Private capital firm Blue Owl Capital is selling $1.4 billion in assets from three of its credit funds so it can return capital to investors and pay down debt, and permanently halting redemptions at one of the funds, the company said, as direct lending and software stocks come under pressure.
The sale comes just over three months after Blue Owl abandoned a plan to merge two of the three funds into one and to temporarily halt redemptions in the smallest of the funds, which were scheduled to resume this quarter.
Questions about credit quality and exposure to software stocks have dogged the industry for months. The about-face on redemptions—just as investors thought they would resume—sparked a shareholder revolt, driving Blue Owl down by 9.8% in intraday trading Thursday, and deepening a broader selloff among private equity firms.
Economist Mohamed El-Erian said the changes echo the early days of the 2008 financial crisis, although nowhere near the same magnitude.
“Is this a ‘canary-in-the-coalmine’ moment, similar to August 2007?” El-Erian wrote on X on Thursday. “The question will be on the minds of some investors and policymakers this morning as they assess the news that Blue Owl is halting some redemptions.
He said it raised questions about larger systemic risks across the industry and “a significant – and necessary – valuation hit is looming for specific assets.”
Other private equity firms were dragged down along with Blue Owl: Apollo Global Management fell by almost 6%, Ares and Blackstone were both down by more than 6%, KKR & Co. was off by almost 4% and Carlyle Group skidded by more than 5% on Thursday.
Selling assets to repay investors, pare debt
The debt Blue Owl is selling cuts across 128 different portfolio companies in 27 industries, but the biggest concentration, 13%, is in the battered software and services sector, the company said Wednesday. The S&P 500 Software & Services index has lost about $2 trillion in value since its peak in October with about half of the losses coming this month.
The loans are held through three credit funds—$600 million in Blue Owl Capital Corp II (OBDC II), $400 million in Blue Owl Technology Income Corp, and $400 million in Blue Owl Capital Corp OBDC.N.
The proceeds will be used partly to pay investors in OBDC II, which the company unsuccessfully tried to merge with the publicly traded fund last year, and to pay down debt, the company said. The other two funds will use the cash to pay down debt. It is permanently prohibiting redemptions in OBDC II fund going forward, it said.
“The OBDC II Board intends to prioritise delivering liquidity ratably to all shareholders through quarterly return of capital distributions, which are intended to replace future quarterly tender offers and may be funded by earnings, repayments, other asset sale opportunities or strategic transactions,” it said.
Blue Owl co-President Craig Packer said the firm hopes to return capital quickly to investors in its OBDC II fund.
“We’re not halting redemptions, we are simply changing the method by which we’re providing redemptions,” Packer told analysts on a conference call Thursday.
He added that the payout planned for the fund holders would be equal to 30% of the fund’s value, more than the 5% they would have been limited to for redemptions.
The company withdrew the previous merger plan in November following investor outcry that battered the broader company’s shares. Redemptions had already been halted when Blue Owl announced the original plan to merge the small fund with its publicly traded counterpart, but Blue Owl had said they would start again this quarter.
Close to par
The company said it is receiving 99.7% of par value on the loans, meaning it is very close to their original value. That price is also the same level where Blue Owl marks the assets on its books, a process that has come under scrutiny in the past year as both retail and institutional investors demand more transparency from managers of assets outside traditional stocks and bonds.
Blue Owl co-President Craig Packer told Reuters the selling price is “an extremely strong statement,” especially when “investors are asking questions about marks and quality of portfolio, risk about software, all the questions are being asked.”
Investor reaction to the sale is a test of just how nervous wealthy individuals who have ploughed funds into private credit are, given the recent selloff in software stocks and continued credit concerns.
Losses among software stocks have spilt over to asset managers, and firms like Blue Owl have been peppered with questions in recent weeks about their investments.
Shares in the publicly traded fund also tumbled by almost 3%.
Valuations marked to market
Packer said executives started talking to potential buyers after the merger collapsed to find a way to return capital to shareholders. The sale is the type of transaction that was envisioned when that fund launched eight years ago, Packer said.
Blue Owl declined to name the buyers, describing them as “leading North American public pension and insurance investors.” They are all buying equal stakes, Packer said.
The sale will allow OBDC II to return up to 30% of its current net asset value to investors, or $2.35 per share. Based on the last published share count, that indicates the total payout will be up to around $268 million.
Citizens analyst Brian McKenna said in a note that the deal meant the valuations were “marked-to-market and are validated, in our view,” and added that the firm was “prudent” to pay attention to the relatively small retail fund because “the investor experience, specifically in private wealth, is by far the biggest driver of success in the channel longer-term.”
Blue Owl’s co-CEO Marc Lipschultz said last week that software was 8% of all the firm’s assets.
Investors withdrew 15.4% of the assets from Blue Owl Technology Income Corp in January after the company raised the redemption limit from 5%. Software companies make up 46% of that fund’s assets, Packer said.
“We like running that fund with a lot of liquidity,” Packer said.
“People have pressed us on this and we have acknowledged a sector like health care, information technology is mostly software,” Packer added.
Reuters
