The private market bubble begins to burst
The boom of the private credit sector is facing a new challenge following the decision by Blue Owl Capital to permanently restrict withdrawals from one of its retail-focused investment funds. Shares of Blue Owl Capital fell nearly 6% on Thursday after the firm sold $1.4 billion in loans from three of its private credit funds. The largest portion of the sale originated from a semi-liquid private credit fund available to US retail investors, Blue Owl Capital Corporation II, which will cease offering quarterly redemption options to its investors. This has reignited the debate over whether pressure is resurfacing in one of Wall Street's fastest-growing corners. "This is the canary in the coal mine," Dan Rasmussen, founder and advisor at Verdad Capital, told CNBC. "The private market bubble is finally beginning to break."
Interest rate fears
The broader fear is that years of ultra-low interest rates and tight yield spreads encouraged lenders to make riskier moves, financing smaller, more stagnant companies with yields that appeared attractive compared to public markets, according to market observers. "Years of ultra-low rates and spreads and minimal defaults led investors to move continuously further out on the risk spectrum," Rasmussen stated. "This is a classic case of 'yield for idiots'—high yields that don't translate into high returns because the borrowers were too risky." Private credit, which typically involves direct loans provided by non-bank lenders to companies, has grown into a market valued at approximately $3 trillion globally. Business Development Companies (BDCs), which are investment vehicles that lend to small and medium-sized private firms and constitute a significant part of the private credit market, are increasingly funded by retail investors rather than institutional ones, according to research from Duke University's Fuqua School of Business.
The Fuqua research, published in September of last year, showed that institutional ownership of BDC shares has steadily declined over time, reaching an average of approximately 25% in 2023. "This trend indicates that retail investors are playing an increasingly larger role in supplying capital to publicly traded BDCs," the researchers noted.
What happened in 2025
In 2025, the eight largest members of the S&P BDC Index offered dividend yields reaching up to 16%, with Blue Owl exceeding 11%. For comparison, the yields of the S&P Global US high-yield corporate bond index for 1, 3, and 5 years stand at approximately 7.7%, 9%, and 4%, respectively. "The majority of loans in private credit funds held by individual investors are high-yield loans. They are, by nature, somewhat risky," said Guy LeBas, head of fixed income strategy at Janney Montgomery Scott. "During the cycle, you can expect some material defaults in these funds," he added.
Rising risks?
Concerns regarding private credit were recently reignited as investors worried that artificial intelligence tools could upend traditional software business models, a key group of borrowers for the industry, adding to existing anxieties over rising leverage, opaque valuations, and the possibility that local pressures on borrowers could reveal deeper systemic weaknesses. The collapse of First Brands Group in September of last year highlighted the risks of the private credit sector, as the over-leveraged auto parts manufacturer found itself in distress, underscoring how aggressive debt structures had been quietly built during years of easy financing.
The episode reinforced fears that similar risks could be hiding throughout the market, leading JPMorgan CEO Jamie Dimon to warn that private credit risks are "hiding in plain sight," cautioning that "cockroaches" will appear when economic conditions worsen. The fundamental problem with deals in the private market sector is the multi-year commitments that do not align with quarterly redemptions, said Michael Shum, CEO of Cascade Debt, which develops infrastructure software for private creditors and asset-based lenders. "When times are good, cash flows cover normal redemption requests. When times are bad, requests increase and it becomes a race to the bottom," he said.
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