Delman v. Blue Owl Credit Advisors Challenges Incentive Fees Charged on Uncollected PIK Interest
Richard Delman, a shareholder of Blue Owl Capital Corporation (NYSE: OBDC), has filed a verified complaint derivatively on behalf of the fund against its investment adviser, Blue Owl Credit Advisors LLC, alleging that the adviser's compensation violates the fiduciary duty imposed by Section 36(b) of the Investment Company Act of 1940. The single-count complaint, docketed in the United States District Court for the Southern District of New York as No. 1:26-cv-03468, alleges that OBDC paid the adviser advisory fees totaling $414.4 million in 2025, computed against the fund's $17.2 billion in total reported assets, and asks the court to declare the fees excessive, award damages, and rescind the investment advisory agreement.
The fee structure at issue has two components. The management fee is 1.5 percent of OBDC's gross assets, which the complaint emphasizes includes assets purchased with leverage rather than the fund's net assets, paid quarterly in arrears. The incentive fee is calculated on pre-incentive fee net investment income, subject to a 1.5 percent quarterly hurdle with a 100 percent catch-up: above the hurdle, the adviser receives all income until it has collected 17.5 percent of the quarter's total, and 17.5 percent of everything beyond that. Pre-incentive fee net investment income, the complaint alleges, includes interest income the fund has accrued but not yet received in cash.
The Payment-in-Kind Theory
The complaint's central theory concerns payment-in-kind interest, in which a borrower pays interest by adding it to the loan's principal balance instead of paying cash. When that happens, the complaint alleges, the paper income still flows into the adviser's incentive fee base, and the enlarged loan balance flows into the gross assets on which the management fee is computed, so a borrower's inability to pay cash increases both components of the adviser's compensation at once. The complaint presses hardest on what happens when the deferred cash never arrives, quoting the fund's own disclosures: the adviser is "not obligated to return the incentive fee it receives on PIK interest that is later determined to be uncollectible in cash."
One structural allegation gives the theory additional bite: the complaint alleges that the adviser serves as OBDC's Valuation Designee, meaning the same entity that earns fees computed on the fund's asset values is responsible for determining the fair value of the fund's portfolio assets. Since PIK income and loan values on a book of private credit are not set by any exchange, the complaint's arithmetic runs entirely through numbers the adviser itself controls or heavily influences.
The Legal Standard and the Widening Front
Section 36(b) permits any security holder of a registered fund or business development company to sue the investment adviser over its compensation, with any recovery flowing to the fund rather than the individual plaintiff, and with damages limited to fees paid within one year before the suit. Courts evaluate these claims under the standard adopted in Jones v. Harris Associates: whether the fee is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining. The bar is high, and plaintiffs have historically found it difficult to clear; the current wave of complaints attempts to distinguish itself by tying the fee analysis to the integrity of the income and valuations underneath the fee base rather than to the fee rate alone.
The Delman complaint arrives amid a cluster of similar 2026 actions against the advisers of large business development companies, including suits concerning Ares Capital Corporation and Blue Owl Technology Finance Corp. in the same district, a parallel Blue Owl action in the District of Maryland, and a suit concerning FS KKR Capital Corp. The suits share a common architecture: incentive fee structures that compensate advisers on income recognized before, and sometimes without, cash collection.
OBDC, formerly Owl Rock Capital Corporation, is among the largest publicly traded business development companies and completed a merger with Blue Owl Capital Corporation III in January 2025. The case has been assigned to Judge Katherine Polk Failla, and an initial conference is expected in September 2026. The adviser has not yet responded to the complaint.
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