Blue Owl's Big Fund Merge: What's Next?

Blue Owl Capital Reconsiders Fund Merger Plan

Background

• Blue Owl Capital is re-evaluating a plan to merge two of its private credit funds.
• The initial plan was halted last week due to investor discontent.
• The primary goals of the merger are to provide shareholders with an exit and reduce costs.

Details of the Merger

• The merger would involve OBDC (the larger fund) and Blue Owl Capital Corporation II.
• Condition for Merger: The share price of OBDC must improve.
• Currently, OBDC is trading at a discount, potentially leading to a 20% loss for investors.
• Blue Owl aims to avoid this loss if possible.

Investor Concerns

• Investors have been worried about credit due to recent high-profile bankruptcies.
• Despite the rapid growth of private credit, the industry is facing increased scrutiny.
• Blue Owl wants to complete the merger before OBDC II's liquidity event, expected by late 2026 or 2027.
• This event would cash out investors, executives, and employees.

Alternative Options

• Blue Owl's co-president, Craig Packer, mentioned considering all options, including:
• Listing the fund
• Selling the assets
• However, the merger is not currently being pursued due to current market conditions.
• Blue Owl still believes in the benefits of merging the two funds.

Private Credit Industry Overview

• The private credit industry has been booming, with non-bank lenders making big corporate loans.
• Blue Owl's ability to bring its funds to a liquidity event is crucial for future demand for such investments.
• As of September 30:
• Blue Owl Capital Corporation II:
• 190 companies in its portfolio.
• $1.7 billion in investments.
• OBDC:
• 238 companies in its portfolio.
• $17.1 billion in investments.

Industry Precedents

• Mergers between funds are common in the private credit industry.
• Examples:
• 2023: Carlyle's publicly-traded credit fund acquired the firm's private Secured Lending III fund.
• 2019: Goldman Sachs merged its publicly-traded BDC with its privately-held Middle Market Lending Corp.