Devon Drew of AssetLink thinks advisors at many leading RIAs and broker-dealers are likely having some uncomfortable talks with clients about a private credit fund that put a halt last week to investment withdrawals.
According to data from regulatory filings compiled by AssetLink, Beacon Pointe Advisors, Osaic, LPL Financial, Cresset and Cetera all have heavy exposure to alternative asset manager Blue Owl Capital's OBDC II private credit fund. Blue Owl sent
Drew, the founder and CEO of AssetLink, said the announcement will no doubt make for some uncomfortable conversations for advisors who had recommended the OBDC II fund as a "semi-liquid" investment. Semi-liquid funds are designed to answer one of the most common criticisms of alternative investments like private credit — that they give investors too little ability to retrieve their money — while also offering the sometimes greater returns of private markets.
All that has been brought into question by Blue Owl's decision to halt withdrawals, Drew said.
"The message, really, to advisors is: If you can't get your clients money out when they ask, the asset isn't semi-liquid, right?" he said. "It's a lock box with a high fee."
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Big exposure for Beacon Pointe, Osaic, LPL, others
Drew's numbers on RIAs' and brokerages' exposure to Blue Owl's OBDC II were culled from Form 13F submissions large institutions make to the Securities and Exchange Commission to report their investment holdings. His data, from filings made between Feb. 17 and 20, show that the biggest holder of OBDC II shares is Beacon Pointe Advisors.
Beacon Pointe, an RIA acquirer based in Newport Beach, California, with more than $60 billion in assets under advisement, holds more than 2.4 million shares of the OBDC II fund. Closely following Beacon Pointe are the independent broker-deal giants Osaic, with more than 1.85 million shares, and LPL Financial, with more than 1.6 million shares.
One of the firms Drew noted — the Nashville-based financial services firm Wiley Bros.-Aintree Capital — loaded up on shares of the OBDC II fund just before redemptions were halted. It increased its allocation by a whopping 343%, to 310,000 shares. By contrast, Corient (formerly CI Private Wealth) made the "smart money" move, selling 140,000 shares in the OBDC II fund just a day before the redemption window closed.
Drew said advisors who recommended the OBDC II fund don't necessarily have a problem on their hands, especially if they were careful to tell clients that they could lose their ability to pull money out once a quarter. His fear, he said, is that many advisors touted the benefits of the fund while not taking time to explain the risks with illiquidity.
"If you said, 'Hey, this is what we call semi-liquid, but on any given day it may not be semi-liquid' … if it's positioned that way, it's all well and good," Drew said. "But if you said, 'Hey, you're going to depend on this for quarterly liquidity, that's where I think there could be some problems, some interesting conversations."
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IHT Capital: Semi-liquidity is more a 'feature than a bug'
Most of the firms appearing on Drew's list did not respond to requests for comment. Cetera, with 590,000 shares in OBDC II, said in a statement that it takes advisors' training and the suitability of their investment recommendations seriously and closely monitors private credit markets.
"Specific to Blue Owl's OBDC II fund, it was offered via a prospectus outlining the share repurchase program, including limitations on liquidity; the prospectus also includes risk factors related to the limited liquidity," Cetera said.
Meanwhile, the chief investment officer of another firm that made Drew's list said he views the semi-liquidity of the OBDC II fund as more of a "feature than a bug." Yussef Gheriani of IHT Wealth Management — which has 110,000 shares in OBDC II — said Blue Owl's decision to cut off withdrawals very likely avoided a "fire sale" situation.
Without that halt to redemptions, Blue Owl could very well have been forced to sell all the assets in its OBDC II portfolio at a fraction of their book value to meet investor demand. The results would have been truly disastrous.
"We definitely believe in Blue Owl's ability to offer returns," Gheriani said. "Even more important, and regardless of whether or not they will return well into the future, the situation would be worse if they could not control redemptions from the fund. If their hand was being forced, there is almost no doubt there would be negative outcomes."
