Money Stuff: People Are Worried About Blue Owl Liquidity

In 2018, David Einhorn’s hedge fund, Greenlight Capital, was having a run of disappointing performance. Some investors wanted to take their money back, but they couldn’t: During happier times, Greenlight had imposed pretty strict limits on withdrawals. The investors complained; one of them told the Wall Street Journal that Greenlight’s “liquidity terms are onerous and out of the norm today,” and that “investors would be more comfortable with those terms if the returns were better.”

I argued that this had it exactly backwards: 

Well but the returns aren’t better! And the investors would no doubt be quite comfortable withdrawing their money if the liquidity terms were less onerous! The downside of strict liquidity terms, for a hedge fund manager, is that when your performance is bad your investors complain to the press about your liquidity terms. The upside is that they can’t take their money out. … If your investors are complaining to the press about how onerous your liquidity terms are, you made the right call on the liquidity terms. If they were less onerous, your investors would be gone.

That is: If you run an investing business, your main, existential job is to keep your clients’ money. One way to do this is by having consistently great returns, so your clients always want you to invest as much of their money as possible. That feels great, and if you can do it more power to you, but it doesn’t always work.

The other way to do it is structural: When times are good, you set up your investment vehicle in such a way that, if times get bad, you can keep the money. When times get bad, this approach doesn’t feel good. It is not fun when your clients complain about you on the front page of the Wall Street Journal. But your existential job, as an investment manager, is not to feel good. It’s to keep the money. And you can control your lockup terms more reliably than you can control your performance. 

We have talked a lot over the last few years about the rise of private credit. One general point that I and others have made about private credit is that it has a more robust funding model than bank credit. Banks are in the business of maturity transformation: They borrow short-term from depositors, and lend long-term to borrowers. If the depositors get nervous, they can all ask for their money back, and the bank will have to sell assets at distressed prices and could go bust. Private credit firms are in the business of maturity matching: They raise long-term, locked-up money from investors, and lend it long-term to borrowers. They are less regulated than banks because they are less risky, as a matter of funding. They might make stupid loans! Nothing prevents that. But they are fundamentally not runnable: The investors’ money is locked up, so they can’t take it out in bad times, so the private credit funds can’t be forced to sell their assets at the worst time.

There are caveats to that. For one thing, leverage creeps in everywhere. Private credit funds juice their returns by borrowing money from banks, so some systemic risk gets recycled back into the system. 

For another thing, private credit really wants to get a lot of retail money (from individual investors and their retirement accounts), and there is a widespread though somewhat perplexing view that retail investors require more liquidity than institutional investors. “There’s a focus on delivering vehicles which can provide enough liquidity for 401(k) access,” a private credit lawyer said recently, even though the whole point of a 401(k) is that you’re not supposed to need your money back for decades.

Anyway last week Blue Owl Capital Inc. did … something … with some of its retail private credit funds? Bloomberg’s Olivia Fishlow, Ellen DiMauro, and Silas Brown reported on Thursday:

The New York-based private credit giant has faced increasing withdrawal requests from investors in recent months, fueled in part by concerns about its exposure to software companies amid the rapid rise of artificial intelligence.

This week, Blue Owl said it would no longer allow for redemptions from one of its retail-focused private credit funds, abandoning an earlier plan to reopen withdrawals later this quarter. Instead, the firm decided to start returning investors’ cash.

Here is the announcement. Typically, Blue Owl Capital Corporation II — Blue Owl’s retail-oriented non-traded business development company, usually called “OBDC II” — would do quarterly tender offers for up to 5% of the fund’s shares, which is fine in normal times (most investors don’t want their money back) but constricting in tough times (more do). Now, OBDC II is not doing its usual 5% tender; instead, it is returning about 30% of its capital to investors in one go. From the announcement:

At approximately 30% of net asset value, the first quarter return of capital distribution is expected to be six times the size of the 5% tender offer previously planned for the quarter. Going forward, the OBDC II Board intends to prioritize delivering liquidity ratably to all shareholders through quarterly return of capital distributions, which are intended to replace future quarterly tender offers and may be funded by earnings, repayments, other asset sale opportunities or strategic transactions.

