Blue Owl Drops as Redemption Halt Stirs Private Credit Concern

(Bloomberg) — Blue Owl Capital Inc. shares tumbled after a decision to restrict withdrawals from one of its private credit funds raised fresh concern over the risks bubbling under the surface of the $1.8 trillion market.

Shares of the alternative asset manager fell about 10% on Thursday to their lowest level in two and a half years.

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The New York–based firm on Wednesday said investors in Blue Owl Capital Corp II, known as OBDC II, will no longer be able to redeem shares on a quarterly basis. Instead, the fund will return capital through periodic distributions funded by loan repayments, asset sales or other transactions. The firm said it had sold about $1.4 billion in direct-lending investments across three funds to provide investors with promised liquidity.

The move highlights the risks confronting retail investors entering the fast-growing private credit market. Though investors are generally allowed to redeem a portion of their capital each quarter, payouts can be curtailed if withdrawal requests exceed set limits.

The news also rekindled fears in an industry that has attracted increasing scrutiny in recent months over valuations in the market and the quality of lending to firms with heavy debt loads and often little track record. Shares of rival alternative asset managers including Ares Management Corp., Apollo Global Management Inc., Blackstone Inc., KKR & Co Inc. and TPG Inc. also fell.

Mohamed El-Erian, former chief executive officer at Pacific Investment Management Co., questioned whether the news was a “canary in a coalmine moment” for private credit.

Craig Packer, a co-founder of Blue Owl, defended the decision to sell the loans, saying that the sale at 99.7% of par value was “a strong statement.”

“There’s skepticism about marks. There’s skepticism about valuation. We’ve always been saying we feel really good about the quality of our portfolio and the quality of our marks, but just saying it in some ways doesn’t seem to have done enough. So we’re putting our money where our mouth is,” Packer said on a conference call Thursday morning.

He added that the fund could return half of investors’ capital by the end of this year, noting the fund was always going to come up with a strategic transaction to return money to investors at this point. “We will look for repayments, earnings and also potential additional asset sales to continue to return that capital,” Packer said.

Scrutiny

Blue Owl sold direct-lending investments across three funds: Blue Owl Capital Corp II, Blue Owl Capital Corporation, and Blue Owl Technology Income Corp. The buyers included North American public pension funds and insurance companies.

OBDC II drew scrutiny in recent months after Blue Owl proposed merging it with a publicly traded vehicle — a transaction that prior disclosures indicated could have resulted in losses of roughly 20% for some investors. Redemption requests had already exceeded the standard 5% quarterly cap.

“OBDC II has been exploring options to either create a liquidity event for investors or wind down the legacy vehicle and ultimately return capital to shareholders. We believe this is an important step forward for the fund as it creates an efficient process around returning capital to these investors,” according to an analyst note from Citizens Financial Group, which said selling loans at par was a “win-win.”

Blue Owl initially looked to sell loans at OBDC II and then widened to other vehicles following demand from institutional buyers, the firm said. OBDC II sold about $600 million — roughly 34% of its portfolio — and will use the proceeds to repay a credit facility from Goldman Sachs Group Inc. and make a special cash distribution that will total about 30% of the fund’s net asset value.

Funds that let investors redeem periodically can face pressure when too many people want their money back at once. Managers often keep some more easily sold assets to meet withdrawals. Selling directly originated loans, which typically don’t trade often, is less common.

Redemptions

In the most recent quarter, redemption requests exceeded 5% at both of Blue Owl’s non-traded business development companies. Its tech-focused vehicle, OTIC, saw redemption requests jump to about 15% of net asset value, Blue Owl said.

Blue Owl’s largest publicly traded BDC, OBDC, sold about $400 million of loans across 74 portfolio companies at around par, with an average position size of about $5 million. Blue Owl Technology Income Corp. sold roughly $400 million of loans and used the proceeds to pay down debt.

The firm said the transactions improved balance-sheet flexibility, modestly increased diversification and created more room to deploy capital.

Still, Blue Owl’s share drop hurt the structured notes that are tied to firm and held by retail investors. One of the securities, which had been issued by a subsidiary of Citigroup, was quoted below 50% of face value on Thursday, according to prices compiled by Bloomberg.

(Updates with share price details starting second paragraph)

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