Private Credit Under Pressure: Activist Investor Swoops In as Liquidity Concerns Mount
A wave of anxiety is sweeping through the private credit market, as evidenced by activist investor Boaz Weinstein’s Saba Capital, alongside Cox Capital Partners, launching a tender offer for stakes in three Blue Owl Capital funds. This move comes amid growing fears of a liquidity squeeze and potential valuation issues, particularly within the software sector. The situation highlights a critical juncture for an asset class that has experienced rapid growth in recent years.
Blue Owl Targeted: What’s Happening?
Saba and Cox are offering to buy stakes in Blue Owl Capital Corporation II (OBDC II), Blue Owl Technology Income Corp (OTIC), and Blue Owl Credit Income Corp (OCIC) at a discount of 20-35% to their net asset value (NAV). This aggressive move signals a lack of confidence in the current valuations and a bet that these funds may face further downward pressure. Blue Owl has already restricted investor withdrawals from OBDC II, opting instead for periodic payouts funded by asset sales.
OBDC II recently offloaded $600 million in loans, representing 34% of its $1.7 billion portfolio, while OTIC sold $400 million, or 6% of its holdings. These sales underscore the challenges faced by private credit funds in maintaining liquidity as investors seek to redeem their investments.
The Software Sector: A Key Vulnerability
The concerns surrounding Blue Owl are inextricably linked to the health of the software industry. Private credit has significant exposure to software companies – approximately $226 billion, according to Voya Investment Management – and fears are mounting that the rise of artificial intelligence could disrupt the software-as-a-service (SaaS) business model. This potential disruption could lead to loan defaults and losses for private credit lenders.
Some investors are describing the current situation as a “perfect storm,” where concerns about software valuations combine with a broader liquidity squeeze in private markets. This confluence of factors is creating a challenging environment for private credit funds and their investors.
Liquidity Concerns and the Rise of Redemption Gates
The industry is grappling with a surge in redemption requests, coupled with an increase in “redemption gate provisions” – clauses that limit investors’ ability to withdraw their money. Blue Owl’s decision to restrict withdrawals from OBDC II is a prime example of this trend. The lack of liquidity in these funds is forcing managers to sell assets, potentially at unfavorable prices, to meet redemption demands.
As Orlando Gemes, founding partner and chief investment officer at Fourier Asset Management, noted, “The thing about liquidity in these situations is that it’s highly valuable.” Weinstein’s offer provides a potential exit for investors who are unable or unwilling to wait for Blue Owl to return capital.
What Does This Mean for the Future of Private Credit?
The situation at Blue Owl is likely to have ripple effects throughout the private credit market. It could lead to increased scrutiny of valuations, tighter lending standards, and a greater emphasis on liquidity management. The industry may also observe a rise in activist investor involvement, as funds like Saba Capital seek to capitalize on distressed opportunities.
Craig Packer, Blue Owl’s co-president and head of credit, maintains that the firm is not “trapping investors” and is working to return capital on an accelerated basis. Though, the market’s reaction suggests that investors remain skeptical.
Al Cattermole, fixed income portfolio manager at Mirabaud Asset Management, highlighted the broader risks within private credit, pointing to challenges around transparency and concentration risk. He warned that losses in software portfolios could further erode appetite for lending to the sector.
FAQ
Q: What is private credit?
A: Private credit refers to loans made to companies by non-bank lenders, such as private equity firms and hedge funds.
Q: What is a BDC?
A: A BDC, or business development company, is a type of investment fund that invests in private credit.
Q: What is a redemption gate?
A: A redemption gate is a clause in a fund’s offering documents that limits investors’ ability to withdraw their money.
Q: Why is the software sector a concern for private credit?
A: Notice fears that new AI tools could disrupt the software industry, leading to loan defaults and losses for private credit lenders.
Q: What is net asset value (NAV)?
A: NAV represents the value of a fund’s assets minus its liabilities, divided by the number of outstanding shares.
Did you know? The private credit market has grown significantly in recent years, becoming an increasingly vital source of funding for companies.
Pro Tip: Investors in private credit funds should carefully consider the liquidity terms and potential risks before investing.
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