There have been a lot of headlines in recent weeks around the private credit markets, particularly as it relates to funds called BDCs (Business Development Companies). BDCs are pools of private loans made primarily to small to mid-sized businesses. Following the Great Financial Crisis in 2009, lending to these companies dried up from traditional banking institutions and the private credit markets filled the void. Companies like KKR, Apollo, Blackstone, Bain, New Mountain, Jefferies, Blue Owl, and many others have raised billions of dollars and provided critical capital funding for small to mid-sized businesses across nearly all segments of our economy. Publicly traded BDCs are usually semi-liquid (quarterly liquidity) and are available to most individual investors. This segment of private credit has grown substantially in recent years and has run into some headline issues in recent months.
One manager in particular, Blue Owl, has been in the spotlight. News reporting about Blue Owl has created confusion and sparked fears of some sort of bigger credit problem in the broader private credit space. While our research indicates that Blue Owl’s situation is not indicative of some widespread issue with loans across the private credit landscape, the headlines have spooked markets and we want to address these issues below.
We have been investing in private credit for nearly two decades and continuously do our work on the markets and the managers we choose. We do not see systemic bad debt risk (in fact defaults are currently below historical averages) but with the explosive growth of the private credit markets over the last 15 years, there are inevitably managers that structured funds poorly or took on risk they shouldn’t have. This happens in nearly every financial market during expansion periods. We continue to be comfortable with the managers we work with and continue to see the private credit markets more broadly as a key attribute to our diversified asset allocation strategies for our clients.
Our assessment is informed by direct conversations with industry professionals conducted late last week.
Blue Owl – What’s Going On
There are semi-liquid publicly traded funds called BDCs (Business Development Companies) that are essentially pools of private loans that individual investors can buy and hold for their portfolios. On Thursday this past week, Blue Owl Capital permanently suspended quarterly redemptions in its $1.6 billion retail-focused BDC fund called OBDC II and sold $1.4 billion in direct lending assets across three vehicles to institutional buyers to free up liquidity to meet redemptions. Blue Owl shares fell ~10%; Ares, Blackstone, KKR, and Apollo dropped 5–6% in sympathy. Sensational headlines ranged from “canary in the coal mine” to comparisons with pre-2008 fund freezes. But it is important to look at this situation specifically versus some broader market breakdown.
OBDC II is a legacy private drawdown BDC launched in 2016 with a structure that forces a specific outcome in 7-10 years from formation. It was established before regulations allowed evergreen structures (perpetual vehicles that don’t have an end date). In this specific case, the fund was designed to convert to a public BDC or execute a liquidity event within 7–10 years, a plan Blue Owl telegraphed for a decade and successfully executed with three other vehicles.
But the fund had a structural flaw: it allowed 2.5% quarterly redemptions but had no mechanism for new capital to flow in. Over time, the net asset value (NAV) of the fund eroded as investors redeemed while the manager couldn’t reinvest or replace outflows. When Blue Owl attempted to merge OBDC II into its public BDC in September 2025, the public vehicle was trading at a ~20% discount—meaning legacy investors would absorb a paper loss. After backlash from investors, the firm abandoned the merger and was essentially left with having to liquidate the fund per the fund’s mandate.
Following the abandoned merger, the firm faced rising redemption pressure and a mandate to provide liquidity within the structure of the vehicle. Blue Owl recently completed a partial sale of roughly one-third of the portfolio to four institutional buyers, including CalPERS, at approximately 99.7% of par.
The sale was completed with established institutional counterparties who already allocate capital to Blue Owl strategies, and the loans continue to be managed by Blue Owl. Demand reportedly exceeded supply. Importantly, this was not a transfer to distressed buyers or a platform-level liquidation; it was a partial reallocation to institutional investors within existing relationships, executed at near-par pricing.
The assets sold were primarily higher-quality, first-lien loans (largely internal 1s and 2s), and represented a portion — not all — of those holdings. Certain more complex and non-first lien positions were excluded to streamline underwriting and accelerate execution. While this was not a strict pro rata strip across the entire book, the near-par pricing provides third-party validation of marks during a period of heightened scrutiny in private credit.
