MW Private-credit managers are betting your money on a market that has never been truly stress-tested
By Fabio Natalucci
Retail investors seeking fast cash could trigger a financial crisis
A spiral of illiquidity, forced selling, markdowns and deleveraging could emerge. Sound familiar? It happened with securitization markets during the 2007-08 financial crisis.
The recent selloff of Blue Owl Capital's (OWL) stock after a redemption at one of its retail private-credit funds has become the poster child for increasing anxiety about the health of the private-credit market.
Private credit has grown rapidly in recent years - approaching $2 trillion - and it has never been tested through a full recession or financial-market stress without the backstop of the U.S. Federal Reserve.
The fault line exposed now is that private credit is being offered to retail investors and wealthy individuals whose liquidity preferences are different from sophisticated, more patient institutional investors. These new investors line up to get their money back, effectively forcing sales of illiquid assets, as in the case of Blue Owl, at a time when entire segments of financial markets are getting repriced based on investor estimates of how artificial intelligence will disrupt the economy.
Shares of Blue Owl hit a 52-week low earlier this month, as did shares of Blackstone (BX). Other major firms including Carlyle Group $(CG)$, KKR $(KKR)$, Apollo Global Management $(APO)$ and Ares Management $(ARES)$ were also caught in the selloff.
It is worth noting that vulnerabilities in private credit are increasing at a time when economic growth is still strong and financial conditions are very accommodative, while the credit cycle is still benign. The answer to whether the stress in this nearly $2 trillion market can turn into something more systemic, like the 2008 global financial crisis, lies in its structure and interconnectedness. Let's take a look.
Liquidity risk
Liquidity risk has historically been limited in private credit. Pension funds and insurance companies have long investing time horizons and understand that illiquid assets are the source of the higher yield or "illiquidity premium" they earn.
But the industry is expanding aggressively into retail, private wealth and 401(k)s through offerings like interval funds, business development companies (BDCs) and integrated technology platforms. Retail investors generally have shorter horizons and stronger liquidity preferences.
The Blue Owl episode highlights the friction that can emerge when periodic, albeit limited, liquidity is promised against fundamentally illiquid underlying assets.
To provide cash to investors in its OBDC II fund, Blue Owl said it sold $1.4 billion of senior secured credit from 27 industries across three of its funds. Four pension funds and insurance companies were among the buyers at an average price close to par, and it was later reported that one of the buyers was an insurance asset manager it owns.
Saba Capital and Cox Capital Partners announced their intention to launch tender offers to purchase shares in three Blue Owl BDCs, with offer price reportedly at a 20% to 35% discount to estimated NAVs - a significant haicut for investors in those vehicles to access immediate liquidity.
Leverage: Layered and opaque
Leverage in the private-credit ecosystem, while limited relative to institutions like banks, exists in complex and opaque layers.
The companies doing the borrowing are leveraged. There also is leverage at the fund level - through subscription lines or capital-call facilities, net-asset-value lending and BDC structures. There is potentially leverage at the investor level through the use of derivatives and other mechanisms.
This layering makes it difficult for investors and regulators to assess overall financial leverage in the system. More importantly, it complicates understanding how these layers may interact in stress - especially when combined with illiquid assets.
Interconnectedness: Strength or vulnerability?
Distributing risk enhances financial stability. But under stress, this interconnectedness could rapidly transmit shocks.
In principle, distributing risk across diverse investors with different horizons and risk appetites enhances financial stability. But under stress, this interconnectedness could rapidly transmit shocks.
For example, insurance companies play a central role in channeling funding into private-credit markets, and some are owned by private-credit managers.
Imagine a situation where, amid rising strains in credit markets, an insurance company needing liquidity but unable to retrieve capital from illiquid investments is forced to sell other more liquid assets, like equities or investment-grade bonds. Correlations across asset classes could rise abruptly, propagating the initial stress like a wave across segments of the financial system seemingly uncorrelated.
Credit quality: Calm on the surface
Private-credit funds appear to have diversified exposures across industries. Yet the broader economy is increasingly exposed to what amounts to a massive macro bet on AI. Investors have aggressively repriced sectors perceived as losers from AI disruption - software, data analytics, tax strategies, cybersecurity and, most recently, delivery and payments. Blue Owl said about 13% of the credit sold represented the internet software and services industries.
Other developments should give investors pause: increased use of payment-in-kind $(PIK)$ interest and the growing use of continuation funds to generate secondary liquidity. These tools can smooth short-term pressures, but they may mask underlying fragilities.
Private-credit markets remain opaque. Prices of loans can vary widely across funds holding similar assets. Secondary liquidity and price discovery are limited.
This opacity matters most for retail investors, who have more immediate liquidity needs and rely more on timely and trustworthy pricing to assess risk. But it also matters for insurance companies, which depend heavily on ratings in determining capital treatment.
If trust in marks, ratings or valuations were to evaporate, the lack of transparent price discovery could lead to a sudden rush for liquidity by retail investors that would amplify stress. Once credit assets are sold at a discount in secondary markets, that price becomes an actual mark for the entire industry.
A spiral of illiquidity, forced selling, markdowns and deleveraging could emerge - amplified by opacity and rapidly fading trust. Sound familiar? It happened with securitization markets during the 2007-08 financial crisis.
Read: Hedge funds offer locked-up private credit investors a way out - at a hefty discount
Such a crisis is a tail risk for now, and possible knock-on effects from the Blue Owl episode seem limited at the moment. But while private credit may not necessarily be the source of systemic stress, it may become an important conduit for it, given its high degree of interconnectedness - particularly in the event of a sharp slowdown of the economy. Investors and policymakers should ask themselves whether the push into the retail space may turn out to be private credit's Achilles' heel.
Fabio Natalucci is CEO of the Andersen Institute for Finance & Economics.
More: 'I'm shocked that people are shocked,' says JPMorgan executive about private-credit meltdown
Plus: This fund that now says it'll never open up for withdrawals has El-Erian making Bear Stearns parallels
-Fabio Natalucci
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(END) Dow Jones Newswires
February 26, 2026 08:35 ET (13:35 GMT)
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