Blue Owl sees higher private credit returns as AI financing tightens

Blue Owl Capital anticipates lending opportunities in AI infrastructure to become more appealing due to tighter financing conditions driving up borrowing spreads, according to Bloomberg. This assessment follows remarks from the firm's executives during their third-quarter earnings calls. Erik Bissonnette, president of Blue Owl Technology Finance Corp (OTF), posited that constraints on new computing capacity post-US midterm elections could further widen lending spreads, despite robust underlying demand for AI infrastructure.

The company aims to augment its engagement in compute-related financing from roughly 2% of its portfolio to the high single digits. As a major player managing about $330 billion, Blue Owl has emerged as a key financial entity for AI infrastructure, encompassing data centers and computing equipment. Recent transactions include a $2.4 billion financing deal for AI infrastructure provider Iren, which marked OTF's largest new investment during the third quarter.

OTF's lending strategy emphasizes short-duration debt backed by contractual cash flows instead of the residual value of computing equipment. Additionally, Blue Owl seeks to allay concerns over private credit valuations and loan quality. The firm disclosed the exit of $1 billion of investments from Blue Owl Capital Corp II this year, with all loans sold at or exceeding their carrying value.

Executives also underscored burgeoning opportunities in upper-middle-market direct lending, citing an improved environment for lenders with permanent capital due to outflows from non-traded funds.