Private Credit Storm Lashes Father-Son Duo at Helm of Cliffwater

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1:40Carol Massar:Podcasts, radio, news. This is Bloomberg Business Week Daily. Reporting from the magazine that helps global leaders stay ahead. with insight on the people, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Business Week Daily Podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. Let's get to the father and son team who rode private credit on the way up and who risk falling hard on the way down. It's an exclusive. It's Bloomberg's Big Take today. You can read the story and more from Bloomberg The Big Take on the Bloomberg Terminal and at Bloomberg.com slash Big Take.

2:22Carol Massar:Yeah, it's a great story. Two reporters among the team reporting it out. Bloomberg News Leverage Finance reporter Ellen DeMauro and Olivia Fishlow. They are both here in studio. It is a great story as we continue to kind of track the concerns when it comes to private credit. And I want to start with you, Ellen. Talk to us about Cliffwater, who they are, what's been their approach, and why we're talking about them, why you guys did a deep dive. Yeah. So Cliffwater is a sort of pioneer in private credit, really. They started out as a consultant to allocators like pension funds, and then they created their own asset management business, which has grown exponentially over the last 10 or so years.

3:02Carol Massar:What they do is essentially partner with other direct lenders and take a slice of each of those loans. And that's allowed them to grow very quickly and become hyper diversified compared to other platforms that are just single manager. It worked out for a while and it made the founders incredibly wealthy. Olivia, come on in here because then redemptions started. What can you tell us about why the redemption started and what investors wanted? Yeah, definitely. So like Ellen's saying, the Cliffwater model is sort of a fund that allows investors to access private credit writ large. So they're not actually doing loans.

3:39Carol Massar:They are investing in other funds that are. They're buying loans from other managers. So it's like a multi lender model. So when stress started to come to private credit and investors started to one out, Cliffwater was a big place where now anyone worried about private credit that's invested the fund maybe decided to pull capital. And that's why we saw record redemptions from the fund this quarter. We have a great chart, and I want to bring it up. It's in the story. And Tim and I were kind of blown away about some of the graphics that really helped tell the story because we talk about this kind of fund of funds approach, if you will.

4:11Carol Massar:It's a circular chart. But what it basically is showing, and it's hard for those folks, obviously, if you're listening on radio, you can't see it, but typical, too, on TV. But what it's basically showing is that they owned, what, about a third of Barings Private Credit Corp at the end of 2025. But they also were involved with Aries, right, Blackstone. I mean, walk us through that circle and what it tells us. Sure. So the way that they've been able to partner with so many managers is by investing directly in the funds. And then they set up agreements to be able to be in the underlying loans as well.

4:45Carol Massar:So they are invested in, I think, more than 50 direct lenders. They are invested in many. This is one chunk of sort of those types of fund investments. This is the non-traded BDCs and the investment partnerships specifically. But they have a large holding in Barings, Aries, KKR, you name it, like all the big names. Blackstone. Blackstone. Kind of a who's who, right? It really is, yeah. I think the question that a lot of people have, and we're going to be speaking about this a little later in our program to Olivia, is this question of to what extent are the challenges at Cliffwater or a single firm contained versus are they part of a bigger picture when it comes to private credit and this idea of so-called contagion?

5:25What did you find in your reporting?

5:26Carol Massar:So I think that we've seen recently that firms are expecting this concern among investors to continue. We saw some lenders that capped redemptions signal that they're going to do the same thing next quarter. So I think we've definitely seen any stress at one fund. Managers are expecting it to kind of spill over to their fund as well. That's what I was curious about. When the stories kind of pitch as one of the biggest question marks in the private credit industry, is it because they are so vulnerable or that if they start to come undone, then you've got to assume that there is that contagion or systemic impact?

6:02Carol Massar:I think people were pointing to Cliffwater in particular because of this fund of private credit funds aspect that's very unique to them. And then also, I mean, they're just really big. How big? It's$33 billion, which is quite large. I think they're second only to B-Cred. So that's pretty large in this market. They're touching a lot of different direct lenders. They're in a lot of loans. Everybody's worried about software and AI disruption. They're in a lot of software. So there's a couple of reasons people are focused. So is that why, Ellen, it didn't work? It worked until it didn't work. Was it software?

6:38What was sort of the straw that broke the camel's back with this?

6:41Carol Massar:I think a lot of this comes down to sentiment around software, personally. We saw people start to get nervous. And we've reported previously that software is the single largest sector exposure in private credit. It's about 20%, which is sizable. So we're starting to see people get their money out or try to, and we're starting to see gating happen. So a lot of this stems from that. I will point out, Carol, software companies taking a hit today. The latest example of volatility in the sector, the information reporting that Amazon Web Services is developing AI tools designed to automate functions and sales and biz dev.

