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June 29 (Reuters) - Alternative asset manager Owl Rock, which launched in 2016 and now manages more than US$3bn in assets, and Regents of the University of California have formed a strategic loan fund aimed at expanding the firm’s middle market direct lending platform.
The two parties have each committed an initial US$100m in equity capital, according to a June 22 regulatory filing.
The fund, structured as a 50-50 joint venture between Owl Rock Capital Corp, one of the firm’s two business development companies (BDCs), and Regents, the governing board of the University of California system, is expected to invest in senior secured loans that are made to middle market companies or in broadly syndicated loans.
BDCs are specialized investment funds that lend to US mid-sized companies. Funds include both publicly traded vehicles with shares listed on an exchange as well as private unlisted vehicles.
The off balance sheet vehicle will allow Owl Rock Capital Corp to employ additional leverage beyond the one-to-one total debt to equity cap for BDCs. Such off balance sheet investment strategies have been used by BDCs as a means to enhance portfolio returns when investing in a lower yielding environment.
BDC managers have used joint ventures of varying strategies, not only to boost yields, but also as a means to increase scale, commit larger amounts of capital and invest in bigger transactions.
Ares Capital Corp, the largest BDC by market capitalization and total assets, and asset manager Varagon Capital Partners announced the Senior Direct Lending Program joint venture in 2015. Regents also entered into a joint venture with Goldman Sachs BDC in 2014, according to regulatory filings.
Lenders to middle market businesses, including BDCs, as well as commercial finance companies and other direct lending platforms, have seen asset spreads erode as institutional investors chasing yield have increasingly turned to middle market loans.
Middle market institutional term loan yields have declined for three consecutive quarters to 6.22% in the most recent three-month period, Thomson Reuters LPC data show.
This year through June 27, LPC has tracked approximately US$28.6bn in total middle market fundraising, including capital allocated to debt funds and separately managed accounts, as well as BDC equity raises and middle market collateralized loan obligations. This follows a total of US$59bn raised last year for middle market lending strategies.
New loan supply has not kept pace with demand and existing portfolio companies have also sought to take advantage of investor appetite to slash borrowing rates, leaving lenders to deploy repayments at lower yields.
Regents had previously invested in Owl Rock, according to regulatory filings.
An Owl Rock spokesperson declined to comment. A spokesperson for Regents did not return a telephone call or e-mails seeking comment.
Owl Rock was founded by Douglas Ostrover, a founder of GSO Capital Partners, Blackstone Group’s credit investment unit, Marc Lipschultz, a former global head of energy and infrastructure at KKR, and Craig Packer, a former co-head of leveraged finance in the Americas at Goldman Sachs.
Owl Rock Capital Corp made its first portfolio company investment in April 2016 and as of March 31 its portfolio consisted of 60.7% first-lien debt investments and 39.3% second-lien debt investments, according to a May 10 regulatory filing.
Between April 1, 2017 and June 16, 2017, Owl Rock funded US$629.7m in commitments in new portfolio companies, according to a June regulatory filing.
New portfolio investments include travel document services provider CIBT Global Inc, power tool manufacturer Blount International, food service disposables distributor Dade Paper & Bag and veterinary hospital operator PetVet Care Centers. (Reporting by Leela Parker Deo and Kristen Haunss; Editing by Lynn Adler)