Owl Rock Technology Income Corp.
S
Owl Rock Technology Advisors II LLC
06/14/23
$25,000
8.02%
5.26%
SOFR + 650 basis points
Blue Owl Securities
KPMG LLP
Eversheds Sutherland LLP; Alston & Bird LLP
Strategy
The Owl Rock Technology Income Corp. (ORTIC) is a BDC (business development company) that makes debt and equity investments in private high-growth software and technology companies based primarily in the United States. BDC’s are a type of investment company that help small and medium size businesses access capital.
ORTIC primarily seeks to provide current monthly income to investors through its debt investments, with a secondary objective to generate capital appreciation from its equity-related investments. It intends to invest at least 80% of its assets in “technology-related companies”, which ORTIC broadly defines as firms offering goods and services which use scientific knowledge to solve problems.
The portfolio is intended to hold a majority of debt investments with a lesser allocation to equity-related securities. ORTIC originates and makes debt investments in technology companies by lending directly to them, including the following:
First-lien debt: has the benefit of a first-priority security interest in assets of the borrower.
Second-lien debt: expected to include secured loans and some secured corporate bonds, with a secondary priority behind first-lien debt, but typically senior to unsecured liabilities in the borrower’s capital structure.
Mezzanine debt: higher risk profile because it ranks subordinate in priority of payment to first-lien and second-lien debt and is often unsecured. High risk, high reward; generally bears a higher interest rate.
Equity investments such as common or preferred stock will generally not be control-oriented investments and may include equity-linked interests such as warrants or profit participation rights. The target credit investment size will range between $20 million and $500 million once ORTIC will have raised sufficient capital. Until it reaches that stage, ORTIC expects to make a greater number of investments in syndicated loan opportunities than it will in the future.
As of Q1 2023, ORTIC has a diversified portfolio of 62 portfolio companies. 90% of ORTIC’s holdings are loans and 10% of it is equity. Its investment mix reveals a bias for downside protection features. All of its loans are senior secured loans primarily in the form of first lien loans and second lien loans. This means that these loans are backed by collateral, which provides downside risk protection. In focusing on loss protection, ORTIC only lends to companies that are moderately leveraged, with LTV (loan-to-value) ratios below 50%. The LTV ratio assesses the risk of a loan. A high LTV indicates greater risk, and a lower LTV may indicate that a borrower is less likely to default.
Style
| Value | Core | Growth | |
| Large | |||
| Mid | |||
| Small |
Fit Check
Investors must have either:
- a gross annual income of at least $70,000 and a net worth of at least $70,000, or
- a net worth of at least $250,000.
With monthly distributions, this offering may be appealing for investors looking for regular and stable income. Investors may want to have assets invested in other sectors as this is a low- diversification strategy with all investments made in technology-related companies.
While this offering includes limited monthly liquidity through a share repurchase program, shares should be considered as illiquid as buybacks are not guaranteed.
ORTIC is meant as a long-term investment. Current income is the main objective of the fund but with 10% of assets allocated to equity securities, investors can expect potential long-term capital appreciation as a secondary objective.
Portfolio Snapshot
As of April 30, 2023
Asset Type
Geography
End Market
Score Breakdown
BULLS SAY
Past performance: with a 6.28% annualized total net return since inception after one year of operations, ORTIC has increased NAV at a faster rate in its first few quarters of operations than comparable offerings launched in 2022.
Liquidity management: ORTIC started issuing distributions in May 2022 and has repurchased shares each quarter since its first full quarter of operations, pursuant to its share redemption plan. In Q1 2023, it repurchased over $36 million in common stock or about 3.1% of outstanding shares.
Security type: the loans in this fund are structured as floating rate notes, which allows investors to benefit from rising interest rates in an inflationary environment.
BEARS SAY
In 2023, distributions stagnated around an 8% annualized rate of NAV which is at the lower end of its peer group. Prospectus for growth in distributions look slim in the near future as the average monthly dividend growth rate stabilized at -0.31% over the first 5 months of the year.
With half of the portfolio (48%) invested in IT and software solution companies, this strategy presents a high degree of concentration risk by focusing solely on technology sectors. ORTIC pursues a high-conviction strategy that offers limited diversification.
