Jim Cramer on Blue Owl Capital: "Things Just Seem to Be Getting Worse Here, Not Better"

Blue Owl Capital Inc. (NYSE:OWL) is one of the stocks that was on Jim Cramer’s radar recently. Cramer discussed the company’s changing strategies, as he stated:

… Starting last year, one of Blue Owl’s oldest BDCs, a private one called Blue Owl Capital Corp II, ran into trouble. These things typically have gating rules about how much of the fund can be withdrawn in any given quarter. For Blue Owl Capital II, it’s a 5% limit on redemptions, and they hit that limit in both the second and third quarter. Now that is worrisome. Then, in November, Blue Owl came up with a solution for the redemption problem. They plan to merge Blue Owl Capital II with one of their publicly traded BDCs, Blue Owl Capital Corp, so investors who wanted out could simply sell their shares in the open market. But, and this is a big but, enough for this Sir Mix-a-Lot seal of approval, they also are going to ban redemptions from Blue Owl Capital II until the merger’s closed. Worse, the publicly traded BDC, Blue Owl Capital Corp was already trading at roughly 20% discount to its net asset value, what the company says the investments are worth.

So shareholders who are trapped in Blue Owl Capital II, they’ll have to take a 20% haircut if they want their money back as soon as possible. Oh man. That went over like a lead balloon. And Blue Owl scrapped the whole plan a couple of weeks later, saying that they’d circled back with a new plan. Last week, we finally saw that new plan, and once again, it raised some eyebrows. Blue Owl announced that it sold $1.4 billion worth of assets from three different BDCs at 99.7% at par value, meaning nearly full price. At the same time, though, they changed the way they’re handling redemptions. Blue Owl Capital II, the BDC where many investors want out, it’s returning 30% of its capital to all investors, even the ones who want to stick with it, and suspending all other redemptions.

… The really worrisome thing here is that Blue Owl got nearly full price for the assets it sold, even though many of these assets came from publicly traded BDCs that are selling for huge discounts to their net asset value. There were some accusations of cherry-picking, dumping their highest quality holdings to raise cash, and leaving shareholders stuck with the worst stuff. Management denies this, okay, unequivocally denies it. Wall Street’s not buying it, though… Now, on Friday morning, Blue Owl’s co-president Craig Packer came on Squawk on the Street. You know what? I thought he did an admirable job explaining the point of view. Shareholders clearly disagreed. Blue Owl, the parent company stock dropped nearly 7% on Friday and another 3.4% today. The stocks say something’s wrong here… Wall Street simply doesn’t believe their holdings are worth what Blue Owl says they’re worth. It’s just a kind of a mismatch here. Now, I’m not trying to pick on Blue Owl. I went through all this because we keep hearing that it might be the canary in the private equity and private credit coal mine.

I don’t like that hackneyed phrase, but I see why people are concerned… The bottom line is that things just seem to be getting worse here, not better. And if any of these BDCs start blowing up, there’s going to be a lot of negative pin action, and that will not be good. Blue Owl’s a case study because it seems like the most vulnerable. It really is the canary in the coal mine. But for the moment, the canary is still breathing, even if it’s not exactly healthy. The situation seems fraught, and Mad Money viewers know I am a seller, not a buyer of fraught situations.

Blue Owl Capital Inc. (NYSE:OWL) provides alternative asset management and private financing solutions, including direct lending, credit products, and real estate investments.

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