Blue Owl Scraps Merger of Private Credit Funds After Selloff

Bloomberg

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00:00Blue Owl, who are they? Where are they in the investment world, private markets, private credit

00:04world? And what's the significance of the news today? So it's a good question. We talk a lot

00:10about Blue Owl and Blue Owl loves to make a lot of headlines. So it is important to reorient our

00:15listeners as to what is Blue Owl and who are they? It was formed as a venture. It was a tie-up,

00:20a merger between Owl Rock and Dial. Owl Rock invested in a lot of middle market companies,

00:25say companies in the $50 to $200 million EBITDA range. They need loans. Regional banks were

00:31pulling back. They didn't necessarily have the capital easily available to them. So if there

00:35were people willing to step up and say, we're ready to do the due diligence, we're ready to do the

00:39credit work and lend to these companies, Owl Rock discovered there was a market for it. And Dial was

00:44a company that was investing in secondary stakes for a lot of these private capital firms. When you

00:50merged the two, you had the formation of Blue Owl, which in the last four years, since the merger,

00:56in the last four years has become sort of a proxy for the private credit market. Because as the demand

01:02for such players has grown, as their capital has become far more important, and as they've been

01:08flexing their muscle, Blue Owl is certainly at the forefront of it. And the people behind Blue Owl,

01:13you have veterans from Goldman Sachs, Craig Packer, Lipschulz from KKR, you have Doug Ostrover from,

01:21you know, erstwhile GSO slash Blackstone. So these are really smart people. So when we think about the

01:27private credit market, and try and get a sense of how it's doing, we look at players like Blue Owl,

01:33they have truly positioned themselves as the leaders in that space.

01:36Well, speaking of mergers, that brings us to what happened earlier this week, and why we saw shares

01:40declined. On Monday, there was set to be a merger between two of its private credit funds. Now it

01:46has called that merger off. Why in the first place would Blue Owl want to combine two of its private

01:51credit funds? And look, it's just such a self-inflicted wound. And, you know, truly, this

01:56isn't something extraordinary or something that never happens. A lot of their non-listed vehicles,

02:01this was a private vehicle for a lot of high net worth individuals, to gain exposure into private

02:06credit markets. Eventually, as a means of getting liquidity, you either take that vehicle and take

02:11it public, so that people can trade in and out of it, or over the life cycle of that fund, after its

02:17defined life ends, you just wind it down, you get the principal back, you've been paying out the

02:22interest as dividends to your shareholders. And when you get the principal back, you could wind down

02:27the fund. Now, Craig Packer was talking about it this morning, as to when the idea was originally

02:32seeded. This private vehicle, OBDC-II, that we're talking about, for high net worth individuals,

02:38and the public vehicle, the much larger public vehicle that does exist, OBDC, they had a lot

02:44of overlap. And pretty much these funds had almost identical holding, something like 98% overlap.

02:50And when they initially thought about this merger, the public vehicle was actually trading very close

02:55to its book value. So it wouldn't have mattered a whole lot. The board would have easily approved it,

03:00the shareholders would have easily approved it. But the timing, the decision to announce this just

03:06a few weeks back, couldn't have been worse. Because you are suddenly telling investors in an

03:11unlisted vehicle who could trade in and out of that on a quarterly basis, right at book value,

03:17and Blue Owl had been honoring all those redemption requests all this time,

03:22that they now move into a publicly traded vehicle, which was trading at a 20% discount. So when the FT

03:29initially reported about this, they were absolutely right. On day one, you have a 20% paper loss,

03:35and no one's going to like that. And that was the problem. And it comes at a time, and we talked

03:40about the Jamie Dimon cockroach comments. Remember the loudest critic of Jamie Dimon right after that

03:45comment? It was Blue Owl. It was Lipshaw talking to our very own Danny Berger. And even without

03:52Danny mentioning Jamie Dimon, he took a swing at the big bank saying that the next problems in private

03:57credit, next problems in the credit market are not going to be in the private credit firms,

04:01it is going to be at the banks. So with those headlines, yeah, in the near pass, and what's

04:07happened now, it's not a good look, it is a bit of a black eye.

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