There’s no denying that narratives travel fast in financial markets.
After Blue Owl Capital sold US$1.4 billion of private credit loans last week, and announced redemption policy changes to its OBDC II private credit fund, the backlash was immediate. Economist Mohamed El Erian warned it could be a “canary in the coal mine,” and invoked the failure of two Bear Stearns credit funds in 2007.
CNBC described the move as a “quake” in private credit markets. Even U.S. Treasury Secretary Scott Bessent weighed in, calling the deal “concerning” because one of the buyers is a regulated insurance company.
A closer look reveals a more nuanced picture.
In a true liquidity crisis, managers are often forced to sell at depressed prices, or struggle to move assets at all. In this case, Blue Owl found buyers for a large block of loans at net asset value. It’s hard to reconcile that with a narrative of distressed selling or a market seizing up.
Furthermore, Blue Owl did not actually turn off the liquidity tap, as the headlines suggest. Instead, the firm effectively pulled forward the return of capital by selling assets and committing to distribute proceeds across the investor base. An important point here is that OBDC II is a closed-end vehicle, meaning a liquidity event would have to come sooner or later, and Blue Owl considers this to be the most efficient method given the circumstances.
Before last week’s announcement, Blue Owl ran tender offers for OBDC II, meaning investors had to indicate their interest in getting capital back, and the company would return capital to those investors up to a 5% aggregate limit. But now any redemptions will be distributed to all investors.
Blue Owl said it anticipates returning half of all capital back by the end of the year in OBDC II, including 30% with this transaction. Again, that’s a far cry from the liquidity freezes seen in other private market funds.
What the numbers actually say
Although some investors worry about excesses in private credit, Blue Owl’s results in the space have been solid. Its largest private credit fund, OCIC, has delivered annualized returns of 9.7% since its inception in 2021, well ahead of relevant benchmarks. Credit losses have also been well contained. The portfolio is in solid shape, with lower rates of non-accruals, a higher percentage of first-lien loans and less top-10 loan concentration than the peer average.
This is all in stark contrast to funds that have gated, in which spikes in redemptions have typically been caused by weak performance. This case also looks very different from some of the apocalyptic forecasts of private credit sceptics, or from the reckless lending that preceded the global financial crisis, which El Erian alluded to in his comments.
This story has plenty of nuance, but the main lesson is worth repeating for anyone considering private markets: these assets carry risks that are very different from those in stocks and bonds.
In this situation, solid performance and a stable investment portfolio are not enough to calm fears when the manager loses control of the narrative. And to state the obvious, investors who cannot tolerate illiquidity should avoid illiquid funds altogether.
Benjamin Sinclair is an investment advisor and associate portfolio manager at Designed Securities Ltd., His newsletter and podcast on private markets are at BeyondTheExchange.ca.