Business Context and Reporting Period
Owl Rock Technology Finance Corp. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The filing identifies the registrant as Owl Rock Technology Finance Corp.; the request metadata refers to Blue Owl Technology Finance Corp. The Company is a business development company and regulated investment company focused primarily on debt and equity investments in U.S.-based technology-related companies.
As of June 30, 2021, the portfolio included 68 companies with investments at fair value of $4.3 billion. The Adviser is Owl Rock Technology Advisors LLC, an indirect subsidiary of Blue Owl Capital, Inc.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total investment income | $98.9 million, versus $40.5 million | $165.4 million, versus $75.3 million |
| Net investment income after taxes | $43.8 million, versus $21.8 million | $69.2 million, versus $37.6 million |
| Net realized gain | $49.9 million, versus nominal loss | $50.9 million, versus nominal loss |
| Net unrealized gain | $51.1 million, versus $44.3 million | $92.9 million, versus $(11.7) million |
| Net increase in assets from operations | $144.8 million, versus $66.1 million | $213.0 million, versus $25.9 million |
| Earnings per share | $1.22, versus $0.78 | $1.91, versus $0.36 |
| Total expenses | $52.3 million, versus $18.6 million | $92.9 million, versus $37.4 million |
| Net asset value per share | $16.33 at June 30, 2021, versus $14.88 at December 31, 2020 |
Net investment income after taxes represented approximately 44% of investment income for the quarter and 42% for the six-month period. The annualized ratio of net investment income to average net assets was 8.4%, compared with 7.2% in the prior-year period; the annualized total expense ratio was 11.7%, compared with 7.2%.
Portfolio, Liquidity and Capitalization
- Total assets were $4.636 billion and net assets were $2.336 billion at June 30, 2021, compared with $3.158 billion and $1.497 billion, respectively, at December 31, 2020.
- Investments at fair value increased to $4.297 billion from $3.057 billion. Debt investments comprised approximately 82% of the portfolio at fair value, with preferred and common equity comprising approximately 18%.
- Cash was $299.8 million, compared with $82.2 million at year-end. Available debt capacity was approximately $1.135 billion, subject to borrowing-base and other restrictions.
- Debt had a net carrying value of $2.104 billion and outstanding principal of $2.145 billion, compared with $1.614 billion and $1.649 billion, respectively, at December 31, 2020. Asset coverage was 203%, compared with 191%.
- Unfunded portfolio company commitments increased to $273.6 million from $199.5 million. Investor capital commitments were approximately $3.1 billion, including $1.0 billion undrawn.
- For the six months, operating activities used $896.3 million of cash, primarily due to $1.837 billion of investment purchases, partially offset by $768.0 million of investment proceeds. Financing activities provided $1.114 billion.
- Distributions declared were $0.24 per share for each of the first two distribution periods in 2021, compared with $0.21 and $0.20 in the comparable 2020 periods.
Material Changes Versus Prior Comparable Period
- Investment income more than doubled, principally due to portfolio growth and higher fee income, including $26.4 million of one-time prepayment fees in the second quarter and $30.8 million in the first six months.
- Investment activity accelerated. Second-quarter new investment commitments totaled $1.442 billion after sell-downs, versus $401.2 million in the prior-year quarter; investments funded totaled $1.349 billion, versus $376.2 million.
- Expenses increased materially as portfolio growth increased management fees, leverage increased interest expense, and investment performance increased incentive fees.
- Average daily borrowings increased to $2.161 billion in the second quarter and $1.906 billion for the six months, compared with approximately $797 million in both prior-year periods. The average borrowing rate also increased to 3.71% for the quarter and 3.99% for the six months.
- Net realized gains of approximately $50 million and net unrealized gains of $92.9 million drove the increase in net assets. The gains were concentrated in certain equity and equity-linked investments, including Circle Internet Services, Robinhood Markets, Algolia, Remitly and related investments; Toast was a significant offset.
- The Company issued approximately $675 million of common shares through private-offering drawdowns during the six months, compared with $636.2 million in the prior-year period.
- The portfolio shifted toward first-lien senior secured and preferred equity investments. First-lien debt fair value increased to $2.929 billion from $2.262 billion, while unsecured debt declined to $274.4 million from $388.6 million.
Guidance, Outlook, Commentary and Risks
No formal earnings or portfolio guidance was provided. Management reported an active origination pipeline supported by strong financing and merger-and-acquisition markets and improved portfolio company performance as COVID-19 restrictions eased. Management also expects repayments to increase based on market conditions and portfolio age, which could make investment income more variable.
- Approximately 97.8% of debt investments at fair value carried floating rates. The filing estimates that a 100-basis-point increase in base rates would reduce annualized net income by approximately $0.7 million under the stated assumptions, while larger rate increases would become beneficial after the effect of floors and funding costs.
- COVID-19 remains a risk to portfolio company operations, credit quality, investment opportunities, financing access and valuations.
- Most investments are illiquid Level 3 assets valued using significant unobservable inputs. Actual realization values may differ materially from reported fair values.
- The portfolio contains below-investment-grade or unrated credit exposure, leverage, PIK income, unsecured debt, equity securities and unfunded commitments.
- LIBOR discontinuation may require amendments to portfolio investment documents and credit facilities and could affect investment income, borrowing costs, valuation and liquidity.
- The Company is exposed to conflicts of interest and allocation risk because the Adviser and affiliates manage other funds and may co-invest with the Company under SEC exemptive relief.
- The Company must maintain BDC and RIC qualification requirements, including asset diversification, qualifying-asset and distribution requirements. It accrued excise tax of $3.3 million for the six months.
- Management stated that no investments were on non-accrual status and that no material litigation was pending or threatened as of June 30, 2021.
Facts Investors Should Verify
- Reconcile the large increase in net investment income and earnings with one-time prepayment fees, PIK income and realized and unrealized investment gains.
- Review the debt maturity profile, borrowing-base requirements, covenants and available capacity, particularly the $1.347 billion of contractual debt obligations due within three to five years.
- Assess the sustainability of the 203% asset coverage ratio after further leverage, distributions, portfolio valuation changes and funding of $273.6 million of unfunded commitments.
- Evaluate the concentration and valuation sensitivity of Level 3 investments, equity-linked holdings and restricted securities, which had an aggregate fair value of $835.1 million.
- Monitor LIBOR transition provisions, interest-rate floors and the sensitivity of portfolio income relative to borrowing costs.
- Confirm the continuation of RIC and BDC status, distribution coverage and the tax treatment of distributions, including any return-of-capital component.
- Review subsequent corporate actions disclosed after June 30, 2021, including the planned September 1, 2021 changes to the chief financial officer, chief operating officer and treasury roles.