Blue Owl liquidity concerns spark questions about retail investor access to private credit

Providers in the spotlight

Private credit has struggled to stay out of the spotlight. What began as a niche alternative to bank lending has grown into a global market with major institutional players.

Expansion has been driven by post-financial crisis bank retrenchment, investor demand for yield and the rise of large alternative asset managers such as Blue Owl Capital.

According to a report from Preqin, private credit assets under management will hit $2.8trn by 2028, almost double 2022's $1.5trn. 

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According to data from PitchBook, total private debt AUM has surged from $282.4bn in 2008 to well over $1.8trn last year.

However, recent market turbulence, sparked by changes to withdrawal terms at one of Blue Owl's private credit vehicles, has forced investors to question whether the asset class is as resilient as its proponents suggest, and whether private credit failures could bleed into the wider market. 

Blue Owl and the liquidity question

Concerns crystallised when Blue Owl altered the withdrawal mechanism of one of its private credit funds after redemption requests exceeded preset limits.

Last week (18 February), Blue Owl revealed it had agreed to sell $1.4bn of direct company loans to four North American insurers and pension funds in a bid to return capital to investors in older funds. 

By doing this, it halted quarterly withdrawals for retail investors in Blue Owl Capital Corporation II (OBDC II), Blue Owl Technology Income Corp (OTIC) and Blue Owl Credit Income Corp (OCIC), throwing into question once more whether the asset class should be available to retail investors. 

Shares in US private credit managers fell sharply in response, with Ares Management, Blue Owl, Apollo Global Management and BlackStone all down more than 20% year-to-date, according to data from MarketWatch. 

 

Tony Whincup, head of investment specialists at TrinityBridge, said the move suggested investors could be "reassessing the liquidity risks involved with such investments". 

Susannah Streeter, chief investment strategist at Wealth Club, described the development as "another niggle of worry" that could turn into a larger headache, particularly for institutions such as pension funds with exposure to the sector.

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Two high-profile bankruptcies last year, First Brands Group and Tricolor, have provided additional background unease.

In the wake of the Tricolor collapse, Jamie Dimon, CEO of JP Morgan Chase, said that "when you see one cockroach, there are probably more".

Boaz Weinstein, founder and CIO of Saba Capital Management, a hedge fund that has gained notoriety in the UK for its activism in the investment trust space, argued that rising redemptions and limited liquidity have left some retail-oriented private credit vehicles facing one of their toughest periods. 

Saba holds positions in several large alternative managers, including Blue Owl. Together with Cox Capital Partners, Saba has offered tender offers for the funds that would "provide a liquidity solution to retail investors in the wake of a significant industry-wide increase in business development company (BDC) redemption requests, multiple quarters of net outflows and a rise in redemption gate provisions", it explained.

The tender prices are expected to be at a 20-35% discount to the most recent estimated net asset value (NAV) and dividend reinvestment price. 

The case for optimism

Recent pessimism is not universal, however. Craig Siegenthaler, research analyst at Bank of America, argued there is "a significant level of misinformation" about Blue Owl and the broader private credit industry, which has created what he viewed as an attractive buying opportunity in credit-heavy alternatives such as Ares Management and Apollo Global Management.

He explained Blue Owl has grown from zero to more than $300bn in assets under management in less than a decade, alongside continued robust fundraising. In his view, the firm's profits are derived entirely from high-quality, fee-related earnings, which he argued merit premium valuations.

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Similarly, John Hecht, equity analyst at Jefferies, maintained a ‘Buy' rating on Blue Owl, signalling continued confidence among sections of Wall Street.

Opacity and illiquidity

Critics, however, focused less on recent performance and more on structural vulnerabilities. 

Fergus McCorkell, assistant manager of the Trojan Income fund at Troy Asset Management, emphasised that private credit is, at its core, straightforward but his fund has steered clear of it.

Traditionally, companies borrowed from banks or those with sufficient scale issued public bonds. Private credit offers a third route: non-bank lending provided by investment funds.

"It is still just a loan," McCorkell said, albeit one extended by an investment fund rather than a bank. 

The Troy AM assistant  manager pointed out that private credit's defining feature is opacity. Borrowers provide detailed financial disclosures only to a limited group of lenders while loans are valued infrequently and typically via mark-to-model methodologies rather than observable market prices.

When banks provide loans, regulators can see those exposures on balance sheets. Private credit loans, by contrast, are distributed among investors and do not sit on a single regulated balance sheet.

Given the relatively low capital requirements for private credit lenders, the riskiest segments of the market may be supported by institutions with less capacity to absorb shocks, according to McCorkell . 

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He also flagged the increasing use of payment in kind (PIK) structures, which allow borrowers to defer cash interest and instead add it to the loan balance. While such features can reduce near-term defaults, they increase leverage precisely as a company's financial condition weakens, he argued. 

Spillover risks

Even investors without direct exposure may not be insulated. 

Troy AM's multi-asset strategy holds no private credit, yet McCorkell warned that in deeply interconnected markets, sentiment and liquidity shocks can spill into listed equities and other liquid assets.

If investors grow anxious about private credit or other themes, they could look to sell what they can rather than what they should, he explained.

McCorkell admitted that "private credit performs a valuable role and will likely remain central to capital markets" but warned that history provides reason for caution. 

"Many of the newly minted billionaires from the rise of private credit cut their teeth in the ‘junk bond' era of the late 1980s. Market historians will know that period did not end well," he said. 

"Private credit is here to stay, but we feel there are enough facts, figures, and anecdotes to suggest the journey may not be an uninterrupted unstoppable rise," McCorkell added.