NAV later, or cash now at a discount

Blue Owl Capital Corp. traded at $11.21 a share on Tuesday, 22.2% below the $14.41 net asset value it reported at the end of March. The gap is the public market's price on a business development company. The nontraded private credit funds that have become a staple of advisor platforms offer a different arithmetic: redemptions of up to 5% of outstanding shares per quarter, with cash coming from the fund rather than another buyer.

Those redemption windows have been busy. InvestmentNews reports that investors and advisors pulled billions of dollars out of private credit funds and nontraded BDCs over the past year, selling their shares back to the sponsors. The redemption feature was a standard part of the pitch while product sales exploded. The outflows have not stopped the payouts, which still run 9% and up depending on the vehicle.

Two worries set off the selling. High-profile bankruptcies spooked investors, and so did the fear that advances in artificial intelligence will wipe out private software companies whose loans sit in these portfolios. The market's scoreboard for the year that ended Monday: the S&P BDC Index down 21.4%, the S&P 500 up 22.3%.

Hedge funds are circling the space. Saba Capital, alongside Cox Capital, launched a tender offer in March to buy 6.9% of the shares in one of Blue Owl's nontraded private credit funds at a steep discount. A tender offer is the secondary market's answer to the redemption queue: cash now, no waiting, but the price is whatever the buyer demands.

Mark Goldberg, a former senior brokerage and alternatives executive who founded Alternative Investments Markets Intelligence, told InvestmentNews it would be ill-advised for many investors to sell at the moment, though those with an immediate need for liquidity are in a different boat. He added that there is a reason hedge funds are trying to buy these funds in the secondary market. The report doesn't specify what it is. The tender terms make the trade-off concrete: the fund's own books carry one value; the buyer paying cash now charges a steep discount.

The 5% cap does what it was designed to do. Total quarterly redemptions are limited to that level, so when many investors are pulling cash, a full exit for any one holder can stretch across multiple quarters. A tender buyer moves now and takes the discount. The two prices are not the same kind of number: one is the fund's valuation, the other is what a buyer will pay to skip the wait.

Blue Owl Capital Corp. releases second-quarter earnings on Thursday. The number will be read against the 22.2% discount. If the marks hold, the discount is the cost of impatience. If they fall, the secondary market was pricing the next markdown in advance. The tender buyers are not waiting to find out.