So there is a sort of semantic dispute over whether it is actually limiting withdrawals:

“We’re not halting redemptions, we’re just changing the form, and if anything, we’re accelerating redemptions,” Craig Packer, Blue Owl’s co-president said in a CNBC interview Friday morning. 

What does it mean? Fishlow, DiMauro and Brown write:

For years, private credit funds trumpeted a key distinction from other corners of finance: insulation from liquidity mismatches.

Because investors typically commit capital for long, fixed periods, and the funds deploy that money into loans with similarly lengthy maturities, the risk of being forced to sell assets at cut-price rates to meet demands for liquidity is minimized. At least, that’s the theory.

But recent strains within Blue Owl Capital Inc.’s business development companies suggest the industry may not be entirely shielded from that longstanding vulnerability.

In a sense, “we got a lot of redemption requests” does suggest that private credit is not entirely insulated from liquidity mismatches; it is not entirely run-proof. In another sense, “we got a lot of redemption requests and we said no” suggests that it is pretty run-proof. A run on the bank is not just “investors want their money back”; it’s “investors want their money back and we have to give it to them.” [1]

Again, though, Blue Owl didn’t quite say no; it is returning a lot of money to its investors. But it is doing so ratably, that is, it is giving back 30% of every investor’s money, rather than fully cashing out investors who ask for their money back. Also it is not quite “being forced to sell assets at cut-price rates to meet demands for liquidity.” It is not being forced, for one thing, but for another thing it’s selling those assets at 99.7 cents on the dollar:

Blue Owl Capital Inc., facing a looming deadline to return cash in one of its private credit funds, found four buyers for a $1.4 billion portfolio of loans to help pay out investors: Three of North America’s biggest pension funds and its own insurance asset manager.

Chicago-based Kuvare, for which Blue Owl manages assets, along with the California Public Employees’ Retirement System, Ontario Municipal Employees Retirement System and British Columbia Investment Management Corp. bought the debt, according to people with knowledge of the matter. Blue Owl said late Wednesday that it sold the loans at 99.7% of par value.

To the extent Blue Owl is selling its loans to itself (Kuvare), you might worry about those marks, but it is also selling them to big arm’s-length outside counterparties. And you might worry that — as in a classic run — Blue Owl might be selling its best and most liquid loans first, though its announcement stresses that it is selling a representative sample. (“Each investment to be sold represents a partial amount of each Blue Owl BDC's exposure to the respective portfolio company,” and “the largest industry represented is internet software and services at 13%, generally consistent with the industry composition of Blue Owl's overall direct lending strategy and reflecting continued confidence in the quality and valuations of these software investments.”)

There are two bigger worries. One is that private credit’s structural protections might not work as well as they’re supposed to. Again, Blue Owl doesn’t have to cash out OBDC II investors, but it will, sort of. It is doing that, presumably, for investor-relations and public-relations and reputational reasons: It’s a bad look to keep disgruntled investor’s money, even if you’re technically allowed to. The question is how constraining those reasons are. In 2018, David Einhorn could just grit his teeth and ignore his investors’ complaining, but in 2007, famously, Bear Stearns & Co. spent billions of dollars of its own money bailing out some hedge funds that it managed. It was not actually required to do that — the hedge fund’s liabilities were not technically Bear’s problem — but it worried that letting the hedge funds go would signal weakness to the market and lead to further problems. (Bailing them out also led to further problems, and things did not end well for Bear.) Bear’s hedge funds were not vulnerable to runs in theory, but they were in practice, and maybe private credit’s retail funds are too. “Is this private credit’s 2007 moment,” asks Bloomberg’s Markets Daily newsletter.

The other worry is that private credit is in the middle of a giant push to manage trillions of dollars of retail money, and this is not exactly helpful for that effort. Logically or not, retail investors do want liquidity, and very public liquidity hiccups are bad for business. “The timing is especially awkward because Wall Street is rushing to bring private assets to the masses,” adds Markets Daily. “Trying to convince 401(k) retirement plans to add such funds gets tougher when investors are blocked from exiting.” Ideally the sequence is (1) have a run of good performance, (2) sell tons to retail, (3) wait a respectable time and (4) then have bad performance and redemption requests. If you run into trouble before you can sell out to retail, it doesn’t work. “Blue Owl's shares have now plunged almost 60% in the past 13 months, even as the firm's revenue continued to climb in that period”: A year ago, private credit was a huge growth story; now that story has been called into question.

