Don’t just focus on Nvidia and Oracle CDS; America’s “hot PE” Blue Owl has blown up, impacting the trillion-dollar private equity market.

While the entire market’s attention is focused on Nvidia and Oracle’s credit default swaps (CDS) and the artificial intelligence boom, seasoned Wall Street insiders are sounding a warning: the real risks may lie elsewhere.

Rich Privorotsky, head of Goldman Sachs’ Delta-One department, stated bluntly in his latest report: “Perhaps we should pay more attention to Blue Owl (OWL) and Capital One (COF).” As a major powerhouse in the U.S. private credit market, Blue Owl has recently suffered a severe setback, exposing deep cracks in this $1.7 trillion market.

According to Bloomberg, on Wednesday Blue Owl abruptly announced the cancellation of its plan to merge two private credit funds, prompting its share price to fall to the lowest point since 2023. The merger was originally intended to incorporate private vehicles into the publicly listed Blue Owl Capital Corp. (OBDC), but concerns over investors potentially facing losses of up to 20% led to a fierce market backlash and regulatory scrutiny. Blue Owl co-founder Craig Packer admitted that negative reports about private credit contributed to the share price decline.

More critically, liquidity pressure is emerging. Redemption requests for the involved private funds have surged, with approved redemptions in the third quarter totaling around $60 million, already breaching preset limits. Although Blue Owl has promised to resume redemptions in the first quarter next year following the termination of the merger, the market fears that if the redemption wave continues, the funds may be forced to restrict outflows. Previously, JPMorgan CEO Jamie Dimon had warned of lax underwriting standards in non-bank institutions, and DoubleLine Capital CEO Jeffrey Gundlach directly criticized the industry’s "junk loans," with investor confidence facing stern tests.

Goldman Sachs’ analysis further reveals macro transmission risks. Privorotsky pointed out that while the market is intoxicated by the tech stock boom, the pressures of a “K-shaped economy” are surfacing—not only is private credit giant Blue Owl facing investor withdrawals, consumer finance giant Capital One is also seeing its stock drop due to rising rates of bad assets. This shows that from institutional credit to personal credit, the underlying assets of the U.S. credit system are bearing the late-stage impact of the monetary tightening cycle.

Deal Collapse and Share Price Plunge

On November 5, Blue Owl announced plans to merge its $1.8 billion non-traded business development company (BDC), Blue Owl Capital Corp. II, into the $17.6 billion publicly traded entity OBDC. However, the deal quickly drew skepticism: since OBDC's market price is about 20% below its net asset value, investors in the acquired funds would face an immediate paper loss upon conversion.

After the announcement, investors responded by selling, dragging down the share price of Blue Owl’s parent company and expanding OBDC’s year-to-date losses to roughly 22%.

Facing market resistance, Blue Owl urgently called off the merger in early trading on Wednesday. In an interview, Packer admitted he was “frustrated by the discount,” and even the simultaneous announcement of a $200 million stock buyback failed to restore market confidence. For Blue Owl, which had enjoyed smooth sailing since its 2021 founding through the merger of Owl Rock and Dyal Capital, this was an extremely rare public setback.

Liquidity Test and Redemption Predicament

The core of the turmoil stems from Blue Owl Capital Corp. II, a traditional private credit vehicle. The fund was originally designed to offer investors liquidity options (like listing, merging, or selling) and permitted quarterly redemptions. However, as market conditions deteriorated, requests to withdraw surged.

Documents show that the fund’s third-quarter redemption requests have already exceeded preset limits. While Blue Owl suspended redemptions during the merger announcement, the company plans to resume the mechanism in the first quarter following the deal’s termination. The market fears that if redemption pressure persists, fund managers may initiate a “gate” mechanism to limit outflows.

Packer stated “all options are under consideration,” including listing the fund independently or selling assets. Management must come up with a solution by April next year or risk facing liquidation pressure. This uncertainty is intensifying market concerns about the liquidity of private credit assets.

Once a Market Darling, Now Facing Industry Headwinds

Blue Owl was once the model for prosperity in the $1.7 trillion private credit market. In the era of low interest rates, it rapidly rose through its “one-stop financing” model, with founders Doug Ostrover, Marc Lipschultz, and Michael Rees all joining the ranks of billionaires. Early BDC products brought hefty returns, and doubts were absent at the time of listing.

But market conditions have shifted. As borrower debt burdens increase, stress in the private credit market is climbing.

Expectations for Fed rate cuts have ironically squeezed lender profit margins, with institutions forced to tighten spreads to compete for deals. JPMorgan CEO Dimon had previously cited bankruptcies of firms like First Brands Group as warnings that underwriting standards at non-bank institutions were deteriorating, while Gundlach bluntly asserted that “junk loans” in private credit could spark a financial crisis.

Goldman’s Warning: Overlooked Risks

As the market fixates on Nvidia and other AI concept stocks, Goldman’s warning is especially pointed. Privorotsky noted that investors are excessively focused on the CDS of tech giants, overlooking signals from Blue Owl and Capital One.

The report emphasizes that Capital One’s share price has recently fallen around 5%, with insider selling and a charge-off rate increase of 42 basis points—far above the 19 basis points seasonal norm—which are both alarming. This reflects how the “K-shaped economy” is eroding lower-tier borrowers, and the pressure is spreading from the base upward to the middle class.

Although institutions such as Morgan Stanley project a $1.5 trillion financing gap for AI infrastructure in the coming years, with about $800 billion possibly filled by private credit, current market turbulence shows private credit may be the most fragile link supporting this grand narrative. Publicly listed BDC ETFs have failed to rebound with the broader market, showing a clear divergence from the credit market overall. If this key financing channel is stalled by a liquidity crisis, the effects would far exceed mere share price swings of individual companies.

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