Risking taking on the mantle of “doomer,” Rubric Capital has issued a warning about systemic risks involving levered private credit and private equity. In a letter obtained by Hedge Fund Alpha, the firm believes “poor incentives” have resulted in an industry that has grown too quickly and started to market its assets to “the wrong investors.”
Read more hedge fund letters here
“Irresponsible industry executives pitched a notion of a better credit mouse trap that (while having some merit in its early days) became nothing more than a way of avoiding mark-to-market exposure,” Rubric’s David Rosen warned in an investor letter which has been making waves over the past few days. “They sold it to foundations and institutional investors, to wealth management clients and then ultimately to Main Street.”
Also see: Why Point72 Alum David Rosen’s Top Performing Rubric Capital Likes Value Traps
A better credit mouse trap?
Meanwhile, the industry continued to expand, selling some of the “most illiquid assets in the world” to less-sophisticated investors. Those offers accompanied promises of increased liquidity that the Rubric team believes will ultimately end up being “ephemeral” when even a modest period of stress develops.
They warned that all this capital was poured aggressively into an environment they feel is similar to a bubble, noting it was “created by excessive flows with industry executives willing to do anything to maintain unsustainable dividends and yields.”
“It’s a toxic brew of compressing margins, increased leverage, structured liability management, PIK interest, poor credit underwriting and AI,” Rosen said.
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