not exist, and the fair prices are hard to know with any certainty. In real time, illiquidity and losses in long-term value are very difficult to distinguish. And I am not in the business of valuing holdings of private credit funds.
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Christine Parlour |
Berkeley Haas | Did Not Answer | Bio/Vote History | |
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Thomas Philippon |
NYU Stern | Bio/Vote History | ||
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Manju Puri |
Duke Fuqua | Bio/Vote History | ||
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Michael R. Roberts |
UPenn Wharton | Bio/Vote History | ||
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Paola Sapienza |
Hoover Institution Stanford | Did Not Answer | Bio/Vote History | |
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Amit Seru |
Stanford GSB | Bio/Vote History | ||
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"True" market value might be different than current market value if there are fire sales. Also see here:
-see background information here |
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Robert Stambaugh |
UPenn Wharton | Bio/Vote History | ||
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Laura Starks |
UT Austin McCombs | Did Not Answer | Bio/Vote History | |
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Jeremy Stein |
Harvard | Bio/Vote History | ||
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Johannes Stroebel |
NYU Stern | Did Not Answer | Bio/Vote History | |
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David Thesmar |
MIT Sloan | Bio/Vote History | ||
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again, it's likely though highly uncertain. These vehicle are quite opaque, though much better capitalized than banks
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Sheridan Titman |
UT Austin McCombs | Bio/Vote History | ||
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Stijn Van Nieuwerburgh |
Columbia Business School | Bio/Vote History | ||
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this statement is too strong, but likely to be at least directionally correct. I would have agreed with a weaker version of overvaluation.
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Nancy Wallace |
Berkeley Haas | Bio/Vote History | ||
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Same response as the previous comment.
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Toni Whited |
UMich Ross School | Bio/Vote History | ||
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Haoxiang Zhu |
MIT Sloan | Bio/Vote History | ||
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