New York
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There is, once again, something shady happening on Wall Street.
And when I say shady, I mean it literally: The drama du jour comes from the world of private credit, which is part of a vast, opaque industry known as “shadow” banking. At the center of it all is Blue Owl Capital, an asset manager specializing in private debt financing. It recently announced a change in the way it was paying out some investors, which doesn’t sound too unusual, but the optics are making a lot of people nervous.
To be sure, just because it’s private doesn’t make it illicit, but it does shield borrowers – most of whom are not public entities – from the scrutiny of shareholders and many regulators. The terms of these loans are known only to the parties involved.
The sector also tends to take on high-risk loans that conventional banks won’t touch, and private credit operates outside the strict regulations that force conventional banks to build redundancies into their businesses.
Which, again, may be totally fine. But not everything that happens in the shadows stays in the shadows, and that is why people are suddenly worried about the sector broadly, and Blue Owl Capital, specifically.
Think of private credit firms as middlemen, connecting companies that need capital to investors willing to lend it.
Non-public companies often turn to private lenders, which charge higher interest rates, when they can’t meet banks’ standards or need specialized debt financing that banks don’t provide.
The money for the loans comes from institutional investors such as pension funds or insurance companies — huge entities that can generally handle a bit of risk in their giant portfolios, and are seeking a higher rate of return than than they can find in the bond market. Those investors typically intend to hold the loan until maturity. (That’s important, for reasons I’ll come back to in a moment.)
Private credit markets aren’t new, but they have exploded in popularity since 2008, when the global financial crisis prompted regulators to impose tighter restrictions on bank lending in effort to curb systemic risk. When banks curbed lending, private funds stepped in to fill the void.
In doing so, they created a huge, deeply complex and opaque market. Between 2020 and late 2024, the US private credit market alone has more than doubled to $1.3 trillion, according to the Federal Reserve Bank of New York.
Blue Owl Capital is a major player in private credit.
Last week, it rattled the market when it abruptly announced it would restrict investors in one of its private funds from taking their money out at previously set quarterly intervals. Instead, Blue Owl said it would sell off assets and use the proceeds to pay investors back on an unspecified timeline. When Blue Owl sold those loan assets, it collected nearly their entire value –a potential sign that the market isn’t too worried about private credit.
Blue Owl managers framed it as an innocuous schedule change designed to return investors’ money faster than initially planned. But some investors read it as another sign of trouble in private markets. Mohamed El-Erian, former CEO of Pimco, wondered on X whether the news was a “canary-in-the-coalmine” moment similar to the run-up to the 2008 financial crisis.
Blue Owl shares tumbled 6% Thursday and another 4% on Friday. The fear also hit Blue Owl rivals such as Ares Management, Apollo Global Management, KKR, Blackstone and TPG.
In a statement, Blue Owl said that “contrary to what has been reported by some, we are not halting investor liquidity in (the fund, known as OBDC II). In fact, we are accelerating the return of capital.”
In an interview with the New York Times, Blue Owl’s co-president Craig Packer said the loan sale was “an unequivocal extremely positive thing for our investors.”
But there have been troubling events that have put Wall Street on edge about the private credit space for months. This past fall, the back-to-back bankruptcies of First Brands, an auto parts supplier, and Tricolor, a subprime auto lender, sparked a brief selloff when it became known that mainstream banks were exposed to those subprime borrowers. (Mainstream banks both compete with private lenders and enable them. Big US banks have made about $300 billion in loans to private credit providers, helping fuel the expansion of the sector, according to Moody’s.)
JPMorgan Chase, for one, said it would take a $170 million loss on its loans to Tricolor. At the time, CEO Jamie Dimon hinted more trouble could be coming from private credit, warning that “when you see one cockroach, there are probably more.”
The panic emanating from Blue Owl underscores the broader systemic risks of such a lightly regulated industry gaining exposure to public markets.
Remember earlier, when I said the investors in these private funds tend to be institutional players with a healthy risk appetite? Well, that’s the usual case. But the Blue Owl fund at the center of all this is novel in that it is designed for so-called retail investors — in this case, high net worth individuals (rather than, say, a pension fund managed by a team of pros.)
Private credit firms have been angling to attract retail investors, because more money coming in is, of course, good for business.
But retail investors don’t behave the same way institutional players do, and when the panic begins in private markets, there are no guardrails to protect individuals the way there are in banking.
“In private credit, firms buy harder-to-sell assets for longer periods of time, with the understanding their clients will be willing to stomach some turbulence in the middle,” the Wall Street Journal’s Matt Wirz writes. “Retail investors, however, are accustomed to trading out of investments whenever they choose.”
Morningstar analysts noted that so-called “semiliquid” products like the one Blue Owl is marketing to deep-pocketed retail investors, “aren’t built for investors who need flexibility” and “work for best for investors who can go years without needing their money back, putting an inherent limit on the ‘democratization’ of private assets.”
