Saba Capital’s Tender Offers for Blue Owl and Starwood Shares Fall Short of Expectations

In a recent move to provide liquidity to investors locked in non-traded private credit funds, Saba Capital Management launched tender offers for shares in Blue Owl Capital Corporation II and Starwood Real Estate Income Trust. Despite offering steep discounts of 35% for Blue Owl and up to 29% for Starwood shares, investor participation was significantly below expectations.

This tepid response highlights ongoing challenges in the private credit market, where elevated redemption requests and limited secondary liquidity are creating stress. Saba Capital signals that while current demand is low, the need for liquidity solutions in this space is expected to grow as credit risks mount in the coming years.

Tender Offers Struggle to Attract Investors

In early March, Saba Capital offered investors in Blue Owl Capital Corporation II (OBDC II) a chance to sell their shares at a 35% discount. A similar offer was made to investors in Starwood Real Estate Income Trust (SREIT) with discounts ranging from 24% to 29%, depending on the share class. However, the tender for Blue Owl shares attracted less than 1% of the offered amount, while Saba acquired approximately $10 million in face value, mostly from Starwood shares.

Why Investors Are Hesitant Despite Steep Discounts

Investor reluctance to accept liquidity at such steep discounts comes amid a quarter marked by high redemption activity across private-credit, non-traded business development companies (BDCs). Blue Owl notably halted quarterly redemptions in OBDC II in mid-February, opting instead for periodic capital returns through asset sales. In the first quarter, investors sought to redeem $5.4 billion from two other Blue Owl private-credit funds, with redemption requests capped at 5%.

"We are hearing from investors in these funds that they want their money back," said Boaz Weinstein of Saba Capital. "This is why we saw a market opportunity to provide liquidity."—Boaz Weinstein, Saba Capital

Saba Capital’s Strategy and Market Outlook

Saba Capital aims to be a reliable liquidity provider for retail investors in private credit products, similar to the liquidity available in public BDCs. Following Saba’s activity in SREIT, Starwood’s CEO Barry Sternlicht committed to injecting equity capital to support investor redemptions, a move Saba credits as catalyzed by their market entry.

• Saba is considering bids on additional products including the Cliffwater interval fund and Blue Owl’s OCIC.
• The remaining illiquid capital in OBDC II is limited, with only $332 million left in the fund.
• Saba anticipates growing credit risk through 2027 and 2028, increasing demand for liquidity solutions.
• Hundreds of billions of dollars in private credit are held by retail investors with limited secondary market options.

Looking Ahead: Preparing for Increased Market Stress

Saba Capital believes the private credit sector will face significant stress, not if but when. The firm is positioning itself to be a consistent liquidity source, ready to deploy capital as investor needs intensify. This approach underscores the growing importance of secondary market solutions in private credit investing.