Business Context and Reporting Period
Owl Rock Technology Finance Corp. (the predecessor name of Blue Owl Technology Finance Corp.) filed its first Form 10-K for the period from July 12, 2018, inception, through December 31, 2018. The company is an externally managed, closed-end BDC that invests primarily in debt and equity securities of U.S. technology-related companies and intends to qualify as a regulated investment company.
The company commenced operations on August 10, 2018 and made its first portfolio investment in September 2018. Its common stock was privately offered to accredited investors and had no established public trading market as of December 31, 2018.
Key Financial Metrics
| Metric | Period ended December 31, 2018 |
|---|---|
| Total investment income | $2.6 million |
| Total expenses | $4.7 million |
| Net investment income (loss) | $(2.1) million |
| Net unrealized loss on investments | $(1.1) million |
| Net decrease in assets from operations | $(3.2) million |
| Loss per share | $(0.34) |
| Cash | $323.0 million |
| Investments at fair value | $262.8 million |
| Total assets | $588.2 million |
| Debt, net of issuance costs | $297.6 million |
| Total net assets | $286.7 million |
| Net asset value per share | $14.53 |
| Weighted-average portfolio yield | 8.0% |
| Asset coverage ratio | 195% |
Investment income consisted primarily of $2.6 million of interest income. The net investment margin was negative because expenses, including $2.1 million of management fees, $0.5 million of interest expense, $0.9 million of professional fees and $0.4 million of organization costs, exceeded investment income. The filing does not provide a meaningful comparable prior-period margin because this was the company’s inception period.
Cash used in operating activities was $263.5 million, primarily reflecting $262.8 million of portfolio investment funding. Financing activities provided $586.6 million, including $289.9 million from common-share issuances, net of offering costs, and $297.6 million from net borrowings after debt issuance costs.
Portfolio, Capitalization and Liquidity
- The portfolio comprised six companies with aggregate fair value of $262.8 million. All debt investments were performing and none were on non-accrual status at year-end.
- Based on fair value, 81.6% of investments were first-lien senior secured debt, 7.4% were second-lien senior secured debt and 11.0% were unsecured debt.
- Industry concentration was highest in education at 34.0% and professional services at 28.2%. The portfolio was entirely invested in U.S. regions, with 40.1% in the Northeast, 39.5% in the South and 20.4% in the West.
- Approximately 89.0% of debt investments by fair value bore floating rates, generally based on LIBOR or a base rate and subject to floors.
- The company had $350.0 million of committed capacity under its subscription credit facility, $300.0 million outstanding and $50.0 million available at year-end. The facility generally bears interest at LIBOR plus 1.50% or an applicable reference rate plus a spread and matures in November 2021, subject to specified earlier maturity events and a possible extension.
- Total investor capital commitments were approximately $1.8 billion, of which $1.5 billion remained undrawn. Unfunded portfolio-company commitments totaled $65.1 million.
Material Changes and Unusual Items
- This was the company’s initial operating period; therefore, there is no meaningful prior comparable period for growth or trend analysis.
- The company raised approximately $289.9 million through three private capital drawdowns and issued approximately 19.7 million common shares during the period.
- The company originated $332.0 million of new investment commitments and funded $261.7 million of principal investments. No investments were sold or repaid during the period, other than $0.3 million of investment proceeds reflected in the cash-flow statement.
- The portfolio’s fair value was approximately $1.1 million below amortized cost at year-end.
- No distributions were declared for 2018. On February 27, 2019, the board declared a distribution equal to 90% of estimated first-quarter taxable income and net capital gains, if any.
- The company elected to operate with the reduced BDC asset-coverage requirement of 150%, although actual asset coverage was 195% at year-end.
- On February 25, 2019, the maximum commitment under the subscription credit facility was increased from $350 million to $450 million, with potential capacity for further increases subject to lender and other conditions.
Guidance, Outlook and Principal Risks
Management expects to focus on established and high-growth technology and life-sciences-related companies, generally with enterprise values of at least $50 million and target investments ranging from $20 million to $500 million. The company intends to invest at least 80% of total assets in technology-related businesses and generally expects the portfolio to remain majority debt and income-producing securities.
Management cites demand for customized financing, limited bank lending to middle-market technology companies, private-equity and venture-capital activity, and growth in technology spending as potential investment opportunities. The filing provides no quantitative earnings, net investment income or distribution guidance beyond the disclosed first-quarter distribution framework.
- Investment valuations are largely based on Level 3 inputs and fair values determined in good faith by the board; realized proceeds may differ materially from reported values.
- Leverage magnifies gains and losses, and defaults or borrowing-base deficiencies could force asset sales at unfavorable prices or require shareholders to fund remaining capital commitments.
- Portfolio concentration, illiquid private-company investments, subordinated or unsecured debt, covenant-lite loans and technology-sector volatility could increase credit and valuation losses.
- Floating-rate assets and floating-rate borrowings create interest-rate spread risk. The filing also identifies uncertainty surrounding the phaseout of LIBOR after 2021.
- The adviser has limited operating history managing a BDC, and conflicts may arise from its management of other Owl Rock funds and allocation of investment opportunities.
- Failure to maintain BDC or RIC qualification, satisfy asset-coverage requirements or make required distributions could result in regulatory restrictions or corporate-level taxation.
- The company has no employees, relies on the adviser and its affiliates, and was still developing comprehensive internal-control documentation. The company stated that disclosure controls were effective, but no management assessment or auditor attestation of internal control over financial reporting was required for this emerging growth company.
Facts Investors Should Verify
- Confirm the company’s current legal name and whether subsequent filings are under Blue Owl Technology Finance Corp. rather than Owl Rock Technology Finance Corp.
- Review subsequent filings for changes in NAV, portfolio fair values, non-accrual investments, realized losses and distributions.
- Verify the current size, outstanding balance, maturity and covenants of the subscription credit facility.
- Assess concentration in the largest portfolio companies and industries, particularly education and professional services.
- Review the valuation methodology and sensitivity of Level 3 investments to market yields, borrower performance and collateral values.
- Confirm the company’s continued qualification as a BDC and RIC, its applicable asset-coverage ratio and any changes to leverage authority.
- Evaluate adviser fees, incentive-fee mechanics, related-party co-investments and allocation policies before relying on reported portfolio yields.