(Bloomberg) — Blue Owl Capital Inc. saw its shares fall about 10% after announcing limits on withdrawals from one of its private credit funds. This decision has raised alarms in the $1.8 trillion private credit market.
This was the lowest share price for Blue Owl in two and a half years. Investors in Blue Owl Capital Corp II, also called OBDC II, will no longer be able to cash out on a quarterly basis. Instead, the fund promises to return money through periodic distributions from loan repayments and asset sales. To provide liquidity, the firm stated it had sold around $1.4 billion in loans across three funds.
The move suggests significant risks for retail investors who are eager to dive into the private credit market. While investors typically get a chance to withdraw their capital each quarter, those payouts can get restricted if too many people request their money at once.
This news also sparked worries in an industry facing more scrutiny recently, particularly regarding company valuations and the quality of loans made to heavily indebted firms. Other alternative asset managers, like Ares Management Corp. and Apollo Global Management Inc., also experienced drops in share value.
Mohamed El-Erian, a leading economist and former CEO at Pacific Investment Management Co., questioned whether this situation could be a warning sign for the entire private credit sector. “Is this a canary in a coal mine moment?” he asked.
Craig Packer, a co-founder of Blue Owl, defended the loan sales, noting they sold at 99.7% of par value. “We feel confident about our portfolio’s quality, but just saying it hasn’t been enough,” Packer said during a conference call. He added that the fund aims to return half of its investors’ capital by the end of the year, focusing on repayments and asset sales.
Recent transactions involved Blue Owl selling direct-lending investments across three of its funds, including OBDC II and Blue Owl Technology Income Corp. Buyers included large public pension funds and insurance companies.
Blue Owl’s OBDC II had already been under scrutiny before this announcement, especially after a proposed merger that could have led to 20% losses for some investors. Demand for withdrawals had surpassed the usual 5% limit, indicating a troubling trend.
An analyst from Citizens Financial Group noted that the sale of loans at par value was a “win-win,” paving the way for a smoother return of capital to investors. Blue Owl plans to use proceeds from the sales to repay a credit facility from Goldman Sachs and make a special cash distribution to investors.
Funds that allow periodic redemptions face challenges when numerous investors want their money at once. Managers often retain more liquid assets to accommodate these requests. Selling directly sourced loans is less common, adding to the challenges faced by Blue Owl.
In the last quarter, redemption requests exceeded 5% at Blue Owl’s two non-traded business development companies. The tech-focused fund, OTIC, saw requests spike to about 15% of its net asset value.
Blue Owl’s main publicly traded BDC, OBDC, managed to sell around $400 million worth of loans, while Blue Owl Technology Income Corp. sold a similar amount to reduce its debt. These moves have improved the firm’s balance-sheet flexibility and diversification.
However, the drop in Blue Owl’s shares negatively impacted structured notes tied to the firm held by retail investors. One security was recently valued at less than half its original face value.
The situation highlights the fragile nature of the private credit market, which has attracted more attention and scrutiny lately. Investors should keep an eye on future developments, as they can significantly impact the quality and safety of their investments.
Source link
Bloomberg, Blue Owl Capital, Craig Packer, OBDC, retail investors, alternative asset manager
