Blue Owl Capital Shares Fall: Private Credit Faces AI Disruption Fears

Blue Owl’s Slide Below IPO Price Signals Broader Private Credit Concerns

Shares of Blue Owl Capital Inc. (NYSE: OWL) fell to a new low this week, trading below their initial public offering price of $10, as investor anxieties mount regarding the private credit sector. The decline, triggered by investor redemptions and fears surrounding exposure to software companies potentially disrupted by artificial intelligence, underscores a growing unease within the broader private capital landscape.

Blue Owl’s stock dipped as much as 9% to $9.73 on Tuesday before partially recovering, marking a roughly 50% decrease in value over the past year. This downturn isn’t isolated; it reflects a wider sell-off impacting private capital groups, particularly those with significant lending to companies vulnerable to the rapid advancements in AI. The Financial Times reported on the slide, noting it as part of a larger trend.

Retail Fund Restrictions and Capital Returns

Recent challenges for Blue Owl include the decision last month to permanently restrict cash withdrawals from its inaugural private retail debt fund. This reversal of plans to reopen redemptions this quarter is part of a strategy to return capital to investors. While the firm managed to sell approximately one-third of the fund’s assets near face value, the move highlighted the liquidity risks for individual investors who had invested in the vehicle.

The situation with Blue Owl’s retail credit fund, called Blue Owl Capital Corp II (OBDC II), previously led to a halted merger plan after reporting by the FT revealed potential immediate paper losses for investors. The fund now intends to prioritize quarterly returns of capital, replacing future tender offers, funded by earnings, repayments, asset sales, or strategic transactions.

Broader Outflows in Private Credit

Investor redemptions aren’t limited to Blue Owl. Funds managed by industry peers, including Blackstone Inc. (NYSE: BX), have also experienced increased outflows in recent months. Blackstone’s $82 billion private credit fund, Bcred, reported $1.7 billion in net outflows for the month ending March 2nd. This outflow contributed to a nearly 9% drop in Blackstone’s share price on Tuesday.

Apollo Global Management (NYSE: APO) and KKR & Co. Inc. (NYSE: KKR) also saw their shares decline, falling 6% and 4% respectively – steeper drops than the broader market. This sector-wide pressure suggests a systemic shift in investor sentiment towards private credit.

Apollo Warns of a “Shake-Out”

Apollo’s Chief Executive Marc Rowan cautioned of an impending “shake-out” in private markets, echoing previous statements about diverging performance among managers. Speaking at a Bloomberg conference, Rowan emphasized the importance of risk management, stating that concentrated exposure to a single industry facing technological disruption is a sign of poor risk assessment. “There’s always going to be underwriting mistakes,” Rowan said, “But the question is, who’s a excellent risk manager and who’s not a good risk manager?”

Troubled Loans and Dividend Cuts

Publicly traded private credit funds managed by KKR, Apollo, and BlackRock Inc. (NYSE: BLK) experienced declines last week after reporting rising troubled loans in their portfolios and being forced to reduce dividends to account for declining interest earnings and asset writedowns. This indicates a growing recognition of potential losses within these portfolios.

Mid-Sized Tech Loan Exposure

The industry’s turmoil has brought to light concerns about the value of loans made to mid-sized technology companies, often backed by private equity firms. Apollo estimates that such deals accounted for nearly a third of all private loans over the past decade and as much as 40% of total private equity dealmaking. This concentration of exposure creates a vulnerability to downturns in the tech sector and the impact of AI disruption.

The Role of AI Disruption

The underlying driver of much of this concern is the potential for AI to disrupt businesses, particularly in the software sector. Investors are reassessing the creditworthiness of companies that may face challenges adapting to or competing with AI-driven solutions. This reassessment is leading to increased scrutiny of private credit portfolios and a flight to safety.

What’s Next: Monitoring Fund Performance and Investor Sentiment

The coming months will be critical for the private credit sector. Investors will be closely monitoring the performance of funds, particularly those with significant exposure to vulnerable industries. Further redemptions could put additional pressure on asset managers, potentially leading to more asset sales and further declines in valuations. The situation is also likely to prompt increased regulatory scrutiny of the private credit market, focusing on liquidity risk and transparency. The editor of the Financial Times, Roula Khalaf, has recently been focused on the topic of AI disruption, as noted in a LinkedIn post.

the broader economic environment, including interest rate movements and overall economic growth, will play a significant role in shaping the outlook for private credit. A recession or further interest rate hikes could exacerbate the challenges facing the sector.

The recent volatility also highlights the importance of due diligence for investors considering allocations to private credit. Understanding the underlying assets, the manager’s risk management practices, and the potential for liquidity constraints are crucial considerations.

As Michael Nasser noted in Satstreet recently, broader economic and geopolitical factors are also contributing to uncertainty, but Bitcoin, unlike private credit, appears to be unaffected by these concerns.