Blue Owl Technology Finance Corp. annual report, Q4 FY2021

Business Context and Reporting Period

Owl Rock Technology Finance Corp. (now associated with Blue Owl Technology Finance Corp.) filed its Form 10-K for the fiscal year ended December 31, 2021. The company is an externally managed Maryland business development company and regulated investment company focused primarily on debt and equity investments in U.S.-based technology-related companies. It targets established and high-growth businesses, generally backed by private equity or venture capital sponsors, and intends to invest at least 80% of total assets in technology-related businesses.

The company is advised and administered by Owl Rock Technology Advisors LLC, an indirect subsidiary of Blue Owl Capital Inc. The common stock was not publicly listed, and investor capital commitments were fully drawn as of November 5, 2021.

Key Financial Metrics

Metric	2021	2020	Change
Total investment income	$354.1 million	$173.2 million	Up 104%
Total expenses	$201.4 million	$94.0 million	Up 114%
Net investment income after taxes	$147.8 million	$78.8 million	Up 88%
Net realized gains	$88.9 million	$0.3 million	Material increase
Net unrealized gains	$188.1 million	$43.0 million	Material increase
Net increase in assets from operations	$424.8 million	$122.1 million	Up 248%
Earnings per share	$3.05	$1.43	Up 113%
Net asset value per share	$17.65	$14.88	Up 19%
Total return based on NAV	24.5%	7.2%	Improved
Distributions declared per share	$0.65	$0.84	Down 23%

Interest income was $291.4 million, including $42.3 million of payment-in-kind interest. Dividend income was $15.9 million and other income was $4.5 million. One-time prepayment fees were approximately $32.6 million, including $26.4 million related to one investment.

Expenses included $93.8 million of interest expense, $46.9 million of management fees and $47.2 million of incentive fees. The ratio of net investment income to average net assets was 6.1%, compared with 6.5% in 2020; the ratio of total expenses to average net assets was 8.4%, compared with 7.8%.

Portfolio, Liquidity and Debt

Investments at fair value totaled $6.14 billion, versus $3.06 billion at December 31, 2020.
The portfolio included 92 companies across 24 industries. The largest concentrations were Systems Software at 18.9%, Application Software at 13.4% and Health Care Technology at 11.9% of fair value.
By fair value, the portfolio consisted of 65.9% first-lien senior secured debt, 8.9% second-lien senior secured debt, 3.2% unsecured debt, 13.1% preferred equity and 8.9% common equity.
All debt investments were floating-rate investments, subject in certain cases to interest-rate floors. The weighted-average LIBOR floor was 0.85%.
New investment commitments totaled $4.32 billion after sell-downs, compared with $1.77 billion in 2020. Investments funded totaled $3.97 billion, while investments sold or repaid totaled $1.15 billion.
Cash was $107.0 million and available capacity under credit facilities was $608.8 million at year-end.
Total debt at principal value was $2.68 billion, compared with $1.65 billion in 2020; net carrying value was $2.64 billion.
Debt consisted primarily of a $1.04 billion revolving facility, $450 million and $300 million SPV facilities, unsecured notes maturing from 2025 through 2027, and $200 million of CLO debt.
Asset coverage was 231%, compared with 191% in 2020. Net debt-to-equity leverage was 0.73x, within the stated target leverage range of 0.90x to 1.25x on a gross debt-to-equity basis as described by management.
Unfunded portfolio company commitments were $390.8 million, compared with $199.5 million in 2020. Management stated that available financial resources were adequate to satisfy these commitments.

Cash used in operating activities was $2.62 billion, primarily reflecting $4.11 billion of investment purchases partially offset by $1.38 billion of investment proceeds and repayments. Financing activities provided $2.64 billion, including $1.70 billion of net share issuance proceeds and $1.02 billion of net borrowing proceeds, offset partly by $83.3 million of distributions paid.

