Blue Owl leader bets private credit will survive a 'SaaSpocalypse'

• Blue Owl has been the face of private credit's redemption rush and software fears.
• The firm is confident that lending rather than buying software companies is the right strategy.
• It is still working to reduce its software exposure, but expects lending fears to be overblown.

Fears of a looming software crisis in the age of generative AI have driven private credit's stint in the headlines.

But while everyone is focused on a redemption rush in private credit, Blue Owl said the real concerns lie in equity portfolios during its first-quarter earnings call.

"Today, by and large, the question at hand is really an equity question, not a debt question," Marc Lipschultz, co-CEO of Blue Owl, said. Blue Owl doesn't have a private equity arm heavily invested in software, but it is a major lender to software companies.

That's by design, said Lipschultz, meaning that the firm's job is to focus on due diligence and underwriting. It also means they're likely to achieve better results than equity investors when some companies inevitably fail as AI shakes up the economy.

As debt investors, they are paid first in the event of default, while equity investors are less likely to be repaid. Lenders can sometimes even take the keys from a struggling company, giving them another chance to squeeze returns out of it.

Blue Owl's retail-oriented investment vehicles have seen a wave of investors asking for their money back, including a record $5.4 billion of requests in the first quarter. They've become the poster child of broader private credit concerns, and their stock, as of end of trading yesterday, was trading down more than 50% year over year.

Blue Owl's stock price is up nearly 10% today on their earnings results, which highlighted continued institutional fundraising strength with $6.1 billion in inflows in the quarter and a credit portfolio that isn't seeing high rates of non-payment.

"Headlines are pretty different from the underpinning facts," Lipschultz said, and the firm's internal indicators on its portfolio companies suggest continued success in the near future.

"You don't go from a healthy company to, gee, I have a tremendous problem," Lipschultz said. "We have huge visibility on that."

Lipschultz expects there to be winners and losers across the whole economy generally, and in software specifically, because of AI.

That being said, the firm is looking to reduce the size of its software bet.

"It's safe to say, as today, we are working down our exposure to software, given the level of uncertainty," Lipschultz said. "We'll all know a lot more in a few years."

Lending vs owning

On the call with analysts, Lipschultz got into the differences between lending and owning.

The upside from a company's growth and profitability is for equity holders. On the debt side, it's about companies getting into "more substantial trouble," like a default, said Lipschultz.

"Credit is not intended, never expected to be a flawless exercise," Lipschultz said. "We've had defaults before. We'll have defaults in the future."

The "key" is to minimize defaults and maximize recoveries, he said, citing the firm's average 80 cents on a dollar average principal recovery, which can rise to a total recovery of 110 or 120 cents on a dollar when you factor interest payments on the firm's loans.

Things could get worse than that, and there may be software defaults in the future, he said. But the large checks that equity investors are writing will likely lead them to inject additional equity into businesses rather than turn them over to lenders.

Blue Owl, and lenders like it, will have to work with their private equity counterparts to decide how to handle the "more contentious" companies, Lipschultz said. That will lead to some losses, but these losses won't be limited to private credit; they will also affect public credit, high yield, and equity, he said.

With software equities in a "downward direction," loan-to-value, an indicator of the amount of debt companies are taking on compared to equity value, has ticked up in Blue Owl's portfolio to the "low 40s."

But that's still a lot of "cushion," and for now, the firm's "job is to be prepared and ready," he said.