(Feb 20): For years, private credit funds trumpeted a key distinction from other corners of finance: insulation from liquidity mismatches.
Because investors typically commit capital for long, fixed periods, and the funds deploy that money into loans with similarly lengthy maturities, the risk of being forced to sell assets at cut-price rates to meet demands for liquidity is minimised. At least, that’s the theory.
But recent strains within Blue Owl Capital Inc’s business development companies (BDCs) suggest the industry may not be entirely shielded from that longstanding vulnerability.
The New York-based private credit giant has faced increasing withdrawal requests from investors in recent months, fuelled in part by concerns about its exposure to software companies amid the rapid rise of artificial intelligence.
This week, Blue Owl said it would no longer allow for redemptions from one of its retail-focused private credit funds, abandoning an earlier plan to reopen withdrawals later this quarter. Instead, the firm decided to start returning investors’ cash.
“We aren’t halting redemptions,” Craig Packer, co-president of Blue Owl Capital Inc said on an earnings call on Thursday.
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“We’ve been tendering for 5% of the shares of this fund for eight years. Instead of resuming 5% a quarter, we are in fact accelerating redemptions. And we’re going to return to this investor group 30% of their capital at book value in the next 45 days.”
Cashing out
The developments underscore the risks facing retail investors as they move into the fast-expanding private credit market. While investors are typically permitted to redeem a portion of their holdings each quarter, those payouts can be restricted if withdrawal requests surpass preset caps.
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BDCs from the largest managers across the market have been grappling with an exodus of cash, as withdrawal requests spiked. Investors in BDCs holding more than US$1 billion asked to pull a total of more than US$2.9 billion in the fourth quarter, up 200% from the prior period, according to a report from Robert A Stanger & Co, a boutique investment bank that tracks the industry closely.
Blue Owl’s fund, Blue Owl Capital Corp II, is the last of its retail-focused vehicles with a finite lifespan, meaning that investors in the fund were long promised that they would see their capital returned.
Late last year, Blue Owl’s first attempt to honour this pledge failed. It cancelled an attempt to merge the fund with another publicly-traded BDC. The deal could have hit investors with losses of about 20% due to the trading price of the public vehicle.
After the merger plans fell through, Blue Owl went looking for another way to pay back its investors, and decided to sell private loans. On Wednesday, the firm said it had sold roughly US$1.4 billion in direct-lending investments across three vehicles — Blue Owl Capital Corp II, Blue Owl Capital Corporation, and Blue Owl Technology Income Corp. Buyers included North American public pension funds and insurance companies.
‘Strong statement’
Packer maintained on the earnings call that the near-par value sale of the assets, which included 34% of the non-traded vehicles portfolio, was actually a sound look for the firm.
“I think that’s strong for any asset class to clear that kind of size at that kind of price, at book value, an extremely strong statement,” Packer said.
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Others concurred — Stanger’s Michael Covello said it was a “favorable outcome” given that investors would now receive a distribution of 30% of net assets in the first quarter, rather than being forced to take the implied discount of the terminated merger. Barclays called the move a strong step towards winding down the fund.
However, Democratic Senator Elizabeth Warren seized on the news to warn on private credit risks. She called for an increase in bank capital requirements for private credit exposures, greater data disclosure from the funds and a stress test for the market. “The Trump administration needs to wake up. Stop pushing these risky investments into Americans’ retirement accounts,” she said in a statement on Thursday.
A representative for Blue Owl said the firm will continue to pursue its plan to return cash to investors in the coming quarters. “Contrary to what has been reported by some, we are not halting investor liquidity,” the representative added.
Deals
- Bain Capital Credit LP and UBS Group AG are lending a combined US$382 million to an Australian health-equipment manufacturer Aidacare Pty
- Ares Management Corp is leading a private credit financing of about €1.4 billion for Scandinavian software business EG A/S
- Synera Renewable Energy Co, a portfolio company of Stonepeak Partners, is seeking US$800 million of private credit for its offshore wind farm project in Taiwan, amid the push for green power supply expansion in the country
- A group of private credit firms led by Blue Owl Capital Inc are providing a US$1.4 billion loan to help buyout firm Hg finance the acquisition of OneStream Inc.
- HPS Investment Partners led a roughly US$700 million private-credit deal for Elara Caring, a home health-care provider
Fundraising
The alternative investment firm Capza, which is ultimately owned by BNP Paribas, has raised almost €1.4 billion for a new private credit fund
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