Shares of leading private investment firms tumbled on , , after Blue Owl Capital permanently restricted investors from exiting a debt fund geared towards retail investors. The move sent ripples of concern through the private credit market, highlighting vulnerabilities within the rapidly expanding sector.
The sell-off underscores the increasing scrutiny of the private credit landscape, which has attracted substantial capital in recent years and fostered the emergence of new Wall Street players. Ares Management, Apollo Global Management, KKR, Blackstone, TPG, and Blue Owl all experienced declines in trading , signaling a recalibration of expectations regarding the profitability of private credit businesses.
Blue Owl bore the brunt of the market reaction, with its shares dropping more than 8 percent following the announcement of the redemption restrictions. The fund in question, Blue Owl Capital Corp II, had previously called off a merger with a larger, publicly traded credit fund managed by Blue Owl. That earlier deal had drawn investor criticism after reports indicated potential losses of 20 percent for investors based on the acquiring fund’s trading price at the time.
The restrictions on withdrawals come amid mounting pressures on private investment groups, including a rise in redemption requests across several flagship credit funds. News last month that a BlackRock private credit fund had reduced the value of some of its investment holdings, coupled with concerns about the potential impact of artificial intelligence on companies to which private credit firms have lent, has dampened investor enthusiasm for the industry.
Mohamed El-Erian, former chief executive of Pimco, questioned whether Blue Owl’s decision could further erode investor confidence in credit vehicles. The industry’s redemption features, which allow investors to pull their money at quarterly intervals, leave funds holding less liquid loans susceptible to shifts in investor sentiment.
Several large credit funds have already observed increased levels of investor withdrawals, signaling growing apprehension. Blue Owl has experienced significant net redemptions at both its Blue Owl Capital Corp II vehicle and a separate “Technology Income” fund, although most credit funds continue to attract net new assets.
“Is this a ‘canary-in-the-coal mine’ moment?” El-Erian asked in a post on X.
Despite El-Erian’s warning of a potential “significant — and necessary — valuation hit” for specific assets, analysts covering Blue Owl offered a more tempered assessment. The company’s decision to halt redemptions at its OBDC II fund coincided with the sale of $600 million in assets, representing approximately one-third of the fund, to new buyers at values near their stated par value. The proceeds were then distributed to fund investors.
Blue Owl also divested a total of $1.4 billion in loans, achieving an average sale price of 99.7 percent of their stated value. Analysts interpreted these asset sales as a positive sign, reinforcing confidence in the quality of the company’s loan portfolio valuations.
“As the loans were purchased at fair value/marks of 99.7, we see the news as reinforcing the quality of marks across the OWL platform and perhaps reassuring investors that You’ll see no ‘cockroaches’ lurking in the portfolio,” noted William Katz, an analyst at TD Cowen, in a client report.
The situation highlights the inherent risks associated with private credit, a sector that has benefited from a prolonged period of low interest rates and strong investor demand. As interest rates have risen and economic uncertainty has increased, the attractiveness of these investments has come under question. The lack of liquidity in private credit markets – meaning loans are not easily bought or sold – can exacerbate problems when investor sentiment turns negative, as demonstrated by Blue Owl’s decision to restrict redemptions.
The broader implications of Blue Owl’s move remain to be seen. While analysts suggest the company’s asset sales provide some reassurance, the incident serves as a stark reminder of the potential for volatility in the private credit market and the challenges faced by firms managing funds with redemption features. Investors will be closely watching for further developments and assessing the potential for similar actions by other firms in the sector.
