Owl Rock’s IPO Highlights a Niche Market’s Potential

Asset manager Owl Rock Capital Partners launched an initial public offering this week for its $6 billion business development company, highlighting the potential for growth in direct lending markets as institutional investors expand to remote corners of Wall Street for high-yielding fixed income.

The listing, which came less than four years after Owl Rock was founded by a trio of leveraged-finance veterans, is the second-largest publicly traded BDC operator in the country. The IPO, representing a small percentage of the BDC’s total stock, raised $176 million.

BDCs raise money by issuing stock and lending out the capital to small and midsize businesses with junk credit ratings, passing back at least 90% of the interest collected on the corporate loans to shareholders through dividends. They are similar to real-estate investment trusts, or REITs.

The IPO gives Owl Rock’s BDC a market valuation of about $6 billion, far above those operated by such hedge-fund and private-equity firms as


KKR -1.18%

& Co., GSO Capital Partners and

Apollo Global Management

APO -0.06%

LLC. Owl Rock rode the fast track by soliciting investments from institutional investors including the University of California, rather than from the retail market, targeted by many BDCs.

The marketplace had long been considered a financial backwater, with a reputation tarnished by some managers who marketed the products to mom-and-pop investors, then charged them high fees.

The niche industry, however, grew to about $100 billion in assets in 2018, up from about $65 billion in 2014 and $23 billion in 2009, according to data from Deloitte LLP. A key driver has been the appetite for high-yielding loans that has bolstered much larger asset classes including collateralized loan obligations, or CLOs, and leveraged-loan mutual funds. While some managers still court controversy, the ascendance of big, professionalized BDCs are transforming the space.

“This is a bit of a watershed moment for BDCs,” said Craig Packer, a former

Goldman Sachs Group

partner who founded Owl Rock in 2016 with Douglas Ostrover and Marc Lipschultz. “We are much bigger than BDCs previously.”

Mr. Ostrover is the former GSO partner who supplied the “O” for the hedge fund’s name, while Mr. Lipschultz is a former member of KKR’s management committee.

Owl Rock bulked up fast by raising funds in private share sales to large investors ranging from Soros Fund Management to New Jersey’s state pension fund. The BDC structure appealed to Owl Rock’s founders because it gave them permanent capital, Mr. Packer said, unlike private-equity funds, which are structured with redemption schedules.

Private, or nontraded, BDCs must eventually list publicly to let their investors to sell out if they wish. With equity markets trading near record highs, the time was right to start that process, Mr. Packer said.

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The new shares were also sold to institutional investors. Now that the BDC’s shares trade publicly, legacy investors will have the option to sell some of their shares after a six-month waiting period, Mr. Packer said.

While Owl Rock only issued a small portion of its BDC’s shares, the IPO places it behind only

Ares Capital

, which was formed 15 years ago and has a market capitalization of $7.7 billion, according to data from S&P Global Market Intelligence.

Write to Matt Wirz at matthieu.wirz@wsj.com

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