Covenant Lite #45: Blue Owl's Failed Merger and Cracks in Non-Traded BDCs
A case of poor timing or something bigger?
PRIVATE BDC’s are going [to] get MASS REDEMPTIONS unless PUBLIC BDC’s prices rebound quickly
PUBLIC BDC’s are trading at a median 20+% discount to NAV. But PRIVATE BDCs are “promised” quarterly liquidity at NAV ..
SUBJECT TO A 5% GATE .. no biggie BREIT gated in ‘22— Kieran Goodwin, Partner & PM at Saba Capital Management (@kieranwgoodwin, Oct. 10, 2025)
For most of the last decade, it didn’t matter if public BDCs traded 10–20% below NAV. A discount might indicate negative sentiment towards private credit. Maybe a view that defaults were likely to tick higher in coming quarters. But the ripple effects were limited: it would make it harder for the fund manager to raise capital (since they would be doing so at a discount) but that was it.
With the rise of the non-traded (or private) BDC, things have become more complicated. Non-traded BDCs don’t have a floating price like public BDCs; instead, they offer quarterly liquidity at NAV.
When public BDCs trade meaningfully below their reported marks, and private BDCs simultaneously offer quarterly liquidity at par, the gap becomes a live arbitrage. The more public discounts widen, the more private investors are incentivized to redeem.
The arb is especially apparent in cases where a fund manager manages both a public BDC and a non-traded BDC with nearly identical portfolios. In such cases, widening discounts on the public side can spell a death sentence for the private BDC. Such is the position that Blue Owl faced in November when its public BDC traded to a 20% discount and redemption pressure began to build on its non-traded BDC.
What Happened
Blue Owl manages one of the largest multi-vehicle BDC complexes in the market. It includes a total of five BDCs, two public (OBDC and OTF) and three private / non-traded (OBDC II, OCIC, and OTIC).
OBDC II is Blue Owl’s legacy non-traded BDC, launched before the wealth-channel boom and built on a traditional tender-offer framework rather than the standardized 5%-per-quarter semi-liquid model used by today’s flagship products. For most of its life, redemptions were steady, modest, and easily met. But by mid-2025, as public BDC prices started to slip, this started to change.
Through the first nine months of 2025, OBDC II investors submitted roughly $150 million in withdrawal requests, up roughly 20% year-over-year and equivalent to nearly 15% of NAV on a cumulative basis. In the third quarter alone, investors requested roughly 6% of the fund.
While high, these redemptions weren’t catastrophic. As of late 2025, tenders were still being met in full. The portfolio remained diversified and largely performing. But the direction of travel was worrying: this was the first time OBDC II’s liquidity program was consistently operating near the functional limit of semi-liquid design (~5% quarterly liquidity).
For OBDC II investors, the arb was fairly obvious. Why not sell the non-traded BDC at 100% of NAV and then redeploy that money into the public BDC at 80% of NAV (a 20% discount)? Especially since the position overlap between OBDC II and its public cousin, OBDC, was 98%.
Faced with rising tenders and a legacy vehicle that no longer fit its scaled wealth strategy, Blue Owl made what appeared to be the rational decision: consolidate OBDC II into the public OBDC. This way, they could clean up a legacy vehicle and offer liquidity to OBDC II investors who wanted out.
The Proposed Merger
Blue Owl announced on November 5, 2025 that OBDC and OBDC II had entered into a definitive merger agreement.
The firm pointed out that the two vehicles pursued the same strategy, were managed by the same team, and held nearly identical portfolios.
OBDC II had always been a smaller, older wrapper sitting alongside Blue Owl’s true flagship wealth vehicle, OCIC. From a product-architecture standpoint, consolidating the two made a lot of sense. The move would eliminate redundancy, simplify client messaging, and create a single scaled vehicle with roughly $18–19 billion in assets.
