Big names, small fees: how Owl Rock gets LPs into a BDC

While it’s unusual for pension funds to invest in business development companies, Owl Rock has been raking in large cheques from these investors thanks to the strong reputation of its founders and unusually low fees.  

Owl Rock Capital Partners, the private debt firm founded by Doug Ostrover (pictured) and Marc Lipschultz, has been scoring large mandates from traditional LPs into its private business development company.

Pension investors often shun BDCs as a retail product because of the vehicle’s recent trading woes, although Owl Rock has been successful given the reputation of its founders and unusually low fees.

The $71.9 billion New Jersey Division of Investment decided to place $600 million with the manager at a meeting this week, citing the founders’ experience and strong economics as reasons for investing. Ostrover is the former co-founder of Blackstone-owned GSO, while Marc Lipschultz is KKR’s former head of energy and infrastructure. The performance of various GSO funds that Ostrover was involved with are listed in Owl Rock’s track record. Since launching in February, the duo have hired many senior people from Goldman Sachs, CPPIB and TPG among other firms.

 “Given the pedigree and experience of its founders, Owl Rock expects most of its investments will be directly originated, with the investment team responsible for underwriting, executing and managing the assets of the firm,” said a memo on the investment from Chris McDonough, New Jersey’s director of investments.

The pension’s investment was split into $400 million for the Owl Rock Capital Corporation BDC and $200 million in co-investments. The fees on the BDC are a 75 basis point management fee and no carry. (BDC’s normally charge fees akin to private equity funds, with management fees between 1 and 2 percent and performance fees in the teens or up to 20 percent.) The co-investment account carries no management or performance fees.

McDonough’s memo said the investment had attractive economics. “The fund is offering initial reduced fee structure, which will increase only upon a public listing for the fund,” he said. “In addition, the division will receive an interest in Owl Rock Capital Holdings, which will allow the division to participate in economics related to the US middle-market lending business in exchange for paying certain management expenses. The total amount of initial fees and expenses, including the expenses related to the revenue share, represent a significant discount from typical fund fees.”

Owl Rock also scored a $150 million investment into its BDC from the Oregon Investment Council in May. The firm won commitments from hedge fund honcho George Soros, the family office of Michael Dell, the Alibaba Group Holdings co-founder Joseph Tsai as well as Brown University, according to Bloomberg.

New Jersey is no stranger to investing in BDCs. The Garden State pension fund invested in TPG Specialty Lending (TSLX) when that vehicle was private and remained one of its largest backers after the BDC went public in 2014.

New Jersey also invested $300 million in TCW’s direct lending fund in January 2015, initially raised as a private closed-end fund but with the option of converting into a BDC if investors approve it at the end of the fund’s term.

Industry experts say that if a BDC’s stock performs well when a non-traded BDC goes public, investors can benefit from two return streams: the stock’s gains and performance on the underlying lending portfolio.

New York-based Owl Rock is aiming to raise between $3 billion and $5 billion including leverage, according to New Jersey’s documents. The fund is primarily focused on floating-rate senior-secured first lien loans, investing in subordinated loans and mezzanine to a lesser extent. It targets an 8-10 percent coupon and companies with EBITDA between $10 million to $250 million.