By Bill Alpert

When the Blue Owl Technology Finance fund got the ticker "OTF" and began trading on the New York Stock Exchange last June, it expected to open a bright new chapter for its investors. Instead, it's been all downhill.

The software company borrowers that fill OTF's portfolio are exactly the sort of companies that now worry investors, as new artificial intelligence tools promise to let users create their own software on the fly. OTF shares are down 40% from their first-day peak, to $12.60. That's barely 50% of the latest net asset value (or book value) of the fund's loan portfolio.

OTF's $14 billion worth in technology loans and equity leave it with one of the deepest discounts in a private credit industry that many investors hate. Maybe they hate it too much.

The selloff has pushed OTF's dividend yield above 11%, and some may think that intriguing. In a flat market Tuesday, OTF was up 2.5% at noon, as were the larger, diversified lending funds Ares Capital Corp. and Blue Owl Capital Corp. Shares of the funds' management firms were up even more, with Ares Management and Blue Owl Capital each rising 5%.

To decide if the private credit stocks are oversold, you need to understand what worries people about them. Software loans are a key concern, now that AI is transforming that industry. A Morgan Stanley analysis of private credit, published Tuesday, says that loans to software and services firms make up a quarter of lenders' portfolios. At OTF, they account for 80% of the loans.

In lending to software companies, the credit firms often used different credit standards. Growing software companies may not have the cash profits of other businesses. But they do have rising levels of recurring revenue that customers agree to pay as subscriptions. So lenders extend loans based on ratios of a software company's "annualized recurring revenue."

Just recently, the fast-growing software company Databricks secured more than $2 billion from lenders such as Blackstone, Apollo Global Management, and Blue Owl, in a loan based on Databricks' annualized recurring revenue.

In the last few years, the high yields on ARR loans powered portfolios like OTF's. The fund boasted of its ARR strategy in an investor presentation slide. That particular slide has been passed around on social media lately by critics who see ARR as a major red red flag in the private-credit bear case.

"It reads like satire," said a recent posting on X, displaying Blue Owl's ARR slide. "It sadly isn't."

Asked about the level of ARR loans on the earnings call last month, OTF President Erik Bissonnette said they've dropped to a low-teens percentage of the fund's portfolio.

"The ARR percentage has been coming down pretty dramatically over the past few years," he said. "There's still really good businesses that could be underwritten on that basis."

OTF's latest 10-K says its ARR loans have better pricing and lower ratios of loan size to a borrower's enterprise value than loans based on a borrower's cash profits. The fund also says it expects to increase its ARR loans.

So far, OTF's loans to software companies haven't had credit problems. "The number of defaults are almost nonexistent and really troubled situations are very small," Bissonnette said on last month's earnings call.

Investors drawn to the high yields at OTF and other private lenders should listen for what they say about their ARR loans in coming quarters. They may come with risks, but they can also deliver profits.

Write to Bill Alpert at william.alpert@barrons.com

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March 17, 2026 15:46 ET (19:46 GMT)

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