Help me understand Owl Rock's 7% return

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Maven
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Help me understand Owl Rock's 7% return

Post by Maven » Wed Nov 13, 2019 3:37 pm

Today a client of mine started chatting about a recent investment he made in Owl Rock. He said it returns 7 - 8%. Out of curiosity, I looked it up and can't quite decipher the facts. I do see a possible 5% sales load and get the concept that they lend money to businesses. Can anyone help explain an investment such as this? I'm not interested in investing in it, just curious for more details - i.e. what's the "real return", risk, etc.

https://owlrock.com

samirol
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Re: Help me understand Owl Rock's 7% return

Post by samirol » Wed Nov 13, 2019 4:36 pm


TheLaughingCow
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Re: Help me understand Owl Rock's 7% return

Post by TheLaughingCow » Wed Nov 13, 2019 4:38 pm

They make loans to businesses too small or risky to secure a loan another way. Basically think of it as buying junk bonds from very small companies. The risk is that many of those small companies go under simultaneously (recession).

dbr
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Re: Help me understand Owl Rock's 7% return

Post by dbr » Wed Nov 13, 2019 5:21 pm

samirol wrote:
Wed Nov 13, 2019 4:36 pm
BDC with junk bonds

https://owlrock.com/wp-content/uploads/ ... 2-2019.pdf
It might be wise to read the statement of risks on page 5 of that document including:

Youshouldnotexpecttobeabletosellyoursharesregardlessofhowweperformandyoushouldconsiderthatyoumaynothaveaccesstothemoneyyouinvestforanindefiniteperiodoftime.Aninvestmentinsharesofourcommonstockisnotsuitableforyouifyouneedaccesstothemoneyyouinvest. {sorry, I can't see how to unmunge that copy}

and extending to the fact that returns may include return of capital and not be actual returns. There is a lot more.

Broken Man 1999
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Re: Help me understand Owl Rock's 7% return

Post by Broken Man 1999 » Wed Nov 13, 2019 5:28 pm

I think Vanguard's high yield junk bond fund is about the only one I would ever consider.

I think their fund is less junky.

Owlrock, NOPE! :shock:

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

ohai
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Re: Help me understand Owl Rock's 7% return

Post by ohai » Wed Nov 13, 2019 5:35 pm

I'd also examine whether or not they are actually producing 7% returns or if this number is overstated for various reasons: lack of platform history, short tenure of loans, idle cash (reinvestment risk), best opportunities not available to everyone, etc. These are the reasons why Lending Club's 11% return was revised to 7% after examination, and then later to about 5%.

Also make sure you are ok with any illiquidity risk and tax implications, since interest income is generally less tax efficient than capital gains.

Finally, and this shouldn't be overstated: make sure your investment is not debt issued by Owl Rock itself. 7% or so is arguably ok for some junk yield, but not for worst-of default risk between Owl Rock and the borrowers.

dbr
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Re: Help me understand Owl Rock's 7% return

Post by dbr » Wed Nov 13, 2019 5:45 pm

ohai wrote:
Wed Nov 13, 2019 5:35 pm
I'd also examine whether or not they are actually producing 7% returns or if this number is overstated for various reasons: lack of platform history, short tenure of loans, idle cash (reinvestment risk), best opportunities not available to everyone, etc. These are the reasons why Lending Club's 11% return was revised to 7% after examination, and then later to about 5%.

Also make sure you are ok with any illiquidity risk and tax implications, since interest income is generally less tax efficient than capital gains.

Finally, and this shouldn't be overstated: make sure your investment is not debt issued by Owl Rock itself. 7% or so is arguably ok for some junk yield, but not for worst-of default risk between Owl Rock and the borrowers.
They state themselves that the shares may not be redeemable indefinitely and may become worthless in the meantime. There is no market to sell these shares. They also state dividends may include return of capital.

Seriously it makes no sense to invest in things like this.