Material Changes Versus the Prior Comparable Period

The investment portfolio approximately doubled in fair value, from $3.06 billion to $6.14 billion, and the number of portfolio companies increased from 52 to 92.
Debt investment par value increased from approximately $2.9 billion to $4.8 billion, driving higher interest income.
Gross originations increased to $4.47 billion from $1.82 billion, while funded investments increased to $3.97 billion from $1.65 billion.
Average daily borrowings increased to approximately $2.23 billion from $914.3 million. Average borrowing cost increased to 3.74% from 3.68%.
Investment income benefited from increased portfolio scale, higher dividend income, greater payment-in-kind income and significant prepayment fees.
Net realized gains increased primarily because of investment exits, while unrealized gains reflected favorable market conditions and outperformance in certain investments.
The company issued 97.7 million common shares for approximately $1.70 billion during 2021. All remaining investor capital commitments were drawn by November 5, 2021.
The $700 million subscription credit facility was repaid and terminated in November 2021. The revolving facility was expanded to $1.04 billion, with an accordion feature allowing potential capacity up to $1.56 billion.
The company issued an additional $250 million of December 2025 Notes and issued $300 million of January 2027 Notes.
The company changed its independent registered public accounting firm from PricewaterhouseCoopers LLP to KPMG LLP in June 2021.

Guidance, Outlook, Risks and Unusual Items

Management described an active technology-finance origination pipeline and continued demand for customized debt and equity financing. It expects investment income to vary with originations, repayments, portfolio age and interest rates, and expects repayments to increase based on market conditions. No formal earnings or distribution guidance was provided.

COVID-19 continued to create risks from supply-chain interruptions, labor difficulties, inflation, market volatility and disruption to portfolio company operations.
The portfolio is concentrated in technology-related industries, which may experience rapid technological change, intense competition, valuation volatility and short product life cycles.
Most investments are privately negotiated and illiquid. Approximately $5.98 billion, or roughly 97% of total investments at fair value, used Level 3 inputs, making valuations highly dependent on management and board judgment.
Although no debt investments were on non-accrual status at year-end and 100% of debt investments were classified as performing, future borrower defaults, covenant breaches and collateral deterioration could reduce NAV and income.
Leverage magnifies both gains and losses. Secured lenders have priority claims on pledged assets, and breaches of borrowing-base, asset-coverage or other covenants could restrict liquidity or require asset sales.
LIBOR discontinuation may affect investment income, borrowing costs, loan documentation, valuations and operating processes. Management could not reasonably estimate the ultimate effect.
Payment-in-kind income represented approximately 11.9% of investment income. PIK and other accrued income may increase taxable income and incentive fees without generating current cash.
The company paid $4.9 million of federal excise tax in 2021 and had estimated undistributed ordinary income and capital gains at year-end.
The adviser and affiliates manage other funds with overlapping strategies, creating potential conflicts in allocating investment opportunities, co-investments and restructurings.
If no exchange listing is completed by the end of the commitment period, subject to permitted extensions, the board may pursue an orderly wind-down, liquidation or dissolution.

Subsequent events included the resignation of director Brian Finn effective February 23, 2022, the reduction of the board from seven to six directors, and a board-declared first-quarter 2022 distribution based on estimated taxable income and potential capital gains.

Important Facts for Investors to Verify

Verify the company’s current legal name and whether any rebranding from Owl Rock Technology Finance Corp. to Blue Owl Technology Finance Corp. affects filings, securities or contracts.
Reconcile NAV growth and the $188.1 million unrealized gain with the valuation assumptions for Level 3 investments, especially equity holdings.
Review debt maturities, refinancing plans and covenant headroom for the June 2025 Notes, December 2025 Notes, June 2026 Notes, January 2027 Notes and revolving facilities.
Assess the liquidity required to fund the $390.8 million of unfunded portfolio commitments and the effect of borrowing-base limitations.
Evaluate recurring investment income separately from the $32.6 million of 2021 prepayment fees and other non-recurring fee income.
Review PIK income, undistributed taxable income, excise-tax exposure and the sustainability of distributions.
Examine concentration in Systems Software, Application Software and Health Care Technology, as well as exposure to private and restricted securities.
Confirm the status of LIBOR transition provisions in portfolio investments, credit facilities and CLO documentation.
Review related-party co-investment allocations, management and incentive fee calculations, and potential conflicts involving Blue Owl affiliates.
Confirm whether an exchange listing is planned and understand the potential implications of the commitment-period wind-down provisions for shareholder liquidity.