Here's Why Investors Are Worried About a Blue Owl Private Credit Fund—and Why It Matters

Key Takeaways

• Shares of alternative asset managers have taken a hit amid mounting concerns of a private credit crisis.
• Mohamed El-Erian, former chief of bond firm Pimco, wondered whether Blue Owl was a private credit “canary in the coalmine.”

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A private credit fund is triggering visions of cockroaches and canaries in coal mines in some investors’ minds.

Alternative asset manager Blue Owl Capital (OWL) earlier this week said that investors in one of its funds—private credit funds are generally built around loans held outside banks —would have to wait to get their money back as it sells portions of its loan book. That raised concerns that there were bigger issues brewing in the U.S. credit market.

Those concerns manifested in part as downward moves in the shares of some asset managers and related products. Shares of the Vaneck Alternative Asset Manager ETF (GPZ), which tracks an index of private asset specialists Brookfield Group (BN), Blackstone (BX), KKR (KKR), Apollo Global Management (APO), and Ares Management (ARES), have fallen more than 3% this week. Blue Owl is down almost 12%.

WHY THIS MATTERS TO INVESTORS

The financial crisis of 2007 and 2008 started with the collapse of the U.S. subprime mortgage market. That private credit is being compared to that meltdown is fueling fears that its problems could eventually take down global stock and credit markets

Blue Owl Capital said its move to “opportunistically” sell some $1.4 billion of its lending investments would allow the fund to “provide substantial liquidity” to shareholders.

Blue Owl is one of the U.S.'s largest managers of business development companies, or BDCs, which raise money from public investors, lend it to companies, and distribute some of the income from interest payments as dividends. It has become the center of a panic around private credit markets this week after it effectively halted customer redemptions from one of its funds.

Investors have in recent years flocked to private credit markets, and funds like Blue Owl’s, for the higher returns offered relative to the rest of the bond market. That growth, combined with the risks associated with the sector—murky lending standards, a lack of liquidity, and significant leverage—could lead to a broader financial crisis, according to some market experts.

“Is this a ‘canary-in the-coalmine’ moment, similar to August 2007?'” veteran bond investor Mohamed El-Erian said in a social media post on Thursday, referencing the Blue Owl Capital fund. El-Erian said the systemic risk posed by private credit was “nowhere near the magnitude” of subprime—the starting domino of yesteryear’s financial crisis—but also that a substantial “valuation hit” to certain assets was looming.

Others, including Jeff Gundlach, founder and chief of bond firm DoubleLine Capital, and JPMorgan CEO Jamie Dimon have warned that the once-booming sector was showing cracks. Bankruptcies at specialized lenders Tricolor Holdings and First Brands Group last year indicated other potential defaults, Dimon said then, comparing them to “cockroaches.”

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Gundlach last month pointed to BlackRock TCP Capital’s slashing its net asset value by almost 20% as another sign of stress. “New Year, new bad developments in private credit,” he wrote on social media in January.

What’s next? Blue Owl Capital’s latest moves could be a one-off—a cautionary tale for retail investors interested in investing in semiliquid private-market funds— or a sign of things to come.

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