The Fed may cut short-term interest rates over the next 6-18 months. New loans made to technology companies by ORTIC will pay a lower rate for those loans, which would potentially put pressure on net investment income and the cash distributions received by investors.
Price Tag
|
Fees & Expenses |
Class S |
Class D |
Class I |
|
Minimum initial investment |
$25,000 |
$25,000 |
$1,000,000 |
|
Availability |
Through brokerage and transaction-based accounts |
Through wrap accounts, participating broker-dealers and RIA's. |
Through wrap accounts, participating broker-dealers, RIA's, and Owl Rock affiliates. |
|
Transaction fees |
|||
|
Up to 3.5% |
Up to 1.5% |
None |
|
|
Annual fees |
|||
|
1.25% |
1.25% |
1.25% |
|
|
0.85% |
0.25% |
None |
|
|
4.97% |
4.97% |
4.97% |
|
|
0.57% |
0.57% |
0.57% |
|
|
Total annual net expenses |
7.64% |
7.04% |
6.79% |
To help you compare the cost of investing in this offering with other offerings, ORTIC has provided an example of the projected dollar amount of total expenses that would be incurred over various periods with respect to a hypothetical investment for each class of common stock.
-
In calculating the projections above, ORTIC made a few assumptions:
(1) A hypothetical 5.0% annual return from investment income, as required by regulation of the SEC and applicable to all registered
investment companies. The assumed return is not a prediction of, and does not represent, the projected or actual performance of
the Fund. Performance will vary and may result in a return greater or less than 5.0%
(2) Annual operating expenses and offering expenses remain at the levels set forth in the Price Tag table above. They should not be
considered a representation of future expenses. Actual expenses may be greater or less than those shown.
(3) Net return after payment of fees and expenses is distributed to shareholders and reinvested at NAV.
(4) ORTIC has indebtedness, equal to 100% of net asset value.
(5) The financial intermediary that facilitates the purchase of shares does not charge any upfront sales commission. Maximum sales
load per share class may or may not be charged by your intermediary.
Managers
-
Industry Experience 30+ years
Career highlights Co-founded Blue Owl, an industry-leading alternative asset manager and lender with about $140 billion assets under management. Previously, Mr. Ostrover co-founded GSO Capital Partners (GSO), Blackstone’s alternative credit platform and served as a Senior Managing Director at Blackstone for a decade.
Education B.A. in Economics from University of Pennsylvania and M.B.A. from New York University Stern School of Business.
-
Industry Experience 30+ years
Career highlights Co-founded and co-presides Blue Owl. Prior to founding Owl Rock, Mr. Lipschultz held various leadership roles in private equity, infrastructure and direct asset-investing at KKR, and in M&A at Goldman Sachs.
Education B.A. from Stanford University and M.B.A from Harvard Business School.
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Industry experience 30+ years
Career highlights Co-founded Owl Rock in 2016, after leading the Leveraged Finance and High Yield Capital Markets divisions at Goldman Sachs for 10 years. Prior to joining Goldman Sachs, Mr. Packer was Global Head of High Yield Capital Markets at Credit Suisse for 6 years.
Education B.Sc. University of Virginia and M.B.A. from Harvard Business School.
Full Review
AVERAGE
To create alignment of interests, the Fund features an incentive fee designed to compensate the investment manager past a certain rate of return. After a minimal annual rate of return of 5% which flows to shareholders, the manager earns 100% of the Fund’s remaining net investment income up to a “catch-up” rate of 5.72%. This is intended to provide the investment manager with 12.5% of net investment income as if the hurdle rate did not apply. For any profits exceeding the 5.72% rate of return, ORTIC collects 12.5% of every dollar of income paid share and the rest goes to shareholders. In addition to the performance fee on investment income, the Fund earns an incentive fee on liquidated investments equal to 12.5% of realized capital gains.
The performance fee does incentivize the fund managers to maximize returns, fostering alignment with investors’ interests. However, most private credit offerings implement the same fee structure which does not provide the Fund with a competitive edge in terms of alignment.
Performance fees do align the interests of the investors and the fund managers, which is in the interest of the investors. Relatively speaking, while this has become an industry standard, a 5% hurdle is a low minimum rate of return to start collecting performance-based compensation. There is no hurdle rate for incentive fees on capital gains as 12.5% is just taken out immediately from any dollar made on realized capital gains.