The transaction delivered significantly more liquidity than redemption gates alone would have allowed. The firm expects approximately half of the proceeds to be returned to investors by year-end, with the remainder self-liquidating over 2–3 years to satisfy the fund’s mandate. Blue Owl also noted it is forfeiting substantial fee-paying assets in order to prioritize investor liquidity, which has weighed on its stock price this year.
Is This Some Systemic Bad Loan Situation?
No. This is a structural unwind of a flawed legacy vehicle. Both Blue Owl and Apollo were unequivocal: the coverage is overblown, and the problems are idiosyncratic to a pre-regulation structure that has had known issues since 2018. However, OBDC II may not be the last—it was noted in our conversations that another firm has similarly structured legacy funds that could face comparable pressures.
The headline risk did produce real “contagion” in retail investors’ redemptions (fear). In Q4 2025, Blue Owl, Blackstone, and Ares all breached their 5% quarterly redemption gates. Apollo’s ADS (Apollo Debt Solutions) saw ~4% redemptions but remained net positive—one of the few BDCs to do so. The portfolios were not in distress; investors were reacting to headlines. This underscores that liquidity management tools—cash buffers, BSL (Broadly Syndicated Loans) allocations, diversified LP bases, disciplined gates—are all important load-bearing walls in evergreen private credit.
A Note On Blue Owl More Generally
The OBDC II resolution is heading toward an acceptable outcome, given alternatives. The near-par strip sale validates the marks, and institutional buyers did their own diligence. But the episode presents questions.
Incentive Alignment
Blue Owl’s public BDC structure generates higher fees and perpetual capital – a massive part of the firm’s earnings. The merger reportedly would have preserved that fee stream at legacy investors’ expense. According to Apollo, the firm reversed course only after public backlash, not fiduciary instinct. Blue Owl frames it as a long-telegraphed plan derailed by market timing.
Growth and Style Drift
Owl Rock (the precursor to Blue Owl) was founded in 2016 and has scaled to ~$180B in credit AUM. That velocity could introduce risk. The firm’s first-lien percentage has drifted from the mid-80s to the mid-to-low 70s, confirming a shift into second-lien positions driven by tight first-lien spreads and performance pressure. Blue Owl claims >90% first lien across the platform and sub-15% software exposure. As with all claims, verification against filings is advisable.
OBDC II Portfolio Quality
The OBDC II portfolio itself extends well beyond first-lien direct lending: second lien, unsecured, specialty finance, preferred and common equity positions. PIK (Payment-in-Kind) is ~10% (down from 12.8%), generating taxable income not collected in cash – a distribution dynamic on top of the liquidity mismatch that may be unsustainable. It is not the portfolio mix that we prefer, but even so, large institutions paid essentially par value to buy a large percentage of this book.
Blue Owl vs. Jefferies: A Side-by-Side Comparison
To illustrate the disparity between the fund at the center of the headlines and the type of vehicle we are inclined to allocate to, the following draws on public filings from OBDC II and Jefferies BDC across Q1–Q3 2025.
First Lien
Jefferies BDC maintains ~99% first lien versus OBDC II at ~77–78%. This ~20pp gap means OBDC II carries meaningfully greater subordination risk in a downturn.
PIK Exposure
PIK (Payment-In-Kind) income is interest that is not paid in cash but instead added to the loan’s principal balance, increasing the amount owed over time; while it can temporarily support reported yields, it reduces current cash flow and signals borrower stress or weaker credit quality if relied upon heavily. OBDC II’s PIK income runs 5–8x higher than Jefferies’ (~7–11% vs. ~1–2% of total investment income), indicating greater reliance on non-cash earnings that could mask credit stress.
An Aside: The Software Problem in Some Private Credit
Separate from the Blue Owl structural story, there is a real credit quality issue building across some BDC portfolios. AI has driven a repricing of software equities and leveraged loans, particularly where business models rely on deferred profitability. Sponsor-backed legacy software loans have been hit hardest: spreads widened, prices dropped to the mid-90s, and there is a fading bid for growth-dependent credits.
