Activist hedge funds circle Blue Owl as private credit’s software jitters grow

Published Mon, Feb 23 20268:33 AM ESTUpdated Tue, Feb 24 20263:15 AM EST

Key Points

Boaz Weinstein's Saba Capital, along with Cox Capital, wants to buy stakes in three Blue Owl credit vehicles.
Shares in Blue Owl tumbled last week after the private debt specialist appeared to tighten the liquidity terms in its retail-focused debt fund.
Concerns over a liquidity squeeze and software exposure risk creating a "perfect storm", according to investors.

Activist hedge fund Saba Capital Management is preparing to swoop down on three Blue Owl Capital private credit funds, two of which recently offloaded some $1 billion of loan assets, as fears grow over software valuations and a broader liquidity squeeze in private markets. Private credit manager Blue Owl's share price has fallen sharply in recent days amid growing concerns over a liquidity crunch in its debt vehicles. The firm has overhauled the liquidity terms in one of its funds, Blue Owl Capital Corporation II, restricting investors' ability to withdraw their money. Now, Boaz Weinstein's Saba Capital, along with Cox Capital Partners, has launched a tender offer to buy stakes in the non-traded funds at a 20-35% discount to the reported net asset value (NAV). Saba and Cox said in an announcement Friday that they had notified Blue Owl of their intent to commence a tender offer to buy a portion of Blue Owl Capital Corporation II fund — also known as OBDC II — shares in cash. They also plan to launch similar tender offers for two other Blue Owl funds — the tech-focused Blue Owl Technology Income Corp (OTIC) and the Blue Owl Credit Income Corp (OCIC). OWL 5D mountain Blue Owl Capital. OBDC II, a business development company aimed at U.S. retail investors, recently offloaded $600 million in loans, amounting to some 34% of its $1.7 billion portfolio. Meanwhile, the OTIC fund sold $400 million in loan assets, representing 6% of its portfolio. Saba and Cox said the tender offers would "provide a liquidity solution to retail investors in the wake of a significant industry-wide increase in BDC redemption requests, multiple quarters of net outflows and a rise in redemption gate provisions." 'Ebbs and flows' Blue Owl said last week it is ending regular quarterly liquidity payments to OBDC II's investors, switching instead to periodic payouts funded by asset sales, earnings, repayments and other deals. The move, which more tightly restricts investors' ability to withdraw their money, sent Blue Owl shares sharply lower last week. "The thing about liquidity in these situations is that it's highly valuable," said Orlando Gemes, founding partner and chief investment officer at Fourier Asset Management. "[Weinstein] is offering liquidity that may not be found elsewhere or that may not be available later." Saba Capital specializes in relative value and capital structure arbitrage opportunities in credit markets. NAV discounts in closed-end funds and investment trusts has become a cornerstone trade for Weinstein's $6 billion activist hedge fund, often with the aim of shaking up boards to help maximize returns. Speaking with CNBC's "Squawk On The Street" on Friday, Craig Packer, Blue Owl's co-president and head of credit, said the firm was not trapping investors, adding the OBDC II is moving to return capital on an accelerated basis, "and the investors are going to get their money back pro rata." "The industry will have ebbs and flows," Packer said. "We think the outlook is quite attractive for the wealth space." Blue Owl is a major direct lender to the software sector, and Saba's intervention comes amid growing scrutiny over broader risks in private credit , and the sector's links to the troubled software space. Of the 128 portfolio companies spanning 27 industries in Blue Owl's recent portfolio sales, internet software and services was the biggest single industry represented, totaling 13%. Publicly traded software-as-a-service companies have been rattled lately amid fears that new agentic AI tools could disrupt the SaaS sector. 'A perfect storm' Now those concerns appear to be spreading into the privately held software space , creating what some investors call "a perfect storm." Private credit's exposure to software companies stands at about $226 billion, according to analysis by Voya Investment Management, which said software is now the "most levered sector in all of core and upper middle market direct lending." "We've been worried about private credit for years," said Al Cattermole, fixed income portfolio manager at Mirabaud Asset Management, pointing to the challenges around transparency and disclosure coupled with concentration risk in deals in a rapidly growing asset class. "But we're also now worried about software, and that suddenly the software-as-a-service business model that has been levered up is at risk. Then it turns out that the largest lender to SaaS is private credit. That then brings together the perfect storm, and this is where there's a higher chance of pain." Any losses within software portfolios would dent appetite among private credit lenders to extend new credit to software or tech-related companies, Cattermole told CNBC in an interview. "So the concern is now that software tips over private credit, you see a lot of these cockroaches come out, you then see big losses at the big private credit firms, and that withdraws liquidity from the market," Cattermole said. Gemes added: "In providing liquidity against an illiquid asset, when enough people want to redeem then there's a problem. So you think you need to sell assets rather than having capital returned as loans mature, and these structures were not built for that. This is exactly the same issue that we experienced in the financial crisis."