Wall Street wants retail investors to embrace private assets, such as stakes in buyout funds or corporate loan vehicles usually off-limits to regular folk. But if mainstream savers want to join the boom in so-called alternative investment, they’ll have to brave the brawls that come with it.
Blue Owl, a US-based private capital firm, just took a bruising in such a skirmish. On Wednesday it cancelled a planned merger between two affiliates that lend to middle-market companies. One of these “business development companies” is publicly traded; the other is private, so its investors have more limited opportunities to sell their holdings.
While now dead, the merger deserves study. Here is how it worked: investors in the unlisted company would have received shares in the listed one. Measured in terms of fund assets, the swap was a wash: an owner of $1 of what sits in the unlisted bucket would still hold a claim on $1 of stuff in the enlarged, listed counterpart.
The catch was that the listed company’s shares were trading in the market at a 20 per cent discount to their net asset value. So in return for getting access to an investment they could sell whenever they liked, Blue Owl’s clients were taking a pretty sharp haircut if they wanted to sell immediately. Predictably, they cried foul.
While that’s the simplified version of events, the deal actually came with some pretty complex engineering. Had the acquiring publicly traded BDC been trading at a premium to its net assets, the exchange would be calibrated based on its share price, not the — lower — net asset value. In return for their $1 of assets they would get paper they could sell into the market also for $1, but representing a claim on stuff worth less than that.
Confusing? Welcome to private markets. Complexity, conflicts and the so-called agency problem are a feature of investments that are minutely structured and lack the traditional disclosures of public assets. Yet understandably, managers such as Blue Owl are keen to get a greater share of a mountain of $9tn in US retirement money.
Future dust-ups are inevitable. Share prices of public BDCs are slipping because of concerns over credit quality and movements in interest rates. Private funds don’t have the same real-time price signals, but investors who are permitted to request their money back at par have an incentive to do so if they think the fair value of their investment might be sliding. Blue Owl’s vehicle was already facing heavy redemption pressure.
True, it deserves some credit for trying. Bankers and lawyers had negotiated on behalf of the private BDC; a “fairness opinion” had been issued indicating the deal was done on reasonable terms. But it looks like Blue Owl simply failed to read the room. The lesson perhaps, and one retail investors should keep in mind before they hand over those retirement dollars, is that when private meets public, feathers can easily be ruffled.