The core issue: some BDC portfolios are loaded with loans to PE-backed software companies that took on heavy leverage expecting growth that never materialized, then got crushed by double-digit floating-rate yields. One large BDC marked down NAV by ~20% and several have rushed to raise investment-grade debt to shore up liquidity. The concern is that weaker vintage loans from the early-decade boom are beginning to surface.
The risk is concentrated in ARR-based lending where leverage is tied to recurring revenue rather than cash EBITDA, making outcomes sensitive to churn, pricing pressure, and AI-driven competitive dynamics. Mature, EBITDA-positive software remains a different risk profile. Blue Owl argues their software holdings are sticky businesses benefiting from AI, with 50%+ revenue and EBITDA growth. That may be true for well-underwritten credits, but it does not address the broader industry problem.
How Our Direct Lending Partners Are Positioned
Within private credit, we view direct lending as a core building block and typically size it at roughly 50% of the allocation. Our managers are addressing AI-related software risk through underwriting discipline, portfolio construction, and selective avoidance rather than broad sector exclusions.
How We Evaluate Direct Lending
Our focus is on downside protection and sustainable cash flow: first-lien senior-secured positioning, true cash interest rather than aggressive PIK, conservative leverage with realistic refinancing paths, and demonstrated sponsor willingness to support assets under stress. We use AI tools internally to systematically review manager filings for changes in leverage, interest coverage, PIK usage, covenant structure, and liquidity disclosures—the objective is to surface risks earlier and apply consistency across a growing universe of borrowers and managers.
The Bottom Line
The Blue Owl/OBDC II episode is a legacy structural issue and not something we see as systemic. Assets were sold at par. The software credit deterioration is separate and more consequential but concentrated in ARR-underwritten, growth-dependent loans, not the asset class broadly. Our exposure is with managers who underwrite to cash flow and have demonstrated discipline across cycles.
A useful risk lens going forward:
- Watch underwriting standards, PIK, non-accruals, leverage, and style drift.
- Watch software credit exposure specifically.
- Watch the gap between marks and reality as weaker vintages season.
AI is creating dispersion, not a blanket problem for private credit. Manager selection has never mattered more.
About Jerrel Armstrong
Before joining IWP (now Matter) in 2021, Jerrel spent nearly three decades working in debt and equity capital markets. He has also served on several nonprofit boards. As Matter’s CIO, Jerrel is responsible for setting and overseeing the firm’s investment strategy, asset allocation, and portfolio construction across all client relationships. Jerrel graduated from Colorado College with a BA in world political economy and has an MBA from the Thunderbird School of Management. He is the proud father of three daughters and lives with his wife in Denver, Colorado, where he grew up.
About Thierry J.D. Brunel
Thierry joined Matter in 2013, bringing years of experience in family office and wealth management. He previously worked in investment research and portfolio management roles at Convergent Wealth Advisors and GenSpring Family Office. At Matter, Thierry leads the investment committee, advising families on portfolio strategy and governance. A Wake Forest University graduate, Thierry has a diverse international background. He’s active in his community, serving as an assistant coach for the John Burroughs School Varsity football team in St. Louis.
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This report is the work product of Matter Family Office. Unauthorized distribution of this material is strictly prohibited. The information in this report is deemed to be reliable but has not been independently verified. Some of the conclusions in this report are intended to be generalizations. The specific circumstances of an individual’s situation may require advice that is different from that reflected in this report. Furthermore, the advice reflected in this report is based on our opinion, and our opinion may change as new information becomes available. Nothing in this presentation should be construed as an offer to sell or a solicitation of an offer to buy any securities. You should read the prospectus or offering memo before making any investment. You are solely responsible for any decision to invest in a private offering. The investment recommendations contained in this document may not prove to be profitable, and the actual performance of any investment may not be as favorable as the expectations that are expressed in this document. There is no guarantee that the past performance of any investment will continue in the future.