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Blue Owl has called off a merger between two of its private credit funds after a Financial Times article outlined how the move risked inflicting steep losses on investors in one of the vehicles.
The planned merger came against a backdrop of rising scrutiny of the risks that retail investors have taken in pouring hundreds of billions of dollars into private debt funds carrying limited liquidity rights.
The private credit group with almost $300bn in assets told investors on Wednesday it was abandoning a merger between its Blue Owl Capital Corporation II fund, one of the earliest private credit funds for individual investors, and its far larger publicly traded credit fund OBDC.
The announcement comes days after the FT reported how investors in Blue Owl Capital Corporation II were being asked to exchange their investments for holdings in OBDC at the stated net asset value of both funds.
However, OBDC trades at a 20 per cent discount to its NAV on public markets, meaning the wealthy individual investors in Blue Owl Capital Corporation II stood to see the value of their holdings drop by about a fifth.
New York-based Blue Owl said on Wednesday that it would “re-evaluate alternatives in the future” for Blue Owl Capital Corporation II.
It added that the abandonment of the merger reflected the commitment of the funds’ boards “to acting in the best interests of shareholders”, and was “based on management’s recommendation due to current market conditions”.
Had the merger gone ahead, investors in Blue Owl Capital Corporation II would have been unable to sell their holdings prior to the deal being completed, the FT previously reported.
Blue Owl said on Wednesday it would keep the fund closed to redemptions until the end of 2025, but would allow investors to pull their money from the first quarter of next year.
How investors respond to both the fund’s merger proposal and its abrupt change of course will show whether thousands of wealthy individual investors and their financial advisers have fully appreciated the risks of private debt funds.
Wealthy individuals have flocked to private funds over the past decade, helping lay the groundwork for the industry to open up further to retirees.
Blue Owl’s decision to merge its private credit funds came as redemption rates in Blue Owl Capital Corporation II had climbed to a level where the fund would have eventually been forced to limit investors’ ability to exit.
Private debt funds such as Blue Owl Capital Corporation II can limit investor withdrawals to reduce the risk that they could be forced to sell assets at fire-sale prices to meet redemption requests.
Private loans, while often higher yielding than corporate and government bonds, do not trade frequently, making so-called gates an important way for funds to manage their liquidity.
Redemptions at Blue Owl Capital Corporation II had grown significantly in recent months to a point where the fund risked having outsized positions in some loans, making restrictions on redemptions a rising likelihood.
The $1bn fund has received $150mn in redemption requests so far this year, an increase of 20 per cent on a year ago. Investors pulled $60mn in the third quarter alone.
Blue Owl previously said it believed its decision to merge the two funds was a strong outcome for investors and better than other options such as a public listing or winding down Blue Owl Capital Corporation II.
On Wednesday Craig Packer, co-president of Blue Owl, said the two funds “remain strong . . . and we are confident in our ability to deliver attractive returns independently” while the firm decided on the “best future opportunities”.
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