Meanwhile here’s a fun little opportunistic trade:

Activist investor Boaz Weinstein is offering to buy shares in Blue Owl Capital Inc.’s business development companies after a challenging week for the lender and broader fears about bubbling risks in the $1.8 trillion private credit market.

Saba Capital Management, led by Weinstein, and Cox Capital Partners launched the tender with an offer price that’s expected to be at a 20% to 35% discount to the most recent estimated net asset value and dividend reinvestment price.

“The Purchasers’ tender offers would provide a liquidity solution to retail investors in the wake of a significant industry-wide increase in BDC redemption requests, multiple quarters of net outflows and a rise in redemption gate provisions,” says their press release.

Private credit firms are not, in February 2026, going to go around selling their loans at 65 cents on the dollar. For one thing, “continued confidence in the quality and valuations” of the loans, etc., but for another thing, that would be a terrible mark that would lead to problems all over their businesses. But some retail investors in private credit funds might want to sell their fund shares at 65 cents on the dollar, if they are sufficiently worried or need cash now. And if Boaz Weinstein thinks the loans are worth more than that, Blue Owl can’t really stop him from buying up the fund shares.

Disclosure: Through a financial adviser, I have a small amount of money in a Blue Owl fund, though I am not sure which one.

Sure:

Shares of cybersecurity software companies tumbled Friday after Anthropic PBC introduced a new security feature into its Claude AI model.

Crowdstrike Holdings was among the biggest decliners, falling 8%, while Cloudflare Inc. slumped 8.1%. Meanwhile, Zscaler dropped 5.5%, SailPoint shed 9.4%, and Okta Inc. declined 9.2%. The Global X Cybersecurity ETF fell 4.9% and closed at its lowest since November 2023.

Anthropic said the new tool “scans codebases for security vulnerabilities and suggests targeted software patches for human review.” The firm said the update is available in a limited research preview for now.

We talked a couple of weeks ago about the general form of this trade. The big artificial intelligence labs frequently introduce new tools like this. Each new tool arguably might make some whole industry — enterprise software, tax planning, here cybersecurity — obsolete. Markets are on edge about this stuff, so the stocks of the relevant industry predictably drop when the tool is introduced. It’s a new one every week. “AI Anxiety Has Found Its Way to Real-Estate Brokers,” the Wall Street Journal reports today, sure.

I wrote about this as a potential business model for the AI labs: Short the industry you are about to disrupt, release your disruptive tool, and make a quick profit. There are arguably some problems with that model, though it does feel like the sort of thing an evil AI might come up with.

A reader emailed another, closely related idea, though: “If I worked at Anthropic and I ‘suspected’ this would happen and so I bought short-dated puts before the announcement, would that be insider trading or just gambling?” I think the answer is that it would be what we sometimes call “shadow trading,” using inside information about one company (here, Anthropic) to make profitable trades on other (negatively) correlated companies. Shadow trading is, uh, probably illegal, though there are fewer cases than there are about traditional insider trading, and this is not legal advice. [2] I suppose if everyone at the AI labs started buying puts on the industries they disrupted, the US Securities and Exchange Commission might start to take notice, though with the current SEC I’m not sure that’s true.

Here’s a similar story from a couple of weeks ago:

Logistics stocks plunged on [Feb. 12] as the group became the latest victim of the artificial intelligence “scare trade.” At the center of the selloff: a former karaoke company with a stock-market value of only $6 million.

The little-known company is worth just a fraction of the value it knocked off of a constellation of others — all of which were dumped by investors fearful of even the faintest threat posed by AI. The company’s trumpeting of its logistics platform sent the Russell 3000 Trucking Index sliding 6.6%. CH Robinson Worldwide Inc. tumbled 15% — and at one point was down by a record 24% — while Landstar System Inc. fell 16%. …

Algorhythm reported less than $2 million in sales for the quarter that ended on Sept. 30, with a net loss totaling nearly $3 million for the period. But its shares soared 30% to $1.08 after its announcement, paring what had been a jump of as much as 82% earlier in the session.

“I would probably be more inclined to be skeptical that this particular company is gonna be the one to disrupt the industry,” Citigroup Inc.’s Ariel Rosa said of Algorhythm. “But the notion that someone will eventually come in and try to disrupt the industry seems like a decently high probability.”

