Blue Owl blinks

Private credit is supposed to be boring—but the industry’s new AI kingmaker just delivered some drama.

Alternative asset manager Blue Owl scrapped plans to fold one of its private funds into its publicly traded fund, Blue Owl Capital Corp (OBDC). The idea was to unlock long-term value by streamlining operations, cutting costs, and letting the combined vehicle benefit from OBDC’s lower funding costs and higher leverage.

But the private fund investors were being asked to exchange their shares at the net asset value of OBDC, which trades at about a 20% discount to its NAV—meaning private fund investors would immediately be hit with 20% paper losses, and they couldn't redeem their capital until the merger closed.

Investors understandably balked. The backlash dragged Blue Owl to 2023-level lows on Monday, and today the company ultimately decided the deal’s benefits weren’t worth the volatility (or negative headlines). Shares remain down 40% year to date.

AI anxiety

We wrote last week that Morgan Stanley estimated that $800 billion—nearly a third of the $3 trillion big tech companies plan to spend on AI over the next three years—will be funded by private credit, and Blue Owl is at the center of that pipeline.

The company just lined up a $14 billion package for an Oracle-OpenAI data-center project in Texas, raised another $30 billion for a Meta Platforms facility in Louisiana, and is even financing the purchase of Nvidia chips that will be leased to Elon Musk’s xAI.

These deals are marketed as low-risk: Lenders say the tenants sign long-term, ironclad leases that guarantee repayment. In fact, Microsoft is rated higher than the US government and is expected to double its data-center capacity within two years. On paper, the system should be bulletproof.

However, sentiment about both private credit investments and the AI trade as a whole has spooked the market. Investors have been pulling their money out of Blue Owl en masse: The Financial Times reported that they’ve withdrawn $150 million from its private fund through the first nine months of the year, 20% more than during the same period in 2024.

Today’s episode underscores the problem: If the underlying assets are so safe, why does Blue Owl need to trap investors and force them into 20% paper losses? If the safety of private-credit AI deals is partly propped up by limiting investor rights and managing liquidity behind the scenes, it might not be very safe at all.

Wall Street still argues that private credit deserves a central place in portfolios, offering diversification and a “healthy premium” over public debt. But critics say the boom is masking real risk: Jeffrey Gundlach warns that weak lending has migrated into private markets, where inaccurate pricing and hidden volatility are easier to bury.—SY