Grt2bOutdoors
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Re: Help me understand Owl Rock's 7% return

Post by Grt2bOutdoors » Wed Nov 13, 2019 5:46 pm

Maven wrote:
Wed Nov 13, 2019 3:37 pm
Today a client of mine started chatting about a recent investment he made in Owl Rock. He said it returns 7 - 8%. Out of curiosity, I looked it up and can't quite decipher the facts. I do see a possible 5% sales load and get the concept that they lend money to businesses. Can anyone help explain an investment such as this? I'm not interested in investing in it, just curious for more details - i.e. what's the "real return", risk, etc.

https://owlrock.com
Your client is buying into a portfolio of loans issued by highly leveraged companies. How much leverage? As a matter of perspective, the S&P 500 traded at 2.57X leverage, the S&P 600 (Small caps) trade at 4X leverage, the average portfolio loan in Owl Rock trades at 5.5X. The loans are highly illiquid, if you had to give them a bond rating "junk" would be a good grade. The loans have fat spreads and float, these aren't fixed rate loans. The risk is high! No free lunch. About 20% of the portfolio is sitting in a second position, they don't have a first lien on assets.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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arcticpineapplecorp.
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Re: Help me understand Owl Rock's 7% return

Post by arcticpineapplecorp. » Wed Nov 13, 2019 6:13 pm

Maven wrote:
Wed Nov 13, 2019 3:37 pm
Today a client of mine started chatting about a recent investment he made in Owl Rock. He said it returns 7 - 8%.
went to the link provided (https://owlrock.com/wp-content/uploads/ ... 2-2019.pdf) and found that only 10.1% of all the investments pay interest of 7% or higher (8.75% is the highest interest rate but only on 0.5% of the portfolio).

So even if we say 10% of the portfolio pays 8.75% (which it doesn't) that only accounts for 0.875% of the total return.

If the other 90% let's say pays 6% (it doesn't. some pay as low as 3.50%) then the 90% paying 6% would account for 5.4% of the rest of the portfolio's return.

Add the .875% and the 5.4% and you have 6.275% total return. Not 7%-8%.

The client clearly didn't do the math or read the prospectus.

anyone who cares to add the interest rates for the percentages of the investments and determine a real total return amount gets an A for effort. Have at it:

https://owlrock.com/wp-content/uploads/ ... 2-2019.pdf
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

Grt2bOutdoors
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Re: Help me understand Owl Rock's 7% return

Post by Grt2bOutdoors » Wed Nov 13, 2019 7:24 pm

arcticpineapplecorp. wrote:
Wed Nov 13, 2019 6:13 pm
Maven wrote:
Wed Nov 13, 2019 3:37 pm
Today a client of mine started chatting about a recent investment he made in Owl Rock. He said it returns 7 - 8%.
went to the link provided (https://owlrock.com/wp-content/uploads/ ... 2-2019.pdf) and found that only 10.1% of all the investments pay interest of 7% or higher (8.75% is the highest interest rate but only on 0.5% of the portfolio).

So even if we say 10% of the portfolio pays 8.75% (which it doesn't) that only accounts for 0.875% of the total return.

If the other 90% let's say pays 6% (it doesn't. some pay as low as 3.50%) then the 90% paying 6% would account for 5.4% of the rest of the portfolio's return.

Add the .875% and the 5.4% and you have 6.275% total return. Not 7%-8%.

The client clearly didn't do the math or read the prospectus.

anyone who cares to add the interest rates for the percentages of the investments and determine a real total return amount gets an A for effort. Have at it:

https://owlrock.com/wp-content/uploads/ ... 2-2019.pdf
You aren't reading the report correctly. The loans are paying an all-in rate based on Libor plus a spread. It appears you are solely looking at the spread. If Owl Rock's cost of funds is below that of Libor, then it is entirely possible for the true spread they earn on the portfolio to be higher than the 6.275% return. From an eyeball point of view, if Libor is running at 1.89%, then 1.89% plus the spread is higher than 6.275%.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Stinky
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Re: Help me understand Owl Rock's 7% return

Post by Stinky » Wed Nov 13, 2019 7:43 pm

dbr wrote:
Wed Nov 13, 2019 5:21 pm
It might be wise to read the statement of risks on page 5 of that document including:

