Blue Owl Capital's Merger Reevaluation: Strategic Fund Consolidation and Undervaluation in the Private Credit Space

The private credit sector, long touted as a resilient alternative to traditional banking, is facing a pivotal moment as Blue Owl Capital reevaluates its controversial merger proposal. At the heart of this reevaluation lies a critical question: Can strategic fund consolidation unlock value in a market grappling with undervaluation and liquidity challenges? For investors, the answer hinges on understanding the interplay between Blue Owl's operational dynamics and broader structural trends in private credit.

Strategic Rationale for Fund Consolidation

Blue Owl's initial decision to merge its publicly traded fund, Blue Owl Capital Corporation (OBDC), with its non-traded sibling, Blue Owl Capital Corporation II (OBDC II), was driven by overlapping portfolios and operational inefficiencies. According to a report by , the merger aimed to address a 20% discount in OBDC's share price relative to its net asset value (NAV), which would have resulted in significant losses for OBDC II investors if executed under the original terms. While the merger was initially canceled in late November 2025 due to investor backlash, management has since indicated a willingness to revive the deal if OBDC's share price improves to a level closer to its NAV.

The strategic logic for consolidation remains compelling. Private credit is projected to grow from $1.5 trillion in AUM at the start of 2024 to $2.6 trillion by 2029, driven by tighter bank lending standards and borrower demand for flexible financing solutions. By merging overlapping portfolios, Blue Owl could reduce redundancies, lower management costs, and enhance transparency-key advantages in a sector increasingly scrutinized for liquidity risks reports. Craig Packer, Blue Owl's co-president, has emphasized that the firm still sees "strategic value" in combining the two funds, particularly given their shared focus on middle-market lending and asset-based finance according to .

Undervaluation in the Private Credit Sector

The reevaluation of Blue Owl's merger also highlights broader undervaluation trends in private credit. Data from With Intelligence reveals that the average interest coverage ratio for private credit borrowers has plummeted from 3.2x in 2021 to 1.5x in recent months, with 47% of borrowers now exhibiting coverage ratios below 1.5x according to . This decline, coupled with a rising reliance on payment-in-kind (PIK) interest structures, underscores growing stress in the sector. The International Monetary Fund (IMF) has further noted that over 40% of private credit borrowers now report negative free cash flow, signaling a shift toward creative capital structures to manage interest burdens according to .

For Blue Owl, these trends have amplified the risks of its merger strategy. Prior to the merger's cancellation, OBDC's share price had fallen 30% year-to-date, reflecting investor skepticism about the firm's ability to navigate a high-rate environment. The proposed merger, which would have transferred OBDC II's assets into OBDC, was seen as a liquidity solution for non-traded investors but faced criticism for potentially exacerbating undervaluation issues. As Bloomberg observed, the fallout from the merger's collapse has intensified regulatory scrutiny, with Federal Reserve officials questioning the sector's departure from traditional bank lending models.

Shareholder Value Creation: A Delicate Balance

The conditional revival of Blue Owl's merger proposal illustrates the delicate balance between investor protection and strategic consolidation. For the merger to create value, OBDC's share price must rise to a level that minimizes losses for OBDC II shareholders while aligning with the fund's NAV. , management has indicated that this threshold is likely tied to market conditions and the timing of OBDC II's expected liquidity event, projected for late 2026 or 2027.

However, the path to value creation is fraught with challenges. The private credit sector's growth is increasingly dependent on disciplined underwriting and the ability to capitalize on high-rate environments. As Morgan Stanley notes, firms that maintain rigorous credit standards and focus on non-cyclical sectors-such as software, insurance, and residential services-are better positioned to weather economic volatility. Blue Owl's success will hinge on its ability to navigate these dynamics while addressing liquidity concerns for both traded and non-traded investors.

Conclusion

Blue Owl Capital's merger reevaluation is a microcosm of the private credit sector's broader struggles with undervaluation and liquidity. While strategic fund consolidation offers a pathway to operational efficiency, its success depends on aligning with market realities and investor expectations. For shareholders, the key takeaway is clear: the potential for value creation lies not in forced mergers but in disciplined execution, transparent valuations, and a focus on sectors with stable cash flows. As the private credit market evolves, firms that adapt to these principles will likely emerge as long-term winners.