Don't just focus on NVIDIA and Oracle CDS, the "hot PE" Blue Owl in the U.S. has exploded, impacting the trillion-dollar private equity market
Don't just focus on NVIDIA and Oracle CDS, the "hot PE" Blue Owl in the U.S. has exploded, impacting the trillion-dollar private equity market
As the entire market's attention focuses on NVIDIA and Oracle's credit default swaps (CDS) and the artificial intelligence boom, seasoned Wall Street professionals are issuing warnings: the real risks may lie elsewhere.
Rich Privorotsky, head of Goldman Sachs' Delta-One division, bluntly stated in a recent report: "Perhaps we should pay more attention to Blue Owl (OWL) and Capital One (COF)." As a "hot" giant in the U.S. private credit market, Blue Owl has recently faced a severe setback, exposing deep cracks in this $1.7 trillion market.
According to Bloomberg, Blue Owl suddenly announced on Wednesday the cancellation of its merger plans for two private credit funds, causing its stock price to drop to its lowest point since 2023. The merger was originally intended to integrate private instruments into the publicly listed Blue Owl Capital Corp. (OBDC), but concerns that investors could face up to a 20% paper loss triggered a sharp market rebound and regulatory scrutiny. Blue Owl co-founder Craig Packer admitted that negative reports regarding private credit led to the decline in stock price.
More severe is the emerging liquidity pressure. Redemption requests for the involved private funds have surged, with approved redemption amounts in the third quarter reaching approximately $60 million, exceeding the preset limit. Although Blue Owl has promised to resume redemptions in the first quarter of next year after the merger termination, the market is concerned that if the redemption wave continues, the fund may be forced to limit capital outflows. Previously, JPMorgan CEO Jamie Dimon had warned that underwriting standards for non-bank institutions were loosening, and DoubleLine Capital CEO Jeffrey Gundlach pointed out that the industry has "junk loans," putting investor confidence under severe strain.
Goldman Sachs' analysis further reveals macro-level transmission risks. Privorotsky pointed out that while the market is intoxicated by the prosperity of tech stocks, the pressures of a "K-shaped economy" are becoming evident—not only is private giant Blue Owl facing investor withdrawals, but consumer finance firm Capital One is also seeing its stock price decline due to rising non-performing asset rates. This indicates that from institutional credit to personal credit, the underlying assets of the U.S. credit system are bearing the delayed impact of monetary tightening cycles.
Deal Falls Through and Stock Price Plummets
On November 5, Blue Owl announced plans to merge its $1.8 billion non-traded business development company (BDC) Blue Owl Capital Corp. II with the publicly listed entity OBDC, which has a market capitalization of $17.6 billion. However, the proposal quickly raised questions: due to a roughly 20% discount of OBDC's trading price relative to its net asset value, investors in the acquired fund would face immediate paper losses upon conversion.
Following the announcement, investors responded by selling off, which not only dragged down the stock price of Blue Owl's parent company but also widened OBDC's year-to-date decline to approximately 22% Faced with market resistance, Blue Owl urgently halted its merger on Wednesday morning. Packer admitted in an interview that he was "frustrated by the discount," and despite simultaneously announcing a $200 million stock repurchase plan, it failed to restore market confidence. This represents a rare public setback for Blue Owl, which has been thriving since its establishment in 2021 through the merger of Owl Rock and Dyal Capital.
Liquidity Test and Redemption Dilemma
The core of the turmoil stems from Blue Owl Capital Corp. II, a traditional private equity tool. The fund was designed to provide investors with liquidity channels (such as listing, merging, or selling) and allowed for quarterly redemptions. However, as the market environment deteriorated, withdrawal requests surged.
Documents show that the fund's redemption requests in the third quarter have exceeded the preset limits. Although Blue Owl suspended redemptions when announcing the merger, the company plans to restore this mechanism in the first quarter of next year after the termination of the transaction. The market is concerned that if redemption pressure continues, fund managers may activate the "gate" mechanism to limit capital outflows.
Packer stated that "all options are on the table," including independently listing the fund or selling assets. Management must find a solution before April next year, or they may face liquidation pressure. This uncertainty has intensified market concerns about the liquidity of private credit assets.
Former Darling Faces Industry Headwinds
Blue Owl was once a model of prosperity in the $17 trillion private credit market. It rapidly rose to prominence during the low-interest-rate era with its "one-stop financing" model, and its founders Doug Ostrover, Marc Lipschultz, and Michael Rees all became billionaires. The early BDC products launched brought substantial returns, and the company did not face today's skepticism at the time of its listing.
But the market dynamics have changed. As borrowers' debt burdens increase, pressure on the private credit market has escalated.
Expectations of interest rate cuts by the Federal Reserve have instead compressed the profit margins of lending institutions, forcing them to tighten spreads in order to compete for deals. JP Morgan CEO Dimon previously warned about the deterioration of underwriting standards for non-bank institutions in light of bankruptcy cases like First Brands Group, while Gundlach bluntly stated that "junk loans" in the private credit sector could trigger a financial crisis.
Goldman Sachs Warning: Overlooked Risks
While the market focuses on AI concept stocks like NVIDIA, Goldman Sachs' warnings are particularly sharp. Privorotsky pointed out that investors are overly focused on the CDS of tech giants, neglecting the signals conveyed by Blue Owl and Capital One.
The report emphasizes that Capital One's stock price has recently dropped by about 5%, with insiders reducing their holdings and the rate of non-performing loans rising (an increase of 42 basis points, far exceeding the seasonal norm of 19 basis points), which serves as an alarm. This reflects that the "K-shaped economy" is eroding lower and middle-tier borrowers, with pressure spreading from the bottom to the middle class Despite institutions like Morgan Stanley predicting a financing gap of $1.5 trillion for AI infrastructure in the coming years, with about $800 billion potentially filled by private credit, the current market turmoil indicates that private credit may be the most vulnerable link in this grand narrative. The publicly listed BDC ETF has failed to follow the broader market rebound, showing a significant divergence from the overall credit market. If this key financing channel is hindered by a liquidity crisis, its impact will far exceed the stock price fluctuations of a single company.
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