Winner: Owl Rock, a division of Blue Owl
Owl Rock, a division of Blue Owl Capital, is recognised in this year’s SCI Middle Market CLO Awards for continuing to grow its platform and remaining an active issuer in challenging market conditions. For closing four MM CLOs during the awards period, three of which were issued after the Russian invasion of Ukraine, the firm has won the Issuer of the Year category.
The transactions comprise: a refinancing of Parliament Funding II in November 2021; a refinancing of Owl Rock CLO V in March; and Owl Rock CLO VII and VIII in June and September respectively. “CLOs are important in enabling us to finance our funds: they provide stable term financing, price attractively and tap into a differentiated investor base relative to our other sources of debt financing. We made a strategic decision to enter the CLO market early on, because we understood the value of the form of financing and recognised that it would take time to develop a brand and attract an investor base,” says Jerry DeVito, head of structured products and portfolio finance at the Owl Rock division of Blue Owl.
The firm has 11 MM CLOs outstanding, representing approximately US$5bn in total capitalisation as of issuance date, with a roster of over 60 CLO investors participating across the Owl Rock platform. Following its debut issuance in 2019, the firm now operates three CLO verticals: one has exposure to diversified direct lending, via the Owl Rock moniker; another has exposure to first lien/lower leveraged loans via the Parliament Funding moniker; and the other has exposure to technology/enterprise software loans via the Owl Rock Technology Finance Corp moniker.
Founded by Doug Ostrover (formerly of GSO), Marc Lipschultz (KKR) and Craig Packer (Goldman Sachs) in 2015, Owl Rock’s thesis is to target the upper middle market, which sits between the broadly syndicated and traditional middle market loan segments. “Historically, there has been less competition in the upper middle market space, due in part to the required scale to accommodate larger transactions. In order to be relevant to private equity clients, you need scale – in other words, a large capital base and plentiful access to financing,” confirms DeVito.
He continues: “For example, our first BDC – Owl Rock Capital Corporation – launched with US$5.5bn equity and is about 1x levered, which translates into US$11bn or more of investing power. Across Owl Rock Funds, we had approximately US$56bn of AUM, as of 30 June 2022.”
DeVito notes that the Covid-19 crisis marked the first real test for the Owl Rock CLO platform, with the firm still able to attract financing. “Our ability to navigate the current challenging market is supported by our track record and our transparency with investors regarding the underlying assets. Investors are being more selective and spending more time reviewing portfolios and performance, while gravitating towards the regular issuers. In this sense, we are helped by the nature of our portfolios: many investors accept our thesis that upper middle market companies tend to be less risky than traditional middle market firms.”
Although spreads have widened across the CLO market generally, there is still capital to deploy and significant demand for MM CLO paper, according to DeVito. “We’re sensitive to spreads, but we also recognise that if funding spreads have widened, our asset spreads are also likely to have widened. We want to minimise funding costs, but because we manage permanent capital and long-duration vehicles, we seek to maintain a certain level of leverage to generate an expected return,” he says.
He adds: “Consequently, we sometimes change up what we issue – sometimes only triple-A and double-A notes; sometimes deeper in the capital structure – depending on the cost of financing, financing alternatives available and the market environment at the time. We’re not trying to time the market and we believe our investors understand this.”
Looking ahead, Owl Rock expects to continue executing on its plan - which is to increase capital under management and provide relevant solutions for its clients. “Dislocation in public markets and banks slowing capital commitments to leveraged lending has provided more opportunities for us. We anticipate continuing to be a regular CLO issuer when the market is available and remain optimistic about the middle market CLO product. With a growing market and more regular issuance, more data and performance information is and will become available, which we believe will increase demand as a reliable way for investors to deploy capital – all of which provides the framework for investors to become more and more comfortable with the asset class,” observes DeVito.
He concludes: “The Owl Rock platform is not arbitrage-driven in the traditional CLO sense – we need access to the CLO market as a funding source; it’s not a stand-alone transaction based on relative market parameters at a point in time.”
For the full list of winners in this year’s SCI Middle Market CLO Awards click here.-