Analysis-Blue Owl’s teachable moment for investors and asset managers chasing yield and ‘hot money’

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By Isla Binnie

NEW YORK, Dec 1 (Reuters) – Blue Owl’s turnabout decisions in the last two weeks – to merge, and then not merge, and then maybe merge two of its private credit funds at a later time – offer a cautionary lesson for retail investors in search of higher yields and the asset managers chasing the billions in “hot money” wealthy individuals bring. 

The New York-based asset manager withdrew a proposal last month to merge a $1.7 billion non-public fund for retail investors with a $17 billion publicly traded fund for institutional and retail clients after news of the deal helped send Blue Owl’s shares down more than 10% in less than two weeks. The retail investors, who had to vote on the plan, were spooked by two things: it could have forced them to take a 20% loss at current prices and Blue Owl paused redemptions until early next year.

“The wild ride of Blue Owl Capital Corporation II schooled the firm and holds lessons for would-be semi-liquid fund investors,” Morningstar analysts wrote in a Nov. 21 research note.

THE RESTRICTIONS OF SEMI-LIQUID FUNDS

Investors were upset by the potential loss and the fact they wouldn’t be able to access their money before the merger closed, one Blue Owl investor said on condition of anonymity.

Blue Owl co-president Craig Packer told Reuters the fund had met all its obligations to investors requesting quarterly redemptions, and was seeing flows into its other funds for wealthy individuals.

“We have done extra calls to make sure folks understand how their funds are performing. And many do want to understand what’s going on with this fund,” he said in an interview.

Packer said the reason for not offering to buy any more this year was that this is standard procedure before a merger. Blue Owl plans to start offering to buy shares again in early 2026.

Andrew Graham, a managing partner at San Francisco investment advisor Jackson Square Capital, said retail investors needed to look carefully at the terms of these investments and don’t always realize how restrictive the withdrawal rules are.

“These are illiquid assets and there’s no ready market for them. There’s no free lunch. They light the building on fire and then lock the doors and you’re inside. So if this is a call to arms for retail clients to look more closely at this, I think that’s a positive takeaway,” said Graham, who does not hold positions in Blue Owl, talking about semi-liquid funds generally.

While non-traded equity and debt can deliver higher returns, they can also carry a higher risk of losses and can’t be cashed out quickly like most stocks or mutual funds. 

“The reason that private credit can advertise more yield is because they’re providing you more credit risk … it’s more concentrated investments in riskier companies. Now that doesn’t sound like a trade that should be in a liquid fund,” said Robert Cohen, director of global developed credit at DoubleLine, a bond-focused investment firm managing $90 billion in assets, referring to private credit in general. 

Blue Owl’s proposal touched a nerve in credit markets already rattled in recent months due to a few high-profile bankruptcies that have undermined confidence in private credit. Also, some in the market fret that expectations of interest rate cuts by the Federal Reserve could reduce the appeal of private credit investments, one of whose main selling points is their juicy yields. 

‘THAT HOT MONEY’

The turmoil comes as the U.S. government looks to expand access to private markets for retail investors. Consumers currently have about $1.15 trillion tied up in private assets in the United States and Europe, and that’s estimated to grow to $6.2 trillion by 2030, according to Deloitte.

Morningstar analyst Jack Shannon said retail investors were more likely to try to take money out when market conditions were poor, meaning there could be liquidity crunches to come in private funds. Investors in the smaller, non-traded Blue Owl fund redeemed $60 million in shares in September, about $10 million more than the fund originally offered to buy, an SEC filing showed. The difference widened from the previous quarter when investors requested $53.8 million in withdrawals on an offer to repurchase $50 million, a securities filing showed. 

“Inviting that hot money invites the potential for this to happen,” Shannon said, referring to retail investors looking to redeem when market conditions are bad. “Asset managers are very eager to grow these (retail) funds as much as they can.” 

(Reporting by Isla Binnie, additional reporting by Davide Barbuscia, Editing by Dawn Kopecki and Anna Driver)