Most important take away

The private credit market has grown to $350 billion in non-traded BDCs plus $100 billion in interval funds since 2018, and the fundamental asset-liability mismatch in these structures creates the conditions for a liquidity crunch that could cascade into a broader credit crunch. Redemptions are already accelerating (from 2.1% to 4.3% at top-six funds) after dividend cuts of roughly 10%, and the bear case involves a reflexive feedback loop of redemptions, forced selling, vanishing bids, and bank line pullbacks that could hit both private credit and private equity.

Chapter Summaries

Kieran Goodwin’s Early Career on Wall Street (1990s)

Kieran describes how reading “Liar’s Poker” led him into finance, starting as an analyst at Smith Barney, moving into interest rate derivatives, and then pioneering credit derivatives at Citibank, Solomon Brothers, and Merrill Lynch. He highlights how each bank had a distinct culture and how he positioned himself at the frontier of the emerging CDS market.

King Street Years and Distressed Investing (2004-2010)

Kieran joined King Street Capital where he combined his derivatives expertise with the firm’s fundamental distressed investing approach. The partnership with Fran Brosens was synergistic, and they thrived during volatile periods (2005 auto/airline defaults, subprime, GFC). The firm grew from $4B to $22B and returned over 100% while the S&P was flat.

Starting and Running Panning Capital (2012-2018)

After a two-year break, Kieran co-founded Panning Capital with Frank Edmonds, launching with $600M and growing to $2.5B within 18 months. He candidly discusses mistakes: growing too fast, not recognizing the low-volatility regime, mission drift on trades, and having too senior a team. The fund returned +20% in 2013 but ground through tougher years before he wound it down.

Downtime and Path to Sabah Capital (2018-2024)

Kieran took another break, spending time with his kids, trying stand-up comedy (opening for Jim Gaffigan), and creating an app game. He reconnected with Boaz Weinstein through a proxy fight on a CLO fund and the hostile bid for Sculptor. This led him to join Sabah in early 2024 with two ideas: systematic electronic credit trading and private credit distress opportunities.

Sabah LT: Electronic Credit Trading

Kieran recruited two traders from Jane Street to build Sabah LT (Low Touch), a systematic approach to corporate bond trading leveraging electronic market access. The team of 13 launched with internal capital in March 2024, refined the algo, and began taking outside capital in November 2024.

Private Credit Market Structure and Risks

Kieran walks through the evolution from bank lending to institutional drawdown funds, non-traded BDCs, and interval funds. He identifies the core problem: non-traded BDCs reintroduced the asset-liability mismatch that drawdown funds were designed to solve, now at massive scale ($350B from zero since 2018).

Marks, Leverage, and the Default Cycle

Discussion of NAV accuracy problems (4-6% variance between best and worst markers on the same loans), concentration risk in SaaS/software lending, the rise of questionable ARR loans (venture lending without warrants), and how AI disruption could trigger a software default cycle.

The Bear Case and Reflexivity

Kieran outlines the worst-case scenario: redemptions plus real defaults lead to forced selling, interval funds exhaust liquid assets, the bar to gate requires SEC exemption, bank lines get cut, and a feedback loop drives private credit bids significantly lower. The extreme tail risk involves annuity providers’ policyholders surrendering policies.

Closing Reflections

Kieran shares that basketball is his favorite hobby, credits two basketball coaches as his biggest professional influences for teaching teamwork and defense (protecting the downside), and advises never losing your cool.

Summary

Actionable insights and investment considerations from the episode:

1. Avoid or reduce exposure to non-traded BDCs and interval funds with heavy SaaS/software concentration. Kieran warns that SaaS was the “darling” of private credit but a wave of defaults in software is coming as AI disrupts 80% gross margins. Funds with 50%+ software exposure that have not clearly communicated this to investors are particularly at risk.

2. Watch dividend cuts as a leading indicator of redemption waves. When Blackstone B-CRED, Goldman, and Oak Tree all cut dividends by roughly 10% in Q4, redemptions doubled from 2.1% to 4.3%. The wealth channel follows a simple heuristic: “You cut my dividend, I’m out.” This pattern is likely to repeat across more funds.

3. Evaluate private credit managers on three factors: underwriting quality, risk management (liquidity sleeves, low unfunded commitments, manageable leverage), and transparency/communication. Managers who explain their portfolios thoroughly and mark accurately will retain investors and survive the cycle.

4. Private credit secondaries are emerging as an opportunity. Sabah is tendering for Blue Owl’s OBDC2 at a discount to NAV, testing demand for liquidity among gated investors. Good-quality private credit may clear in the low 90s, offering around 11% unlevered yields on quality loans. This space is nascent but growing.

5. Be cautious on private credit secondaries with older vintage loans. Unlike private equity where a long-held company may have genuinely improved, a private credit loan past its 4-year expected life likely has a reason it has not been refinanced.

6. CLO equity is an area showing stress signals now. SaaS defaults are concentrated in a few sectors, and as first-loss pieces, CLO equity tranches are absorbing disproportionate damage, similar to the 2005 correlation trade blowup.

7. Systematic/electronic corporate bond trading is an emerging edge. Sabah LT’s approach of building algorithmic market-making on the buy side, enabled by electronic trading platforms like MarketAxess, represents a structural opportunity as corporate bond markets become more electronic.

8. Fund-level leverage is the hidden amplifier in private credit. All attractive private credit returns depend on fund-level leverage. An unlevered BDC would be “a yawn” after fees. If banks start cutting credit lines to underperforming managers (those with 15-20% default rates), leverage withdrawal becomes a systemic risk.

9. The worst tail risk extends to insurance/annuity companies that have loaded up on BBB-rated private credit. If annuitants begin surrendering policies, forced selling from insurers would add another layer of reflexive pressure to private credit prices.

Stocks and investments mentioned: Blackstone B-CRED (non-traded BDC), Blue Owl OBDC2 (non-traded BDC, Sabah is tendering for shares), Goldman Sachs non-traded BDC, Oak Tree non-traded BDC, Sabah Capital ($6B hedge fund), Sabah LT (systematic credit trading fund), CLO equity tranches (underperforming).