7:19Carol Massar:Yeah, like we continue to see this on a daily basis, kind of questioning some of the existing models or companies and whether or not, you know, we're going to see more problems going forward. I guess time will tell. Olivia, I want to bring you back in because you've got another story in the Bloomberg that's about Aries Management and Apollo Global capping private credit fund withdrawals as clients want to redeem more. We kind of remind everybody, private credit, not so liquid, folks. You're going to have to park your money for a while. But that's not, you know, investors are pushing back. So tell us a little bit more about this.

7:50Carol Massar:Right. Yeah. So I think, like we're saying, there's all these fears around private credit, around software, right? But I think a big issue for these lenders is that they went really aggressive into the retail space. And that helped grow their firms a lot. It let them bring in a lot of money. But maybe they weren't prepared for that retail space to sort of turn. And now we're sort of dealing with the first wave of all of these funds having to cap redemptions. Who's at fault, though? Like when you think about that, and we've had folks on around this table who said, read the fine print. And sometimes that fine print is pretty early in.

8:19Yeah, James Crombie talks about that all the time. You know, your colleague on the team. He says this is like literally what it says in the prospectuses. So, you know, read the fine print here.

8:30Carol Massar:I think that is true. But what is hard is that we've seen some lenders actually decide not to cap redemptions. And they took special measures to return all of investors' capital. So it sort of set this not uniform pace where maybe some investors felt like, wait, I thought I could get all my money back. Yeah, I mean, okay. So what are we watching? Let's go back to Cliffwater. So what do we need to watch? What are you guys watching that is an indication that, all right, this storm, it's not just a short storm, it's something much bigger. Yeah, I think we're going to continue to watch for redemptions.

9:04Carol Massar:If they stay elevated, we're going to watch Cliffwater's liquidity levels. we reported that they'll be able to manage this like max redemptions for at least a year without having to sell any assets or sell any fund stakes or anything like that any extreme measures so we'll be waiting to see if they can maintain that liquidity and maybe investors will get more comfortable again and stop redeeming maybe they won't right time will tell and i also think about the rate environment whether we start to see rates go up we know that higher rates have been problematic for all of the private credit world.

9:38Carol Massar:Thank you guys so much. Important story among the most read on the Bloomberg terminal. Bloomberg News Leverage Finance reporter Ellen DeMauro and Olivia Fishlow. You can read their story and more from the Bloomberg Big Take. It's on the Bloomberg and at Bloomberg.com slash big take. Stay with us. More from Bloomberg Business Week Daily coming up after this. They told us to expect change. They warned us about the transition. But honestly, they forgot the best part. This is the chapter where we finally focus on us. LifeMD delivers expert menopause and midlife care right from your home. From hormone health to holistic wellness, LifeMD helps you feel your best for the best years of your life.

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12:41Carol Massar:There are so many conflicting headlines coming at us. I'm just taking a look at our live blog when it comes to the U.S. and Israeli war in Iran. What are the latest headlines that we are focusing on, you mentioned Axios reporting potential talks between the U.S. and Iran, that they may hold some high-level talks as soon as Thursday, U.S. waiting for response from Iran on those possible talks, and the U.S. claims Iran had agreed to many of its plans, points. Axios citing two sources with knowledge on the potential of these talks. So, I don't know. This is something that I feel like we've been floating around, certainly yesterday again.

13:15Carol Massar:We're just trying to figure it out. Yeah, I mean, it runs counter to what we've heard from several Iranian officials who push back on the idea that there is any sort of negotiating going on. It follows a report that we got earlier today, too, from the Wall Street Journal, that the Pentagon is planning to deploy a brigade combat team from the Army's elite 82nd Airborne Division to the Middle East to support operations against Iran. This, according to the Wall Street Journal, citing two officials, written order to deploy the unit, made up of roughly 3 ,000 soldiers, is expected in the coming hours, the officials said.

13:45The decision, though, to put boots on the ground in Iran hasn't been made yet, according to the officials.

13:49Carol Massar:Yeah. And I think what's interesting, you know, one of the things you and I were just talking before we came on air, Iran setting a transit fee of as much as $2 million per trip through the Strait of Hormuz. So basically setting up a bit of a toll there and just wondering how much oil, but it is a lot of oil that these tankers, you know, carry. We think about any of these ships that go through these major straits or ports, if you will. I think about the Panama Canal. I've been down there seeing lots of things, but this is what they're doing, I guess. It's just kind of part of our macro setup. The other thing we also want to get to, and it's one of our most read stories on the Bloomberg today on the U.S.

14:24Carol Massar:war in Iran, Iran's biggest Gulf Arab neighbors considering joining the U.S.-Israeli war against Iran could be pushed to if Tehran attacks their critical infrastructure. And this is according to several people with knowledge of the situation. So this is kind of where we are. Well, with a view and an understanding on what's happening in the region, we welcome back Ray Takei, senior fellow for Middle East Studies at the Council on Foreign Relations. He's the author of several books, including most recently, The Last Shah, America, Iran, and the Fall of the Pavlavi Dynasty and Guardians of the Revolution, Iran and the World in the Age of the Ayatollahs.

