Until quite recently, the name Blue Owl Capital was synonymous on Wall Street with the booming business of private lending—a lightly regulated financial sector where non-bank entities extend credit to riskier firms. Lately, however, its name has come to embody the vulnerabilities of this $1.8 trillion industry.
Blue Owl has seen its market value plummet by 40% this year, and its shares (OWL) dropped again on Thursday after the company revealed a sharp surge in investor requests to withdraw their money, compelling the firm to implement withdrawal limits. In a letter, Blue Owl disclosed it had received redemption requests representing 41% of its $6 billion tech-focused fund (up from 15.4% in the prior quarter) and 22% from its flagship $36 billion fund (compared to just 5%). The lender is only fulfilling a fraction of these requests, paying out only 5% from each fund.
Blue Owl’s stock dipped 9% early Thursday, before partially recovering to close the day down 1.5%. Shares of other major private lending players, such as Apollo Global and Ares Management, also experienced declines.
Blue Owl executives stated in investor letters, seen by CNN on Thursday, that they believe “market perception” fueled the spike in redemption requests, but stressed that “fundamental credit performance across our portfolio remains resilient.” They also attributed the situation to “heightened market concerns regarding AI-related disruptions.”
A Blue Owl representative declined to comment beyond the shareholder letters.
Risks Are Mounting
Major private lending firms have reported similar influxes of redemption demands from investors, with most responding with comparable restrictions on withdrawals.
Proponents of private lending view the sudden capital outflow as more indicative of growth pains than a systemic flaw. In recent years, investors flocked to private markets, drawn by the promise of higher returns than typically available in the public bond market.
However, investor anxieties about the sector did not emerge from nowhere, and the nature of modern financial markets means upsets in one corner can quickly spread.
Private credit has existed for decades, but following the 2008 financial crisis, when conventional banks were forced to tighten lending standards, it transformed from a relatively small, niche asset class into a giant holding nearly $2 trillion in capital.
“When you see a segment of the financial sector emerge out of nowhere and grow very rapidly, it’s a sign that perhaps a certain amount of risk is accumulating,” noted Itay Goldstein, a finance professor at the University of Pennsylvania’s Wharton School.
This rapid expansion, combined with the industry’s opacity—private credit terms are, by definition, not public—has long made the sector a point of concern for policymakers and academics, Goldstein observes.
Wall Street alarm sharpened last fall following the bankruptcies of First Brands and Tricolor, both of which had significant private financing.
Simultaneously, fears that artificial intelligence could eventually disrupt software companies have intensified worries about private lending, which aggressively courts middle-market tech firms. And while many fund managers have tried to downplay the sector’s software concentration, the Wall Street Journal reported this week that the four largest funds, including Blue Owl, have far greater exposure to software than their public disclosures suggest.
For instance, Blue Owl’s Credit Income Corp. fund reported that 11.6% of its portfolio consisted of loans to “Internet Software and Services” companies as of the fourth quarter. However, the Journal’s own analysis indicated the fund’s software exposure is closer to 21%.
The risk to everyday consumers may not be immediate, but it is not zero. Large U.S. banks offering consumer credit also partner with private lenders. If banks face massive losses from private lending, they are likely to tighten lending across the board, making it harder for businesses and consumers to secure financing.
“We shouldn’t underestimate the consequences of these smaller issues because once uncertainty begins, and you don’t know which bank holds what, a kind of general panic starts in the financial system,” Goldstein stated.
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