By Stephen Gandel
Getting harder-to-sell assets into mom-and-pop investment portfolios turned out to be the easy part. It’s getting them out that’s difficult.
Non-traded private credit funds marketed to rich individuals have ballooned into a $300 billion pool of money. Now, those small-fry savers are rushing for the exits and bumping into quarterly withdrawal limits. The exodus has led to opportunistic offers to buy them out immediately, at a discount. Managers have cause to push back, but some investors might benefit if others take the money.
The issue is valuation. Shares of non-traded business development companies, or BDCs, are priced according to the value of their loans. Add them up and adjust for expected losses and leverage to find net asset value. This figure also sets the withdrawal limit: typically, investors cannot pull more than 5% of NAV per quarter.
Blue Owl Capital NYSE:OWL said on Thursday that its flagship BDC, Blue Owl Credit Income, received $3.6 billion of redemption requests in the last three months, or 19% of NAV. It's less than the 22% in the first quarter, but still well above the cap. Funds managed by Apollo Global Management and Blackstone, among others, have similarly prorated withdrawals.
Sustained withdrawals could force fire-sales of assets that erode a fund’s value before all investors can exit. At least that's the cautionary note from research published in a recent National Bureau of Economic Research working paper.
The risk is that investors begin treating this as inevitable, essentially valuing their shares at a discount and demanding their money no matter what. Tender offers from third parties looking to buy them out at an actual discount, as hedge fund Saba Capital has done, might seem particularly dangerous. Widespread acceptance would just seal a fund’s reputation.
Yet if redemption requests at Blue Owl have peaked, investors might be fully paid within three quarters. Conversely, a full wind-down could stretch on for years. Assuming a three-year wait and discounting future redemption proceeds at the fund’s roughly 9% yield suggests investors might accept about $0.77 on the dollar to exit immediately. Any concerns about underlying loan values would move the figure lower.
If the most eager investors to leave cash out, the exit queue should shrink, and with it the implicit discount those who remain should accept. Managers might reasonably bristle, especially if their claims to have invested wisely pan out: healthy loans should throw off repayments that make everyone whole. For patient investors, however, a bit of opportunism might not be so bad.
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CONTEXT NEWS
On July 2, Blue Owl Capital reported that investors asked to withdraw funds equivalent to 19% of net asset value from Blue Owl Credit Income, a non-traded business development company, in the most recent quarter. The firm will limit redemptions to 5%.