The top-line numbers from Blue Owl Capital Inc.’s funds were unambiguous and, by just about any measure, ugly.
Investors sought to cash in more than 20% of shares from its flagship $36 billion private credit fund. Its smaller, tech-focused vehicle saw redemption requests top 40%. The firm, like others across the $1.8 trillion market, enforced a 5% withdrawal limit, leaving billions trapped.
In short, no major private credit manager has faced the onslaught that Blue Owl’s funds were asked to pay back.
Still, in letters to shareholders of Blue Owl Credit Income Corp. and Blue Owl Technology Income Corp., firm Co-President Craig Packer and the funds’ presidents had a different view of the surging redemptions.
It came from a “small minority” and “within certain wealth channels and regions,” they said, adding that both funds are “well-positioned to capitalize” on the current market turmoil despite the rush for the exit.
The explanations did little to quell the tempest around Blue Owl, which rode those same investors’ appetite for private credit to become one of the biggest money managers in the business. Its shares fell as much as 8.7% on Thursday to a record intraday low, before paring the loss to close down 1.6%.
In the aftermath, the redemption requests are raising fresh concerns about the composition of its investor base. And perhaps the biggest question of all: In this era of net outflows, what stops withdrawals from amassing quarter after quarter, diverting money from making loans, crimping returns and keeping new investors away?
“I got a request from a client today saying, ‘get me out of all my private credit investments.’ They weren’t in any, but I think it shows the idea around the panic,” said Phil Blancato, chief market strategist at Osaic, which advises on $700 billion of assets. “Until we see markdowns across the products, or there’s an offer for better economics, like a chance for extra shares, or returns improve, there won’t be an incentive to buy in.”
Blue Owl’s $6.2 billion tech-focused business development company, known as OTIC, faced elevated withdrawals late last year from wealthy individuals in Asia, which constitute a significant portion of its investor base, Bloomberg previously reported. In a virtually unprecedented move, the firm honored redemption requests amounting to 15.4% of the fund’s net assets.
In recent months Blue Owl and rival fund managers have hosted in‑person events with private bankers in Hong Kong and Singapore in an effort to calm investors’ nerves.
But last week, Doug Ostrover, co-chief executive officer at Blue Owl Capital Inc., acknowledged some of the pitfalls of its breakneck growth. He said the people interfacing with retail and high-net-worth investors may not have fully communicated the kind of liquidity restrictions that private credit needs, given the inability to easily trade in and out of the underlying loans.
“Between us, and the advisers who sell our products, I don’t think we made it clear enough,” he said.
In Blue Owl Credit Income Corp.’s shareholder letter, Packer and fund president Logan Nicholson stressed that “underlying credit fundamentals across our portfolio have remained resilient.”
They highlighted year-over-year revenue growth of 9% among the companies the fund lends to, while noting the vehicle’s 0.8 times net leverage ratio, $11.3 billion of liquidity and non-accrual rate of just 0.3%.
Net outflows for the quarter were $116 million, less than 1% of the fund’s net asset value, they added. Roughly 90% of clients didn’t tender their shares. Blue Owl, like peers, includes automatic reinvestment of dividend payments as part of its inflow calculation, in addition to any new investor money.
Whether any of it helps bolster investor confidence enough to stem the wave of withdrawals and, perhaps more importantly, lure fresh cash, remains to be seen, however.
Investors who were unable to exit earlier this year will be able to try again in the coming months, potentially rejoining the queue quarter after quarter until they are largely repaid.
Even without additional redemption requests, a 5% quarterly cap implies it could take up to two years to clear OTIC’s backlog. And any performance deterioration over the span could spur further withdrawals.
The pressure is also weighing on inflows, as investors may hesitate to commit capital to a vehicle prorating redemptions with little compensation for the liquidity risk. Concerns around software exposure and macro pressures may further deter new money.
It’s a “stress test” not of private credit so much as the BDC structure, John Cocke, deputy chief investment officer of credit at Corbin Capital Partners, said speaking about the industry broadly. If “outflows stay at 5% a quarter for the next year, how do you ultimately get inflows to start coming back in? It becomes an existential question of the vehicle.”
Some are more optimistic the asset class can rebound relatively quickly.
If withdrawal requests track those seen in similar markets, they should ease in the months ahead, according to Michael Covello, executive managing director at Robert A Stanger & Co.
“Now seems to be the peak of redemptions,” Covello said. “If Blue Owl continues to meet redemptions, and maintains their net asset value, they will weather the storm.
“They must have assumed at some point macro events would turn unfavorable to flows. I think if either changes then it becomes a different conversation.”
Written by: Olivia Fishlow — With assistance from Davide Scigliuzzo @Bloomberg
The post “Blue Owl Reels as Investors Who Fueled Its Growth Now Want Out” first appeared on Bloomberg
