Blue Owl will reduce private credit exposure to software

By Isla Binnie

NEW YORK, May 7 (Reuters) – Blue Owl’s biggest publicly traded private credit fund will look to reduce its exposure to software, the fund’s chief executive said, as uncertainty about the impact of artificial intelligence on the sector roils valuations.

The share of software assets in Blue Owl Capital Corp declined to 16% from 19% in the first quarter of the year, Craig Packer told analysts on a conference call on Thursday. 

This happened “naturally” as borrowers repaid loans, Packer said. “We’re going to continue to be, I think, very cautious in software, and as we get repayments probably look to continue to take that down,” he added.

Private equity and credit firms invested heavily in enterprise software companies during and after the COVID-19 pandemic. Investors have since become increasingly ⁠nervous about the high valuations assigned to some of those assets.

A smaller Blue Owl fund that was set up to focus on software, Blue Owl Technology Finance Corp, will continue to do so, but the “threshold for new investments has never been higher,” that fund’s president, Erik Bissonnette, said on a separate call.

“As we evaluate opportunities against a rapidly evolving AI landscape, we are increasingly selective, continuing to pass on legacy models,” Bissonnette said.

TOUGH ENVIRONMENT

Blue Owl has faced particular scrutiny as private credit came under an uncomfortable spotlight. Its stock has started to recover from lows hit in March and April but is still trading 30% lower on the year. 

OBDC marked down the value of its assets by 2.7% to $14.41 per share in the first quarter and cut its dividend to 31 cents per share from 36 cents per share. OTF cut its valuation by 4.8% to $16.49 per share.

Volatility in the publicly traded loan market has put pressure on the value of assets in the funds, the executives said.

Packer said it had been tougher to deliver earnings due to reductions in both rates and risk premiums, but said borrower performance was stable and he expected more demand for direct lending.

OBDC and OTF bought back a combined $85 million of their own stock in the first quarter.

OBDC’s shares were down 2.4% on the day and down 7.7% so far this year. OTF’s shares were down 5.5% on the day and down around 23.5% on the year.

(Reporting by Isla Binnie in New York; Editing by Chizu Nomiyama and Matthew Lewis)