Blue Owl software lending triggers another quake in private credit

The latest tremor in the private credit world involved a deal that should’ve been reassuring to markets.

Blue Owl, a direct lender specializing in loans to the software industry, said Wednesday it had sold $1.4 billion of its loans to institutional investors at 99.7% of par value.

That means sophisticated players scrutinized the loans and the companies involved and felt comfortable paying nearly full price for the debt, a message that Blue Owl co-President Craig Packer sought to convey in interviews several times this week.

But instead of calming markets, it sent shares of Blue Owl and other alternative asset managers diving on fears of what could follow. That’s because as part of the asset sale, Blue Owl announced it was replacing voluntary quarterly redemptions with mandated “capital distributions” funded by future asset sales, earnings or other transactions.

“The optics are bad, even if the loan book is fine,” Brian Finneran of Truist Securities wrote in commentary circulated Thursday. “Most investors are interpreting the sales to mean that redemptions accelerated and led to forced sales of higher quality assets to meet requests.”

Blue Owl’s move was widely interpreted as the firm halting redemptions from a fund under pressure, even as Packer pointed out investors would get about 30% of their money back by March 31, far more than the 5% allowed under its previous quarterly schedule.

“We’re not halting redemptions, we’re just changing the form,” Packer told CNBC on Friday. “If anything, we’re accelerating redemptions.”

Coming amid a broad tech and software selloff fueled by fears of AI disruption, the episode shows that even apparently strong loan books aren’t immune to market jitters. This in turn forces alternative lenders to scramble to satisfy shareholders’ sudden demands for the return of their money.

It also exposed a central tension in private credit: What happens when illiquid assets collide with demands for liquidity?

Against a backdrop that was already fragile for private credit since the collapse of auto firms Tricolor and First Brands, the fear that this could be an early sign of credit markets cracking took off. Shares of Blue Owl fell Thursday and Friday. They are down more than 50% in the past year.

Early Thursday, the economist and former Pimco CEO Mohamed El-Erian wondered in social media posts whether Blue Owl was a “canary in the coal mine” for a future crisis, like the failure of a pair of Bear Stearns credit funds in 2007.

On Friday, Treasury Secretary Scott Bessent said that he was “concerned” about the possibility that risks from Blue Owl had migrated to the regulated financial system because one of the institutional buyers was an insurance company.