ORTIC’s key members of the investment committee and ORTIC affiliates all have skin in the game, albeit to a moderate extent. Mr. Ostrover and Mr. Lipschultz both have over $100,000 of direct beneficial ownership in ORTIC while Mr. Packer holds an indirect stake in the Fund through securities held in the entity that manages the fund. A few members of the investment committee do not hold equity in ORTIC, according to most recent disclosures. The investment made by key management members is limited but does create some degree of alignment with investors’ interests.
In total, Owl Rock affiliate entities made a combined seed investment of $50 million at inception. The PPM includes a policy that ensures that the investment manager will not dispose of its securities in the fund, as long as it remains the investment manager of ORTIC.
AVERAGE
The Fund began its operations last year which means that there is limited operating history to assess its potential for performance. However, the Owl Rock Technology Income Corp has shown average performance since inception. As of April 30, 2023, the fund’s Class S shares have generated total net returns of 1.25% YTD and 6.28% annualized since inception.
It is normal for a private credit fund’s NAV to grow at a low rate in its first year as it raises funds and allocates capital to new investments. Initial organizational and offering expenses put pressure on NAV. However, ORTIC has increased NAV at a faster rate in its first few quarters of operations than comparable offerings launched in 2022. Total return figures below are as of April 30, 2023.
| Offering | Inception Date | Year-to-date Annualized Net Return | Inception-to-date Annualized Net Return | Annualized Distribution Rate on NAV |
| Apollo Debt Solutions BDC Class S |
January 2022 | 2.38% | 0.55% | 8.15% |
| Owl Rock Technology Income Corp. Class S |
May 2022 | 1.25% | 6.28% | 7.97% |
| Oaktree Strategic Credit Fund Class S |
June 2022 | 0.24% | 2.53% | 8.89% |
ORTIC started to issue cash distributions as early as May 2022 and gradually increased distributions to reach a 8.09% annualized distribution growth rate at year-end. During 2022, the average monthly dividend growth rate was 8.52%.
However, in 2023, distributions have stagnated around an 8% annualized rate as the average monthly dividend growth rate stabilized at -0.31% over the first 5 months of the year. Not only has dividend growth stalled, but with a 7.97% yield as of the latest disclosures, ORTIC is lagging behind its competitors. ORTIC’s distributions rates are relatively high compared to public market funds and may be attractive to investors seeking current income, especially considering that distributions have been issued every month since inception. But these distribution rates are below average when comparing them to other private market direct lending funds.
Its distribution rates will rise and fall along with US government short-term rates. So as short- term rates rise, ORTIC will be able to charge a higher interest rate to borrowers. But the opposite is true when the US Federal Reserve is cutting rates which would lead to new loans being generated by ORTIC to be lent out at lower rates and therefore potentially leading to a lower distribution rate to investors. With interest rates having risen across the board over the last year, it is now a good time to be a lender.
ABOVE AVERAGE
The Owl Rock Technology Income Corp. has concentration risk. It only lends to private technology companies. Technology companies tend to be cyclical in nature. Cyclical revenue streams of these tech companies may affect loan payments back to ORTIC. As of April 2023, 48% of the portfolio comprises IT and software solution companies. ORTIC is a high-conviction strategy which creates some concentration risk in the portfolio that investors must be aware of.
As mentioned earlier, the distribution rate will fluctuate since the loans in the portfolio are all floating rate loans. Distribution payouts will be affected by interest rate volatility which has been elevated for the past year. High volatility may persist for the remainder of the year. The amount of income an investor in ORTIC earns is dependent on the level of interest rates of short-term US government securities.
BELOW AVERAGE
This is a relatively new strategy with limited operating history, having launched just over a year ago. Owl Rock itself was founded fairly recently in 2016 and grew at a rapid pace to manage over $70 billion in assets today. It specializes in middle market lending and has managed other BDCs in the past that also operate in tech-related spaces. Owl Rock’s management has real expertise in the markets they operate in. Co-founders all sit on the investment committee of ORTIC and other comparable strategies. Owl Rock’s centralized leadership structure may favor a higher degree of repeatability and consistency.