He said IHT always makes disclosures about the liquidity and other aspects of any investment it presents to clients. The firm and its roughly 150 advisors take pains to explain to investors in a clear way, and those conversations are documented and preserved.
"We all know investors can have selective memory and that what sounded like a reasonable exchange of liquidity for excess return two years ago may all of a sudden not seem like as attractive a deal," he said.
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The perils and promise of private credit
Blue Owl's decision with the OBDC II fund was significant not only for its investors but also what it could mean for the broader private credit market. Private credit funds — estimated to hold $1.8 trillion globally — are used to provide loans to businesses outside the regular banking system.
Proponents of private credit say that outsider status allows lenders to take risks and use their money in ways not allowed by bank regulators. But critics warn that the opaque nature of the private credit markets conceals dangers that are too often not perceived by retail investors.
The vulnerability of Blue Owl's OBDC II fund stems in large part from its heavy investments in software makers. Giants like Salesforce, Intuit and Atlassian have all seen their share prices plummet this past week amid fears that AI firms like Anthropic would soon offer products that could render once-essential software systems obsolete.
When Blue Owl announced last week that it was halting quarterly withdrawals from OBDC II, it also said it was selling $1.4 billion in loans from that fund and two others at 99.7% of their book value. Roughly 13% of those loans were to firms in the software industry.
The money raised will be used to pay to investors 30% of the OBDC II's fund's value at the end of last year.
"Instead of resuming a 5% a quarter tender, where only tendering investors get a small portion of their capital back, we are returning six times as much capital and returning it to all shareholders over the next 45 days," Blue Owl has said in a statement.
Stephan questioned if OBDC II even merits the name of "semi-liquid." He said the fund is part of an older generation designed to sell their assets by a certain date and use the proceeds to pay back investors.
Blue Owl had tried to carry out such a sale last year by merging OBDC II with another one of its funds, but it backed off after finding the transaction would have resulted in large paper losses. Stephan noted that the OBDC II fund was created in 2017 — a time when investors were willing to trade liquidity for returns substantially higher than those offered by the ultralow rates then paid on bonds and other fixed-income investments.
Many private credit funds have since been structured in a way that's far more deserving of the "semi-liquid" designation, Stephan said. Rather than relying on a sale of assets to compensate investors, many now use payments from borrowers and other consistent sources of income to provide quarterly or even monthly payouts, he said.
Stephan said he thinks the industry has already taken steps on its own to mitigate many of the anxieties prompted by Blue Owl's decisions to halt withdrawals from one particular fund.
"It's a legacy vehicle, right?" he said. "This is an old structure and not really a modern structure of the private credit funds in the market today. So this is just a transition period that's being navigated."
At the same time, Stephan said he understands concerns that some clients may have been overpromised "semi-liquidity." Stephan said most retail investors get into private credits with the
"It comes back to education and communications from the manager or the fund sponsor really being able to provide full transparency throughout the life cycle of these funds," Stephan said. "And I think that's, frankly, where some have struggled."
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How other private credit funds could give advisors similar concerns
For many, the question now turns to whether other large private credit managers suffer harm from the same concerns that hit Blue Owl last week. On Wednesday, analysts at UBS said defaults within private credit
Blue Owl is far from the only asset manager with heavy lending exposure to software makers. Shares in Ares Management, Blackstone and Apollo Global Management all also fell in response to last week's news.
Drew at AssetLink said he also has concerns that large asset managers that decide to sell large parts of their private credit portfolios to meet investor demand, like Blue Owl did, will take their best holdings to market first. Such cherry picking, if it does take place, raises serious questions for advisors whose clients remain invested after such a sale has taken place.
"Advisors really need to ask: What's left in this bucket?" he said. "I think that's where the concern is. Because if you sell your best assets to pay off the loudest investors or the biggest investors, the 70% of clients who stay behind are now holding a portfolio that's structurally riskier and more concentrated in the very sectors like software that are currently under fire."
