Owl Rock targets $5bn on diversified lending strategy, offers GP stakes

New Jersey will make its third investment in an Owl Rock vehicle, which will include its third stake in the firm.

Owl Rock Capital Partners is raising a new fund and the accompanying business development company (BDC), targeting $5 billion in total. The focus of the new strategy is diversified lending, and the firm is once again offering some LPs stakes in the firm, Buyouts has learned.

The new fund comes with a 1 percent management fee, according to documents from New Jersey Division of Investment. New Jersey will commit $150 million to that fund and also take a stake in Owl Rock Diversified Holdings LLC, a separate entity being set up concurrently with the fund.

Since New Jersey is also taking a GP equity stake, it will get charged a 10 percent carry on that stake until June 30, 2025 but no carry on the fund itself. After that, the 10 percent carry is dropped from the GP stake and picked up by the fund interest. The stake itself can go on in perpetuity. The fund and GP stake both have a 6 percent preferred return.

“There’s no real peers in the marketplace that are offering [GP stakes],” head of private equity and private credit Jared Speicher told the New Jersey State Investment Council. “To get that at sort of standard market terms we think is a very good opportunity.”

Speicher said the target returns for the commitment itself are between 8 and 12 percent net internal rate of return, but that the GP stake could add 500 to 600 basis points of incremental returns on top of that. Of the 8-12 percent return, 7-9 percent of that could come from income.

This is the third Owl Rock fund the $75 billion New Jersey pension has committed to, as well as the third stake it has taken with the GP. Its previous commitments total $500 million. It has also done $200 million in co-investments with the firm.

Speicher said New Jersey’s 2016 stake in Owl Rock, which accompanied a $400 million commitment, as Buyouts reported, added about 800 basis points to its investment returns and the fund had received $9 million in dividends.

The fund will invest in “directly originated, senior secured loans to upper middle market companies owned by private equity sponsors,” according to the New Jersey memo. Businesses will be mostly US-based, generating between $50 million and $2.5 billion in annual revenue and $10 million and $250 million of annual EBITDA.

“Financing is expected to be used to fund leveraged buyouts, add-on acquisitions, liquidity, refinancings, and restructurings,” the New Jersey document said, and will be comprised mostly of first lien senior secured loans.

Rhode Island State Treasury has committed $50 million to the fund and taken a stake as well, according to the minutes from its June meeting.

A memo from Cliffwater, Rhode Island’s consultant, says target loans will be between $20 million and $250 million and that the fund will make at least 100 loans with investment sizes ranging between 1 percent and 2 percent, with a maximum position size of 5 percent. It will hold most of them between two and four years.

Oregon Investment Council also committed $150 million to the fund, staff confirmed to Buyouts. It was not clear if it was offered a stake.

Owl Rock’s history

The New Jersey documents listed performance data for two previous Owl Rock funds and their accompanying GP stakes as of the end of 2019.

Owl Rock Capital Corporation, the firm’s debut vehicle, was a 2016 vintage with a 19.3 percent net IRR and 1.3x net multiple of invested capital. “ORTF/ORTH,” a technology-based fund that raised $5.5 billion, as Buyouts reported, was a 2018 vintage with a 42.1 percent net IRR and 1.4x net multiple.

Owl Rock was founded in 2016 by Doug Ostrover, one of the founders of GSO, which was later acquired by Blackstone, Marc Lipschultz, formerly of KKR, and Goldman Sachs veteran Craig Packer.

Last year, Buyouts reported the firm would be launching a new fund and a new BDC this year backed by a minority investment from Dyal Capital. Dyal owns 20 percent of the firm.

Action Item: read Owl Rock’s latest form ADV here. Read Rhode Island’s materials on Owl Rock Capital Corporation III here.

Update: this story has been updated to include Oregon’s commitment to the fund and Rhode Island also taking a stake.