14:58He joins us from Washington. Ray, always good to check in with you. We just want to start with the back and forth, what Axios is reporting, the idea of Iran agreeing to some sort of multi-pronged plan to end the war, the pushback that we got earlier this week, the comments from the president that sent markets soaring yesterday. What's your view on the end of this conflict? Well, on the American side, the president may be looking for an off-ramp with everything that has happened in the markets and so on. However, with President Trump, there's always a large number of options that he can consider.

15:36There's a lot of military deployments taking place in the region. And so what we have seen in previous rounds of negotiations in June and in March, in February, they were usually preludes to war. So this may be another one that what the president is saying about discussions doesn't meet the manpower that he's deploying, but he may be looking for off-ramp from a war that is proving more complex than he thought. I suspect that Iranians, despite their narrative of success and triumph, are also looking for a way out of this. They have suffered a great deal, and they may be essentially trying to figure out how to extricate themselves from this conflict as well.

16:21So we'll see if this mediation is real, and we see if it can produce some sort of agreement not to settle the conflict between the two nations, but at least some sort of an armistice for now that allows everybody to return to their corners. All right.

16:36Carol Massar:So let's throw on top of that, Ray, one of our stories. It is our most read on the Bloomberg or one of our most read about Iran's, you know, most powerful or biggest Gulf Arab neighbors, Iran's biggest Gulf Arab neighbors, considering joining the U.S.-Israeli war. I'm trying to understand that. And help me out here in your understanding or thinking and your knowledge of this region. Did the region know, did Saudi Arabia know that Donald Trump was going to do this, was willing to go along, and maybe this is part of a bigger strategy, a plan? Or are they just looking at it and saying, wait, this could actually be an opportunity for us to change the direction of the Middle East going forward?

17:15Carol Massar:I'm just trying to understand the steps here. Or is it all just kind of happening in real time with no big strategy? I suspect the latter. I'm not quite sure if this is a very synchronized, thought-out plan. And in terms of the Gulf states, before the war, they were essentially having a policy of detente with Iran and actually pressuring the administration not to engage in the conflict because the Iranians were quite clear about what they would do should there be an attack on them. They said they would regionalize the war, and they would also target energy supplies as well as the passage to the Persian Gulf.

17:57So there was nothing surprising about what the Iranians did. There are some reports that the Gulf states are becoming more aggressive. But honestly, I suspect at the end of this war, whenever it is, they will return to their practice of trying to balance the two sides, having a relationship with the United States as close, but also not necessarily being antagonistic to the neighbor in the north, which would be grieved, injured, and quite angered. Well, the implication of what you just said, Ray, is that we don't see a very changed Iran following the end of this conflict. Oh, no. Iran will certainly change after this conflict.

18:38The Islamic Republic that that survives this war is going to be very different than the one that went in before. For one thing, a large number of highly senior officials have been decapitated. And one of the things that has happened with this large-scale decapitation is you're beginning to finally see a generational shift, where you begin to see a new group of people gradually coming to power. in terms of the military services, the Revolutionary Guards and others. You begin to see the second-tier officials coming to power. And for them, their formative experience was not the 1979 revolution. They were too young for that.

19:22It wasn't even Iran-Iraq war. They may have participated in this latter stages. For a lot of them, their most formative experience was the Syrian civil war. A large number of the Iranian military officials rotated through that Syrian civil war. About a thousand died. And the lesson they drawn from the Syrian conflict, what was built for a long period of time, collapsed in a matter of three weeks. So they're likely to be more vicious in protection of their patrimony at home. The Islamic Republic that comes out of this war, should it survive, which I suspect it will, is likely to be more militant, but also more brittle.

20:00in a sense that the elite that's coming to power are less competent in statecraft and management and so forth than the ones that was decapitated. Not that the ones that were killed were exactly managers of competence and so forth. So Islamic Republic is going to be very different going forward. Its entire strategic doctrine may change. The value of nuclear weapons has It's never been greater for this regime, but everything that has happened. No, we're going to come out of this with a very different regime whose ramifications were all formed over time.

20:39Carol Massar:Well, so a different regime that comes out. But if I heard you correctly, that nuclear power is still very important and maybe more important than ever before. Is that more important than ever? Yes, absolutely. And it was actually one of the tensions between the late Supreme Leader Ali Khamenei and some within the security services. The perception was that the Israelis after October 7th, Prime Minister Netanyahu certainly, said that the rules of the game have changed. and he certainly has proven that. Israel became much more preemptive in dismantling strikes and dealing with threats before they metastasized.

21:26And there were a lot of voices within the security services in Iran that were saying, if the Israelis change the rules of the game, we should do so as well and actually cross the nuclear threshold. And they were very public about that. And for For whatever set of reasons, Ali Khamenei didn't do it. As a result, he lost his nuclear program in June and his life in February.