Saba Capital’s Bid for Blue Owl Funds Signals Rising Stress in Private Credit
Boaz Weinstein’s Saba Capital has made an offer to purchase shares in three Blue Owl funds at discounts of up to 35% below net asset value, a move that underscores growing anxieties within the $2 trillion private credit market. The offer comes as Blue Owl seeks to reassure investors following the halting of redemptions in its Blue Owl Capital Corporation II fund (OBDC II).
A ‘White Knight’ or Predatory Move?
Saba’s tender offer allows investors to exit the funds, albeit at a loss. This action is being viewed with caution by industry participants, with some labeling it as potentially predatory, especially given the significant discounts offered. Such tenders can likewise erode confidence in a fund’s reported net asset value.
Blue Owl’s Response and Recent Actions
Blue Owl has been actively attempting to shore up confidence. Earlier this week, the firm announced the sale of $1.4 billion in loans from three of its funds, including OBDC II, to return capital to investors and reduce leverage. The loans were sold at 99.7% of their stated value, which Blue Owl presented as evidence of portfolio strength.
Craig Packer, Blue Owl’s co-president, defended the company’s actions, stating that the loan sales were an “attractive” way to accelerate capital returns. Though, Blue Owl’s shares have fallen over 10% since the redemption halt was announced, and are down 28% year-to-date.
Wider Implications for Private Credit
The situation at Blue Owl reflects broader challenges facing the private credit industry. Rising redemptions and limited liquidity are creating a difficult environment for business development companies (BDCs) and interval funds – vehicles that often lend to riskier mid-sized companies. Saba partner Kieran Goodwin recently warned that increased redemptions could force firms to sell assets at depressed prices, potentially triggering a downward spiral.
Boaz Weinstein’s Track Record
Boaz Weinstein, founder of Saba Capital, has a history of capitalizing on market dislocations. He gained prominence in 2012 by successfully betting against a large credit derivatives position at JPMorgan Chase. Saba is known for both making bets on credit market imbalances and launching activist campaigns against closed-end funds.
The Impact of AI on Private Credit
Beyond liquidity concerns, the private credit industry is also grappling with the potential impact of artificial intelligence. Investors and analysts are questioning the future of software companies that have received substantial lending from private credit groups, as advancements in AI threaten their business models.
What’s Next for Private Credit?
The current turbulence suggests a period of increased scrutiny and potential consolidation within the private credit sector. Expect to observe:
- Increased Regulation: Regulators may step up oversight of private credit funds to address liquidity and transparency concerns.
- Greater Investor Caution: Investors are likely to become more selective about where they allocate capital, favoring firms with strong balance sheets and robust risk management practices.
- More Restructuring Activity: Distressed companies may seek restructuring deals as borrowing costs rise and economic conditions become more challenging.
FAQ
What is a tender offer? A tender offer is a public offer to buy shares of a company or fund, typically at a premium or discount to the current market price.
What is net asset value (NAV)? NAV represents the per-share value of a fund’s assets minus its liabilities.
What are business development companies (BDCs)? BDCs are companies that invest in small and mid-sized businesses, often providing debt financing.
What is an interval fund? An interval fund is a type of closed-end fund that offers periodic repurchase opportunities to investors.
Is private credit a risky investment? Private credit can offer attractive returns, but it also carries risks, including illiquidity, credit risk, and interest rate risk.
Did you know? Boaz Weinstein previously made a significant profit by betting against the “London Whale” at JPMorgan Chase in 2012.
Pro Tip: Diversification is key when investing in private credit. Don’t set all your eggs in one basket.
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