Blue Owl Technology Finance Corp. quarterly report, Q2 FY2021

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

MetricThree Months Ended June 30Six 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.