Private credit has recently often been described as "financial alchemy". The question arises as to whether this often opaque sector, which is becoming increasingly active in commercial real estate, is truly an illusion or an example of alternative capital allocations that can deliver magical returns to investors.
Blue Owl, a publicly traded private credit fund that has grown into a giant in both direct investing and non-bank lending and is emblematic of the financial impact of the private credit sector, was at a turning point earlier this year. After its share price had fallen by almost 50 percent in the previous year, from around $20 to below $10, the company's funds faced redemption requests totaling $5.4 billion from investors. This was due to fears that the software companies Blue Owl had lent to could be replaced by artificial intelligence. On 2 April, Blue Owl introduced a 5 percent redemption limit for its Blue Owl Technology Income Corp. (OTIC) and Blue Owl Credit Income Corp. (OCIC) funds.
This manifestation of a decline in investor confidence reflected the general market concerns surrounding private credit this year. The share prices of similar funds from industry giants such as Blackstone had fallen by 20 to 40 percent from the beginning of the year to early April. However, by June, the situation appeared to have changed. According to the first-quarter earnings report, Blue Owl managed to attract 80 institutional investors, including 33 new ones.
Record Fundraising and Diversification
Alan Kirshenbaum, Chief Financial Officer of Blue Owl, noted that institutions currently find credit attractive and some that had previously paused might now be returning. These new investments led to soaring fundraising figures – $9 billion in the first quarter, up from $6.7 billion in the previous year – driven by real estate and infrastructure investments. One of the funds that faced redemption pressure earlier in the year even managed to raise $500 million. In addition, Blue Owl recently opened an office in Abu Dhabi and is soliciting investments from Mexican pension funds. Andrew Williams, Head of Communications at Blue Owl, stated that investor demand for private markets is global and growing.
One reason why Blue Owl is considered an example of the potential dangers of private credit could be a mix of age and temperament. Formed from a massive merger, the company began trading under the ticker OWL in 2021, making it a relative newcomer among other private credit providers, less established and more risk-averse. Since then, it has acted aggressively and versatilely, pursuing the data centre boom and closing huge transactions. In the last four years alone, Blue Owl has quadrupled its assets under management to $315 billion and diversified significantly, even seeking a stake in the NBA's Cleveland Cavaliers. During the same earnings call in June, executives noted that Blue Owl has completed four data centre transactions of $10 billion each in the last 18 months alone and shows no signs of slowing down. Although Blue Owl is often criticised for its overinvestment in data centres, these assets only account for 6 percent of assets under management.
Opportunities in Real Estate and Transparency Concerns
Blue Owl sees increased opportunities in real estate, including cold chain logistics facilities and data centres. To date, the company has focused on net-lease and digital infrastructure assets, recently acquiring Sila Realty, a net-lease real estate trust specialising in the healthcare sector, for $2.4 billion in cash. Blue Owl views the decline in traditional bank financing and the high volume of maturing debt as an opportunity to provide lower leverage loans, achieve higher spreads and returns, and lend against assets at a discount to replacement cost. Andrew Williams emphasised a focus on mission-critical and well-structured assets in these sectors, often with strong sponsors and stable cash flows.
According to Marc Zahr, Co-President and Global Head of Real Assets at Blue Owl, the Sila transaction highlights the significant opportunities Blue Owl sees in the healthcare sector, as spending growth outpaces US GDP. These are properties with high tenant creditworthiness, mission-critical use, and therefore a value that extends beyond individual tenants. Data centres, viewed by some as the long-lasting and necessary infrastructure of the future and by others as physical manifestations of a hype bubble about to burst, underscore Blue Owl's conviction to aggressively invest in what it considers critical infrastructure.
Nevertheless, Blue Owl's growth and the associated fears of some analysts and investors have raised broader questions regarding disclosure and transparency in the private credit market. Shlomo Chopp, Managing Partner of Case Equity Partners, stated that a much larger issue was at play, which people ignored in the concept of private credit. He questioned who the actual end lender was, who, although receiving general disclosures, did not know what they were actually investing in.
