Blue Owl hoots and private credit hollers
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Private credit was hot, and now it's not. That has some parts of the financial world on edge.
Why it matters: A few trends — the AI scare trade and the retail investing boom — are colliding at once and stressing a trillion-dollar-plus piece of the economy.
State of play: Last week, everyone was talking about one private credit firm called Blue Owl Capital.
- Facing high demand from investors in one of its funds to get their money back, Blue Owl sold off assets. It also changed the way redemptions at the fund operate, setting off alarm bells.
How it works: Asset managers like Blue Owl, as well as better-known firms like Blackstone and KKR, take in money from investors to create funds that typically lend to mid-market businesses, like smaller nonpublic companies that don't issue high-grade bonds.
- That investor money gets locked up for a while. Historically, that was OK because investors were often deep-pocketed institutional types, insurance companies or pension funds not apt to need to cash out very often.
Friction point: The dynamic started shifting about five years ago when retail stock investing started booming, and everyone seemingly had a Robinhood account and a stock strategy.
- Private capital managers wanted in. They started marketing to individual investors in a big way and started talking about the democratization of investments.
The big picture: It's a concerning moment. Nonbank lending started growing in the wake of the 2008 financial crisis, picking up a business the banks were retreating from, and ballooning out from there.
- Private credit hasn't been tested since then by any kind of prolonged economic slowdown.
Where it stands: Now, like so many other corners of the economy, private credit is under AI stress. Firms including Blue Owl lent to software and IT businesses.
- Those tech companies are seeing their valuations plummet on fears that AI could put them out of business.
Threat level: The thing with private credit is that it's…private, "like banks without bank regulations," writes Mark Malek, chief investment officer at Muriel Siebert.
- But unlike banks, you can't just take your money and go.
- Private credit firms aren't backstopped by the government with deposit insurance for investors, or with access to the Federal Reserve's discount window for borrowing.
Zoom in: Previously, Blue Owl offered quarterly redemptions of up to 5% of the value of the fund, increasingly a problem since investors wanted more.
- Moving forward, the firm said it would make regular payouts, but on its schedule. The company's head of credit put it this way: "We're not halting redemptions, we're just changing the form."
Where it stands: Investors still found this alarming.
- "Individual investors have no say over when they get their money back," Paul Davies writes in Bloomberg. "This is never a good look for a fund manager."
Reality check: Because funds limit redemption requests, the risk of something akin to a bank run is minimal.
- "The danger emerges when expectations and structure collide," Malek says. "If an investor treats a semi-liquid private credit fund like a money market account, disappointment is almost guaranteed."
