Blue Owl is spoiling private credit’s sales pitch

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There are asset managers working in droves to cultivate the image of private credit as an attractive product for retail investors. Then there is Blue Owl. Last week, the US fund manager became a warning of what happens when exotic products do not go to plan, that will — and should — make everyday investors think twice before diving in.

The group, which manages more than $307bn of other people’s money, has permanently restricted redemptions at its Blue Owl Capital Corp II (OBDC II) fund. Previously, investors had been able to pull out cash equivalent to 5 per cent of the fund every three months. Instead, the company will sell assets in the fund piecemeal and return cash quarter by quarter, handed out to everyone according to their share whether they want it or not.

The saga highlights the two big risks that face investors in private credit: valuation and liquidity. The first involves trusting managers over what assets in funds are worth because there are no live market prices. The second entails limits on how much of their money investors withdraw from the fund and when. Illiquidity is a feature, not a bug: it allows private capital managers to park money for extended periods of time in deals not available on public markets.

Blue Owl’s problem was originally linked to valuation. Investors worried its loans were not worth what it said, partly because a big chunk of OBDC II’s lending is to software companies. A listed fund with near-identical assets, called OBDC, was trading at a big discount to its net asset value — as, in practice, most “business development companies” of this kind do.

The valuation problem turned into a liquidity one: in an effort to stop outflows of OBDC II, the group tried to merge it with its listed counterparty, forcing investors to take a de facto haircut in exchange for the ability to sell stock on the market. Some kind of “liquidity event” — a sale, merger or listing — had always been the plan for OBDC II and is a common feature of older business development companies. But the terms of the deal raised hackles: Blue Owl scrapped its plan.

With valuation and liquidity concerns feeding off each other, Blue Owl is now trying to tackle both at once. It has sold a strip of loans to other asset managers at close to face value, hoping to reassure the market that its loans are worth what it says they are.

Yet the transaction, which includes Blue Owl’s own insurer as one of the four buyers, has not totally quelled fears. Activist investor Saba Capital Management is offering to buy fund stakes from customers at an embarrassingly steep discount.

The latest gaffe triggered a minor sell-off in asset managers’ stocks, which presumably reflects that retail investors are spooked. Blue Owl and peers such as Apollo and Blackstone are keen to broaden out, targeting the modestly rich as well as the super-rich. The hope is that, if regulation changes, holders of US 401(k) pensions could partake too.

The value of that future fee opportunity is now falling as reflected by the 15 per cent slump in Blue Owl’s stock over the past week. The company is now skirting close to the $10 a share at which it went public in 2021, having halved from its peak a year ago. Private credit is certainly making some people richer; Blue Owl’s shareholders are not among them.

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