Blue Owl tried to make the merger as simple as possible, proposing a 1-for-1 exchange of OBDC II shares into OBDC stock, based on NAV—with an expected closing in early 2026.
There was only one problem: if OBDC II investors accepted the merger, they would instantly crystallize a 20% loss based on where OBDC was trading in the market.
Under the proposed 1-for-1 structure, OBDC II investors would trade $1 of NAV in the private vehicle for $1 of NAV in the public vehicle. However, the public vehicle traded at a 20% discount to NAV, so that $1 would only be worth 80c once converted—even though nothing had changed in the underlying loans.
In addition, OBDC II investors would be unable to redeem their shares until after the merger had closed. Investors who might otherwise have redeemed at NAV were now locked in and forced to wait for a conversion into a discounted public vehicle.
The merger was reported on extensively by the Financial Times, Reuters, Bloomberg and Barron’s in the days following the announcement. And it prompted an investor (mostly wealth advisor) backlash.
What troubled investors wasn’t just the haircut, it was why the haircut was happening. Non-traded BDCs had been marketed as stable-NAV income vehicles that avoided public-market volatility. Now, without any deterioration in credit performance, investors were being told that structure alone would erase a fifth of their value.
RIA managers and wirehouse analysts began raising three concerns:
Fiduciary optics: How could they justify clients taking a 20% hit unrelated to credit fundamentals?
Precedent risk: If a manager could unilaterally merge a non-traded BDC into a discounted public vehicle, what did that imply about other semi-liquid funds across the industry?
Process and communication: Many felt blindsided by the freeze in redemptions and timing of the announcement, which came at a moment of elevated public-BDC discounts.
In short, the advisor community rejected the merger before shareholders ever had a chance to vote. What began as a rational internal consolidation became, externally, an unacceptable breach of the wealth channel’s implicit social contract: NAV should move because credit moves—not because of corporate plumbing.
That advisor-led pushback, more than anything else, set the stage for Blue Owl’s retreat.
On November 19, 2025, Blue Owl announced the termination of the merger agreement between OBDC and OBDC II, citing “current market volatility” and “best interests of shareholders”.
Aftermath and What it Means
Blue Owl’s retreat ended the immediate controversy, but it did not resolve the underlying tension that sparked it.
The reversal confirmed that the advisor community (wirehouses, private banks, and large RIAs) has become the de facto governance layer for non-traded BDCs. These platforms expect NAV stability to reflect credit fundamentals, not corporate structuring. When a merger forces investors to realize public-market discounts they had been told were irrelevant, advisors will simply refuse to distribute the product. That refusal is now powerful enough to unwind a signed, fully negotiated transaction.
The episode also highlighted a structural flaw in the semi-liquid design. NAV-based redemptions cannot coexist indefinitely with public-market discounts of 15–25% on identical portfolios. As long as that divergence persists (and as long as managers operate public and private vehicles side by side) the arb will remain. Over time, investors will redeem at 100% NAV in the private vehicle and repurchase the same assets at 80% in the public one. A few quarters of that behavior is manageable. A sustained period is not.
The failed merger underscores a harder truth for private credit: public BDCs are now the price-setters for the asset class. Their discounts, fair or not, dictate what private investors believe their holdings are truly worth.
This is unlikely to be the last episode of its kind. Other platforms run both public and private BDCs with meaningful overlap. Others have legacy wrappers with tender-offer mechanics designed for a different rate environment. And most wealth-channel allocators now understand that stable private marks are not a permanent buffer against volatility.
Blue Owl’s reversal solved the problem for OBDC II. It did not solve the problem for the category.
The next manager to confront this mismatch may not be able to walk away from the merger. And the next advisor community may not be as forgiving. It remains to be seen how forgiving they will be with Blue Owl. OWL is down ~11% since the merger announcement.
Covenant Lite
Great breakdown, thank you.
The de facto admission by Blue Owl that the market price was the more accurate determinant of value rather than their own reported marks is the most damaging aspect of this fiasco.