The private credit industry is facing an unexpected crisis, not from widespread loan defaults as anticipated, but from a crisis of communication and confidence. This stems from Blue Owl, a $US300 billion private credit group, which recently froze redemptions on a $US1.7 billion unlisted private credit fund marketed to retail investors. Blue Owl is a company that provides alternative capital solutions and manages investments across credit, real estate, and GP capital solutions. Its core business involves originating and managing loans for various borrowers.
The move triggered an 11 per cent drop in Blue Owl’s shares over two days and amplified existing concerns about the sector’s exposure to software companies threatened by artificial intelligence. UBS analysts estimate that 25 to 35 per cent of private credit portfolios face AI disruption risk. The situation escalated further after economist Mohamed El-Erian drew parallels between Blue Owl’s actions and the early signs of trouble in mortgage-backed securities during the Global Financial Crisis (GFC).
While comparisons to the GFC might seem extreme given the private credit sector’s $US2 billion valuation and the manageable projected default rate increase, the market’s unease is palpable. Investors are contemplating potential repercussions, such as companies struggling to access capital and forced asset sales in public markets. The firm’s handling of the redemption issue has been heavily criticised, with the market fixating on the gating of redemptions, not the broader plan around the fund’s wind-down.
Concerns about AI’s impact on software valuations and the potential for further declines are fueling the market’s skittishness. While some analysts believe the market is overreacting and that disruption takes time, the combination of rapid AI advancements, crowded positioning in technology, and inadequate risk compensation is creating volatility. The market is on edge, awaiting the other shoe to drop after a prolonged period of rising markets.
