Blue Owl Capital's 63% Drop: What the Market Mispriced

Blue Owl Capital shares are down 63% from their high. The sell-off reflects fears about regulatory proposals, interest rate sensitivity, and the pace of capital deployment. Some of those fears are justified. Not all of them are.

Jussi Askola, writing for High Yield Investor, argued that the market has overcorrected. The manager's AUM has grown to nearly $200 billion. Fee-related earnings remain stable. The quarterly dividend of $0.185 is covered by distributable cash flow, Askola noted. At current prices the yield is above 20%, a level that typically signals distress or a miscalculation.

The distress scenario is not hard to construct. Regulators in Washington are circling private credit. A proposed rule would require banks to hold more capital against direct lending funds. Blue Owl specializes in direct lending. If the rule passes in its strictest form, the banks that backstop some of these funds would pull back. That would slow deployment and could pressure fee income.

Askola sees a different path. The rule is likely to be softened, he wrote. The SEC has already shown a willingness to compromise on smaller fund managers. Blue Owl itself has moved into insurance capital through its partnership with Oaktree. That channel is not subject to the same bank rules. The analyst estimates 2025 earnings of $0.74 to $0.76 per share, more than enough to cover the $0.74 annual payout at the current run rate.

Interest rates are another headwind. Floating-rate loans account for most of Blue Owl's portfolio. If rates fall, net interest income shrinks. The company hedges some of that risk through swaps and a growing permanent capital base. Askola argued that the market is pricing in a recession-level drop in rates that the Fed itself has not signaled.

The risk that the market got wrong is the stability of AUM. Blue Owl has not seen meaningful redemptions despite the drawdown. Its funds have lock-up periods that run two to five years. That is a structural buffer that most public lenders do not have. The capital is sticky.

A recent AlphaScala piece covering the recovery thesis noted that the pain may be over for Blue Owl's business development company, OBDC. The parent's outlook is similar. The next real test will come in the second half of the year, when the regulatory proposals are expected to take formal shape. If the final rule is milder than the market expects, the stock has room to recover. If it is not, the current yield will be the only comfort.

The SEC is scheduled to release the full text of the proposed changes later this summer.