Youshouldnotexpecttobeabletosellyoursharesregardlessofhowweperformandyoushouldconsiderthatyoumaynothaveaccesstothemoneyyouinvestforanindefiniteperiodoftime.Aninvestmentinsharesofourcommonstockisnotsuitableforyouifyouneedaccesstothemoneyyouinvest.
Classic disclosure language! :D

I wouldn’t touch something like this with a ten foot pole.
It's a GREAT day to be alive - Travis Tritt

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arcticpineapplecorp.
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Re: Help me understand Owl Rock's 7% return

Post by arcticpineapplecorp. » Wed Nov 13, 2019 7:45 pm

Grt2bOutdoors wrote:
Wed Nov 13, 2019 7:24 pm
arcticpineapplecorp. wrote:
Wed Nov 13, 2019 6:13 pm
Maven wrote:
Wed Nov 13, 2019 3:37 pm
Today a client of mine started chatting about a recent investment he made in Owl Rock. He said it returns 7 - 8%.
went to the link provided (https://owlrock.com/wp-content/uploads/ ... 2-2019.pdf) and found that only 10.1% of all the investments pay interest of 7% or higher (8.75% is the highest interest rate but only on 0.5% of the portfolio).

So even if we say 10% of the portfolio pays 8.75% (which it doesn't) that only accounts for 0.875% of the total return.

If the other 90% let's say pays 6% (it doesn't. some pay as low as 3.50%) then the 90% paying 6% would account for 5.4% of the rest of the portfolio's return.

Add the .875% and the 5.4% and you have 6.275% total return. Not 7%-8%.

The client clearly didn't do the math or read the prospectus.

anyone who cares to add the interest rates for the percentages of the investments and determine a real total return amount gets an A for effort. Have at it:

https://owlrock.com/wp-content/uploads/ ... 2-2019.pdf
You aren't reading the report correctly. The loans are paying an all-in rate based on Libor plus a spread. It appears you are solely looking at the spread. If Owl Rock's cost of funds is below that of Libor, then it is entirely possible for the true spread they earn on the portfolio to be higher than the 6.275% return. From an eyeball point of view, if Libor is running at 1.89%, then 1.89% plus the spread is higher than 6.275%.
ah, that's what the "L+" means.

thanks. now I understand. libor ran at 1.89 a month ago (for 1 month) and is now 1.76:

https://www.bankrate.com/rates/interest ... libor.aspx
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

Grt2bOutdoors
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Re: Help me understand Owl Rock's 7% return

Post by Grt2bOutdoors » Wed Nov 13, 2019 8:03 pm

arcticpineapplecorp. wrote:
Wed Nov 13, 2019 7:45 pm
Grt2bOutdoors wrote:
Wed Nov 13, 2019 7:24 pm
arcticpineapplecorp. wrote:
Wed Nov 13, 2019 6:13 pm
Maven wrote:
Wed Nov 13, 2019 3:37 pm
Today a client of mine started chatting about a recent investment he made in Owl Rock. He said it returns 7 - 8%.
went to the link provided (https://owlrock.com/wp-content/uploads/ ... 2-2019.pdf) and found that only 10.1% of all the investments pay interest of 7% or higher (8.75% is the highest interest rate but only on 0.5% of the portfolio).

So even if we say 10% of the portfolio pays 8.75% (which it doesn't) that only accounts for 0.875% of the total return.

If the other 90% let's say pays 6% (it doesn't. some pay as low as 3.50%) then the 90% paying 6% would account for 5.4% of the rest of the portfolio's return.

Add the .875% and the 5.4% and you have 6.275% total return. Not 7%-8%.