BELOW AVERAGE
Investments made into the Owl Rock Technology Income Corp. are illiquid as shares are not listed on an exchange. The ability to sell shares is limited but not restricted: ORTIC offers a share repurchase program where the company periodically offers to buy back common stock from its investors up to 5% of outstanding shares per quarter or 20% per year.
A periodic repurchase offer happens when a fund buys back shares from investors to create liquidity for them. There is liquidity risk here because there is a cap on redemption requests fulfilled per quarter so not all investors may be able to exit fully when they would like. Also, Owl Rock is not required to repurchase shares and may suspend or terminate the share repurchase program at any time. In practice, ORTIC has repurchased shares each quarter since its first full quarter of operations. In Q1 2023, it repurchased over $36 million in common stock, or about 3.1% of outstanding shares, up from 2.23% of outstanding shares in Q4 2022.
Loans originated by ORTIC to their portfolio companies are illiquid, meaning that it is not easy for ORTIC to sell these loans. But with that said, Owl Rock typically tends to hold their loans until maturity and does not seek to trade them. If the value of a loan decreases, that is just an unrealized loss. It only temporarily affects the fund’s valuation.
ABOVE AVERAGE
The debt risk of this strategy is above average. There is a risk that portfolio companies may not be able to pay back their loans. ORTIC may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient. If the assets securing the loans that ORTIC makes decrease in value, then it may lack sufficient collateral to cover losses. If the value of collateral underlying the loans declines or interest rates increase during the term of the loan, a portfolio company may not be able to obtain the necessary funds to repay loans at maturity through refinancing. These are inherent risks of the private credit business.
This strategy also uses leverage. Owl Rock borrows money to make debt investments (loans), which magnifies the potential for either gains or losses. Leverage introduces an additional layer of risk to the investment, making it more sensitive to changes in the value of the underlying assets. As a result, the use of leverage tends to increase the volatility of investments. If the value of the assets decreases, leverage would cause the NAV to decline more sharply than it otherwise would have if there was no leverage.
Leverage ratio (debt-to-equity):
Target leverage ratio: 0.75 – 1.25x, with a regulatory limit of 2.0x
Current leverage ratio: 1.01x
ORTIC may opportunistically invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. This means that the portfolio companies may have low credit ratings.
While this is a possibility, ORTIC prioritizes downside risk protection. The Fund makes loans to companies with LTV (loan-to-value) ratios below 50%. In doing this, it decreases the chance of default on a loan made by ORTIC. Overall, the Fund has been doing a good job at mitigating debt risk and its leverage ratio is moderate.
ABOVE AVERAGE
The ORTIC website is easy to navigate and offers a very thorough repository of information. It regularly updates key performance figures and portfolio metrics in a digestible way, while also providing access to more technical SEC filings and communications for more curious investors. Owl Rock’s investor relations team promptly and effectively addresses inquiries through calls or emails.
ORTIC discloses a detailed breakdown of its holdings which is a plus for the most curious and diligent prospective investors. Unfortunately, the portfolio holdings document online has not been updated since December 2022. More responsiveness and regular updates would help to enhance transparency and facilitate due diligence. Moreover, ORTIC does not disclose the name of the independent third-party valuation firm that reportedly may be engaged for monthly NAV calculations, as stated in the prospectus. More transparency regarding the valuation methodology would go a long way in enhancing the reliability of performance metrics.
Peer Group
 |
 |
 |
|
|---|---|---|---|
| Vehicle name | Owl Rock Technology Income Corp. (Class S) |
Apollo Debt Solutions BDC (class S) |
Oaktree Strategic Credit Fund (Class S) |
| Minimum investment | $25,000 | $2,500 | $2,500 |
| Holding period | Permanent Capital | Permanent Capital | Permanent Capital |
| Annual management fee | 1.25% | 1.25% | 1.25% |
| Distribution and Servicing Fee | 0.85% | 0.85% | 0.85% |
| Sales Load | Up to 3.5% | Up to 3.5% | Up to 3.5% |
| Inception Date | May 2022 | January 2022 | June 2022 |
| Net Returns Since Inception (Annualized) | 6.28% | 0.55% | 2.53% |
| Annualized Distribution Rate | 7.97% | 8.15% | 8.89% |
| NOYACK® Score |
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