That’s Not an Owl, That’s a Canary!
Blue Owl is doing a great job of attracting attention. First they proposed a merger that didn’t make sense from an investor perspective (but certainly did to Blue Owl management), then they called the merger off due to investor backlash and resulting in shareholder lawsuits. Then they gated fund redemptions, before doing a 180 and opening the gate a bit wider. Now the latest and perhaps most damaging news, they are halting redemptions permanently on their first retail fund, Blue Owl Capital Corp II. So investors won’t be able to withdraw funds on a quarterly basis on their own terms: instead BOCCII has elected to sell about 30% of its loan portfolio, and will sell down the remaining assets and distribute the proceeds to investors through non-mandatory quarterly distributions of capital, the amount of which is at the discretion of Blue Owl.
Some observers are trying to find positives in this story, such as that Blue Owl was able to sell those loans at 99.7% of carrying value (which leaves the question, what was the carrying value, and how was it established?), and that they don’t have an abnormal level of exposure to the now-unpopular software sector, about 13% of the remaining portfolio.
But this is trying to put lipstick on the wrong end of a pig. There is a basic maxim in any kind of open market: if you think the value of something is going to go up, you buy it. If you think the value of something is going to go down, you sell. And Blue Owl is only selling, and avoiding any responsibility to buy units back from its clients. I don’t think you can get any more fundamental than those facts. Canary, meet coalmine.
Given what I’ve written in previous posts, you can call me a Cassandra. The Blue Owl loans are not the same as the NINJA mortgages that “supported” so much MBS in 2008. However there still has been a decline in underwriting quality as everyone wants to be in the private credit game, just as how everyone wanted to issue CDOs pre-GFC, and the actions of Apollo and Blackrock don’t foster confidence.
Combined with a macro and geopolitical scene that is, scientifically speaking, fucked up and only getting worse, the most critical risk I see in the credit markets is the specter of everyone getting spooked at once and rushing to cash out. When that happens, there is no liquidity, no pricing, and no market. Blue Owl emphatically saying that they are shorting private credit is a big step to that spooking scenario. On top of this, the policy makers in the largest credit and rates market in the world have no experience, and are more interested in their own wealth than the collective wealth of their citizens. They couldn’t organize a party in a brewery, let alone a bailout, so all credit managers will be running “Evergreen" funds, whether they like it or not. Cue the continuation vehicles!