The client clearly didn't do the math or read the prospectus.

anyone who cares to add the interest rates for the percentages of the investments and determine a real total return amount gets an A for effort. Have at it:

https://owlrock.com/wp-content/uploads/ ... 2-2019.pdf
You aren't reading the report correctly. The loans are paying an all-in rate based on Libor plus a spread. It appears you are solely looking at the spread. If Owl Rock's cost of funds is below that of Libor, then it is entirely possible for the true spread they earn on the portfolio to be higher than the 6.275% return. From an eyeball point of view, if Libor is running at 1.89%, then 1.89% plus the spread is higher than 6.275%.
ah, that's what the "L+" means.

thanks. now I understand. libor ran at 1.89 a month ago (for 1 month) and is now 1.76:

https://www.bankrate.com/rates/interest ... libor.aspx
Usually loans are using 3 month or 6 month or 1 year Libor as the base rate plus the spread. The higher spread is to account for the riskiness of the borrower. If you noticed, Uber was paying a fixed rate of 8.5% on one of the loans. Very risky.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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JoMoney
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Re: Help me understand Owl Rock's 7% return

Post by JoMoney » Wed Nov 13, 2019 8:09 pm

Benjamin Graham in The Intelligent Investor wrote:... It is when the investor demands more than an average return on his money, or when his adviser undertakes to do better for him, that the question arises whether more is being asked or promised than is likely to be delivered...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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arcticpineapplecorp.
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Re: Help me understand Owl Rock's 7% return

Post by arcticpineapplecorp. » Wed Nov 13, 2019 8:09 pm

Grt2bOutdoors wrote:
Wed Nov 13, 2019 8:03 pm
arcticpineapplecorp. wrote:
Wed Nov 13, 2019 7:45 pm
Grt2bOutdoors wrote:
Wed Nov 13, 2019 7:24 pm
arcticpineapplecorp. wrote:
Wed Nov 13, 2019 6:13 pm
Maven wrote:
Wed Nov 13, 2019 3:37 pm
Today a client of mine started chatting about a recent investment he made in Owl Rock. He said it returns 7 - 8%.
went to the link provided (https://owlrock.com/wp-content/uploads/ ... 2-2019.pdf) and found that only 10.1% of all the investments pay interest of 7% or higher (8.75% is the highest interest rate but only on 0.5% of the portfolio).

So even if we say 10% of the portfolio pays 8.75% (which it doesn't) that only accounts for 0.875% of the total return.

If the other 90% let's say pays 6% (it doesn't. some pay as low as 3.50%) then the 90% paying 6% would account for 5.4% of the rest of the portfolio's return.

Add the .875% and the 5.4% and you have 6.275% total return. Not 7%-8%.

The client clearly didn't do the math or read the prospectus.

anyone who cares to add the interest rates for the percentages of the investments and determine a real total return amount gets an A for effort. Have at it:

https://owlrock.com/wp-content/uploads/ ... 2-2019.pdf
You aren't reading the report correctly. The loans are paying an all-in rate based on Libor plus a spread. It appears you are solely looking at the spread. If Owl Rock's cost of funds is below that of Libor, then it is entirely possible for the true spread they earn on the portfolio to be higher than the 6.275% return. From an eyeball point of view, if Libor is running at 1.89%, then 1.89% plus the spread is higher than 6.275%.
ah, that's what the "L+" means.

thanks. now I understand. libor ran at 1.89 a month ago (for 1 month) and is now 1.76:

https://www.bankrate.com/rates/interest ... libor.aspx
Usually loans are using 3 month or 6 month or 1 year Libor as the base rate plus the spread. The higher spread is to account for the riskiness of the borrower. If you noticed, Uber was paying a fixed rate of 8.5% on one of the loans. Very risky.
thanks. very risky, especially since Uber is burning cash (https://fortune.com/2019/06/20/cash-bur ... lyft-snap/). For the OP, this means their ability to repay bondholders is dependent upon their ability to keep getting investors money or turn the business around and start showing a profit.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

Topic Author
Maven
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Re: Help me understand Owl Rock's 7% return

Post by Maven » Thu Nov 14, 2019 12:06 am

Thanks all. Your answers are exactly what I expected.

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firebirdparts
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Re: Help me understand Owl Rock's 7% return

Post by firebirdparts » Thu Nov 14, 2019 3:29 am

Now you've also learned where people can get money at lower than the LIBOR rate. They can get it from your buddy.

PS full disclosure, I own more than one bond fund and for instance I hold a fidelity "high yield" bond fund SPHIX. The 30 day yield is about 5%. Most of the debt is rated B and BB. 15% of the debt is worse.

If that sort of thing interests you.
A fool and your money are soon partners

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