Not a Crisis, a Mismatch: What Blue Owl Reveals (and Doesn't) About Private Credit
When Blue Owl Capital permanently gated withdrawals from its $1.6 billion retail focused private credit fund, the reaction was immediate and violent. The stock dropped roughly 6% in a single day, and other alternative heavyweights such as Ares, Apollo, Blackstone, and KKR sold off almost in lockstep. Within hours, the event was being branded as the “canary in the coal mine” for a supposed private credit bubble.¹ Yet, while the stress is real, it is specific in origin. A canary coughing in one tunnel does not mean the entire mine is collapsing, nor that the whole industry is destined to fail. Rather than asking whether private credit itself is collapsing, the real investigation is more precise: which tunnel is actually at risk, and why?
Diagnosing the Structure Issue
Private credit has seen a meteoric rise over the last decade and a half following the Global Financial Crisis, as discussed in our previous insights article here. As the asset class scaled, managers who historically raised capital from institutions faced surging demand from retail investors and responded with new fund structures that promised periodic liquidity. Researchers from Duke’s Fuqua School of Business identified how far this shift has gone: by 2023, institutional ownership of publicly traded BDCs had fallen to only 25%, with the balance increasingly held by individuals.² Blue Owl’s OBDC II, the semiliquid fund at the center of the recent turmoil, was built for exactly this new audience, offering quarterly redemptions against fundamentally illiquid, long-dated corporate loans. That structure embedded a classic maturity and illiquidity mismatch from day one.
In other words, what broke at Blue Owl was not “private credit” in the abstract, but a retail fund structure that promised more liquidity than cash flow from the underlying loans could realistically support. As Alex Bolostein of Goldman Sachs Research reported, “Over 80% of the assets in [private credit BDCs do not have the liquidation mechanism that could result in fire sales and a downward spiral in prices, which is what everybody is worried about.”³ The distinction here is critical: the difference between a well‑structured fund and a fragile one is the difference between being forced to dump illiquid loans at a discount to meet redemptions, and having illiquidity and maturity thoughtfully planned for from the outset. At Athos, for example, we deliberately designed our private credit vehicle with three distinct share classes: illiquid, semi-liquid, and liquid. Each share class owns different underlying assets with matching risk profiles and liquidity terms, giving investors the flexibility to align their allocation with their actual time horizon and liquidity needs.
So yes, investors should absolutely care about whether a vehicle’s liquidity terms are honest. But stopping the conversation there would miss the bigger picture. The real risk‑reward profile of private credit is shaped just as much by where in the market a fund is playing, what kinds of businesses it is lending to, and how that “yield” is being created by the risk inherent in the loans. In our view, four issues dominate the current conversation:
Liquidity mismatch in fund structures
As the Blue Owl case illustrates, promising frequent redemptions against illiquid, long‑dated loans can force managers into selling assets at a discount when flows reverse. Getting this alignment wrong can turn a vehicle problem into a portfolio problem, as liquidity needs rather than credit stress drive losses.⁴
Capital crowding in large-cap direct lending
A growing share of private credit capital has chased the same large‑cap and upper‑middle‑market direct‑lending opportunities, compressing credit spreads and weakening lender protections. We prefer more niche and lower‑middle‑market credit, where loan covenants tend to be stronger and market inefficiencies still support more attractive risk‑adjusted returns.⁵
Lending against SaaS EBITDA
Much of today’s private debt risk is tied to loans underwritten on sponsor‑backed software and SaaS EBITDA that may not translate into durable cash flow, especially as AI reshapes business models and pricing power. When lenders lean heavily on forecasted EBITDA and aggressive exit multiples, those loans begin to behave less like true credit exposure and more like disguised equity risk.⁶
The growing use of PIK structures
Payment‑in‑kind features can make yields look higher on paper while quietly deferring financial stress, again shifting credit exposure toward equity‑like risk. Investors need to be highly selective in accepting PIK and work with managers who predominantly structure loans as cash‑pay, using PIK sparingly and only when they are clearly compensated for the additional risk.
The Bull Case for Private Credit
Looking back on the recent events of Blue Owl and the anxiety they sparked, it is easy to mistake a design flaw in a fund’s structure for a verdict on the entire asset class. While we can acknowledge the areas of concern that drove initial waves of redemptions, we should also be clear that these weaknesses were driven by fund‑level choices—liquidity terms, underwriting standards, and portfolio management—not by some fatal flaw in private credit itself. Like any other asset class, the real risk lives in the quality of the manager: how they underwrite, how they size and diversify positions, and how they manage liquidity and covenants through a cycle. The key question, then, is whether these issues are becoming systemic, and thus far the evidence suggests they are not.⁷ We do not see broad, simultaneous stress across vehicles that are conservatively structured and disciplined in their credit work; instead, pressure has been concentrated where yield was maximized by compromising on structure and risk management. That distinction matters, because it points to a manager‑selection and portfolio‑design problem, not an asset‑class‑wide crack.
At the same time, the structural fundamentals supporting private credit remain intact. Traditional banks still face regulatory and balance sheet constraints that limit their willingness and ability to lend to lower middle market borrowers, leaving a persistent funding gap that private lenders are well positioned to fill. A higher for longer rate environment also looks increasingly plausible as inflation has proven sticky rather than transitory. The combination of a durable supply demand imbalance for credit and elevated base rates continues to provide a strong income tailwind and, in our view, supports an attractive risk reward profile for well underwritten, thoughtfully managed private credit portfolios.
Against that backdrop, the events surrounding Blue Owl are best understood not as a signal to step away, but as a reminder of where discipline matters most. Private credit, like any asset class, has both strengths and areas of vulnerability. And like any asset class, it rewards managers who are thoughtful about structure, selective in where they deploy capital, and consistent in how they manage risk.
For investors, the implication follows naturally. The opportunity in private credit remains compelling, but outcomes will increasingly be determined by manager choice. The focus, therefore, should not be on reacting to headlines, but on identifying managers with the experience, structure, and discipline to navigate the risks outlined above. In a market defined by dispersion, that selection is what ultimately drives results.
Sources
1. CNBC - ‘Canary in the coal mine’: Blue Owl liquidity curbs fuel fears about private credit bubble
2. Duke Fuqua School of Business - Why Private Credit Concerns May Be Overblown
3. Goldman Sachs – Private Credit Concerns in Context
4. DWS Asset Management - What’s driving private-credit valuations?
5. Chronograph - How Direct Lending Competition Is Impacting Private Credit Deal Terms
6. KBRA - Private Credit: Deep Dive on AI and Software
7. Goldman Sachs – The Outlook for Private Credit amid Rising Market Stress
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