Once Down, Blue Owl Finds Its Wings Again

Private credit has often been described recently as “financial alchemy.” 

The question is whether the often opaque sector, increasingly active in commercial real estate, is truly smoke and mirrors, or an example of alternative capital allocations that can lead to magic returns for investors. 

Blue Owl, a publicly traded private credit fund that’s become a behemoth in both the direct investment and non-bank lender space and a symbol of the private credit sector’s financial impact, faced an inflection point earlier this year that seemed to suggest an answer. 

After its stock had dropped by nearly 50 percent over the previous year, from hovering around $20 to under $10, the company’s funds faced $5.4 billion in redemption requests from investors, driven by fears the software firms it had lent to would be replaced by artificial intelligence. Blue Owl instituted a 5 percent redemption limit on its Blue Owl Technology Income Corp. (OTIC) and Blue Owl Credit Income Corp. (OCIC) funds on April 2. 

That manifestation of a drop in investor confidence mirrored the general market anxiety felt around private credit this year. The share price of similar funds from megaplayers across the industry, like Blackstone, had dropped between 20 and 40 percent from the start of the year through early April.

But by June, the story seemed to have changed. 

Blue Owl drew in 80 institutional investors, including 33 new ones, according to its first-quarter fundraising call. As Chief Financial Officer Alan Kirshenbaum said, “I think institutions are actually seeing that this is an appealing time to look at credit. In fact, some who perhaps had paused credit might be very well coming back.”

Those new investors drove skyrocketing fundraising figures — $9 billion in the first quarter, up from $6.7 billion a year ago — fueled by real estate and infrastructure investments. One of the funds that faced redemption pressure earlier in the year even raised $500 million, and Blue Owl even recently opened an office in Abu Dhabi and has been courting Mexican pension investments. “Investor demand for private markets is global and growing,” said Andrew Williams, Blue Owl’s head of communications.

Part of the reason Blue Owl has been labeled a poster child for the potential dangers of private credit is perhaps due to a mix of age and temperament. Formed from a massive merger, it started trading under the OWL ticker in 2021, making it a relative owlet amid other private credit lenders, less set in its ways and more willing to bet big. It’s been aggressive and multifaceted since then, chasing the data center craze and building out gargantuan deals.  

In the last four years alone, Blue Owl has quadrupled assets under management to $315 billion and diversified substantially, even seeking out a stake in the NBA’s Cleveland Cavaliers.

During that same earnings call in June, execs noted Blue Owl has done four $10 billion-plus data center deals in the last 18 months alone, and shows no signs of stopping. While Blue Owl is often criticized for overindulging in data centers, these investments represent just 6 percent of AUM. Worries about software bets rose at the same time others believed the firm had gone in too deep on data centers. In effect, Blue Owl was placing massive bets on the AI future and the AI bubble.

So why the big narrative shift? 

“We think the disconnect is primarily driven by headlinedriven narratives versus actual realized credit outcomes,” said Williams. “Public markets tend to reprice quickly based on sentiment, liquidity dynamics or isolated events, while private credit is fundamentally underwritten with a longer-term, hold-to-maturity mindset.”

But beyond that assurance of long-term performance, the growth of Blue Owl  — and the anxieties that growth has given to some analysts and investors — has raised larger questions about disclosures and transparency in the private credit market, according to Shlomo Chopp, managing partner of Case Equity Partners. “I think there’s a much larger issue at play over here that people just ignore with this concept of private credit, right?” Chopp said. “Who’s the actual ultimate beneficial creditor? He gets high-level disclosures, but he doesn’t know what he’s actually investing in. ”

Blue Owl sees increased opportunity in real estate, including cold-storage distribution facilities and data centers. It’s been focused on net-lease and digital infrastructure plays so far, and recently made a $2.4 billion all-cash acquisition of Sila Realty, a net-lease real estate trust focused on the health care sector.  Blue Owl sees the pullback in traditional bank lending and the large volume of maturing debt as an opportunity to originate at lower leverage levels, achieve higher spreads and yields, and lend against assets at a discount to replacement cost.

“We are especially focused on mission-critical and well-structured assets across these sectors, often with strong sponsorship and durable cash flows,” Williams said. 

The Sila transaction exemplifies the significant opportunities Blue Owl sees in the health care sector, according to Marc Zahr, Blue Owl’s co-president and global head of real assets, with spending growth outpacing U.S. GDP. These are properties with high tenant credit quality, mission-critical use, and therefore value beyond any single tenant.

Data centers — which some see as the durable and necessary infrastructure of the future, and others view as the physical manifestations of a hype bubble about to burst — emphasize Blue Owl’s belief in aggressively investing in what it views as crucial infrastructure. Blue Owl has chased data center deals from all angles, functioning as capital partners across the entire life cycle: They can lend on a data center, finance it, and build and operate it. 

Alliance for Affordable Energy Executive Director Logan Burke, who has campaigned against data center expansion, said Blue Owl exemplifies the way private credit and its opaque nature can take massive bets on this sector — one defined by huge amounts and long-term uncertainty — in ways that banks can’t. While some investors may see this as an upside, Burke said it’s leading to unsustainable and environmentally damaging expansion.

“Blue Owl really seems to be going out on a limb here,” Burke said. “They do seem to be leading in these risky kinds of bets.”

In Louisiana, Blue Owl’s funding has supported the development of data centers for Meta and the gas turbines for the utility Entergy that will power them, giving Blue Owl expanded exposure and risk. Another AI skeptic, Ed Zitron, called Blue Owl the “loosest lender in the universe,” and highlighted a Michigan deal that fell apart, as the Financial Times reported, due to a push for stricter debt and financing terms. 

Blue Owl argues that it isn’t overtly concentrated in the sector. First, its net-lease strategy is diversified across sectors, and second, they argue that they focus on financing development of pre-leased facilities primarily to investment-grade tenants, with investments often targeting current yield and strict criteria including triple-net leases and minimum cap rates.

“We continue to see a significant and sustained runway in data center infrastructure,” said Williams. “The level of activity speaks to the depth of demand from hyperscalers and the trust they place in our platform to deliver at scale.”

According to Chopp, Blue Owl’s play is intimately tied to market performance — better performance helps investments pay off interest. But the performance gets too good, that brings back more banks into more risky lending which might push them to lower rates on future deals.  He said he believes Blue Owl has been unfairly singled out amid its peers, and represents not an outlier, but just the latest iteration of private credit, for better or worse.

“The reality is, it’s not like they’re giving away money at rates and leverage that no other lender is doing, right?” said Chopp. “It’s not like private credit is something that someone came up with two hours ago. It’s been around forever.”

Some believe the funds have been undervalued, and others see the lack of disclosures as long-term risk. The market’s reaction has been tempered. While positive news from earnings and fee-related income sent the stock up in May and June, with some arguing that, with doomsday results prices in, it only had room to go up, the stock price is now hovering around its early April nadir.