Investors are alarmed by rumors of a private credit crisis

In private credit, there are parallels to 2007

Investors should be aware of the potential for a crash but should not panic.

The saying goes, "Generals are always prepared to fight the last war." It is simple to base our expectations on the events of our most recent significant bull or bear market. For this reason, a few minor rumblings in private credit are receiving a lot of attention. This may seem familiar to anyone who witnessed the subprime mortgage crisis leading up to the global financial crisis.

Blue Owl, an alternative investment manager with significant exposure to the private credit market, and two of its fundsa listed fund called Blue Owl Capital Corporation, which goes by the ticker OBDC, and an unlisted fund called Blue Owl Capital Corporation II, which goes by the ticker OBDC IIare the subject of the most recent wobble.

OBDC II redemptions increased to such an extent in the latter part of last year that it would have had to stop. Thus, Blue Owl suggested that OBDC II become part of OBDC. Investors could have sold shares at any time because OBDC is listed.

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Start your trial, but since OBDC was trading at a discount to net asset value, the merger terms would have effectively reduced the value of investments in OBDC II by 20%. It was crushed by irate investors.

Regular OBDC II redemptions will be permanently stopped, according to Blue Owl.

Thirty percent of the investors' capital will soon be returned, with the remaining portion being distributed over the ensuing years. A portion of OBDC II's portfolio will be sold to new Blue Owl-run vehicles backed by US pension funds and a Blue Owl-owned insurer in order to finance the 30%. In the same transaction, assets are being sold by OBDC and another Blue Owl fund.

Blue Owl Capital Corporation's share price graph (NYSE: OBDC).

Owl cap in blue. Inc. (New York: OBDC) US dollar price.

The bullish argument is that institutional investors are willing to purchase the assets at reasonable prices (99.7 percent of carrying value), despite the fact that OBDC trades at a discount to net asset value and cautious investors have been withdrawing their funds from OBDC II.

Cynics will argue that the best loans will be purchased by the new investors and that some of the portfolio's other assets won't perform as well. The issue is that we are unable to determine which view is fair.

Problems with private credit could affect the larger market.

It's obvious that investors are becoming more anxious about private credit. They are concerned that certain funds have made large loans to software and tech companies that may face existential threats from AI or from an AI bubble bursting (pick your poison).

The sector's lack of transparency makes it challenging to assess the effectiveness of loans and the strength of lender protections. Additionally, they have every incentive to flee as soon as they can if they are startled.

This does not imply that this cycle's subprime crisis will be private credit. Planning for the last war is not what we want to do. Therefore, we shouldn't consider this to be the same kind of systemic threat that will cause a global collapse. However, given the significant role that private credit currently plays in financing and fundraising, a takeover here might increase pressure on the larger market.