First of all, Algorhythm is an incredible name for a karaoke-pivoting-to-AI company. Second, here is its announcement that “its SemiCab platform in live customer deployments is enabling its customers’ internal operations to scale freight volumes by 300% to 400% without a corresponding increase in operational headcount.”

Third, uh. What can you learn from this if you are a micro-cap company with an interest in pivoting to AI? What I argued a few weeks ago, and in the previous section, is that a good trade is (1) build a disruptive AI technology, (2) short the industry you plan to disrupt, (3) announce the disruptive AI technology and (4) profit. It is possible that the first step — actually building the disruptive technology — is the least important. Certainly it is the hardest. The market is jumpy! Maybe just announce the disruptive technology and see what happens. Not legal advice!

There is really nothing to this! We have talked about it a few times before, basically when every lower court ruled that Donald Trump’s blanket emergency tariffs are illegal. They are illegal because the US Constitution, really clearly, right up front, says that only Congress, not the president, has the power to impose taxes, and tariffs are taxes. Did Congress impose Trump’s tariffs? Well, obviously not, but the argument was that Congress, decades ago, passed a law called IEEPA that gives the president the power to “regulate importation” in an emergency. The problems with that argument are that (1) “all of commerce” cannot possibly be an emerency and (2) the power to “regulate importation” is not the same as the power to impose tariffs.

As I said repeatedly, this is quite straightforward, but I did add that the US Supreme Court “has generally been more willing than lower courts to ignore precedent and declare that Trump can do whatever he wants.” But last week the Supreme Court, in a 6-3 decision, ruled that “the terms of IEEPA do not authorize tariffs”:

When Congress has delegated its tariff powers, it has done so in explicit terms, and subject to strict limits. Congress has consistently used words like “duty” in statutes delegating authority to impose tariffs. …

The U. S. Code is replete with statutes granting the Executive the authority to “regulate” someone or something. Yet the Government cannot identify any statute in which the power to regulate includes the power to tax. The Government concedes, for example, that the Securities and Exchange Commission cannot tax the trading of securities, even though it is expressly authorized to “regulate the trading of . . . securities.”

Next up will be:

• More and different tariffs: IEEPA does not authorize tariffs, but other statutes do, albeit with more process and at lower levels. President Trump has already announced 10% global tariffs, and also, later, 15% global tariffs.
• Refund lawsuits. Tariff refunds are theoretically interesting because the importer who paid the tariff can sue to get its money back, but it’s not obvious that the economic incidence of the tariff is always on the importer. If a foreign supplier cut prices to make its products more competitive in the US, or if the importer raised prices to consumers to pay for the tariffs, then the importer didn’t “really” pay the tariff, but is nonetheless the party that can ask for a refund. In a dissenting opinion, Supreme Court Justice Brett Kavanaugh pointed out that “the United States may be required to refund billions of dollars to importers who paid the IEEPA tariffs, even though some importers may have already passed on costs to consumers or others.” I don’t know how big of a practical problem this is — in practice tariffs don’t seem to have had that much effect on consumer prices, in part because everyone was uncertain about their permanence — but I suppose you might worry about it. If you bought stuff on Amazon and Amazon gets a refund, can you ask for your cut?

I used to be a mergers and acquisitions lawyer, and then later I was an investment banker, so I have pulled my share of all-nighters. Now I see my kids and get to bed at a decent hour, and if you told me I had to work until 2 a.m. every day for a week, I would say “no thank you.” I have chosen a more restful life, and I have a lot of sympathy for the young people who are currently investment banking analysts, who do have to work until 2 a.m. every day, and who think “this is dumb and bad and I would rather get some sleep.”

But I also have a certain amount of sympathy for the more senior bankers who make them work all night. It is a client service business, there is a lot of money at stake, speed is often critical, and deal teams are often, for fairly good reasons, quite lean. There is a lot of inefficiency and face time and nonsense, but at some level working long hours probably is an important part of becoming a skilled investment banker and getting the work done.

I suspect that a lot of people who have worked in financial services share this sense of ambivalence: It does seem cruel and wasteful to work people that hard, but it is not just arbitrary cruelty; there is a reason for it. But you know who does not share that sense of ambivalence? Everybody else on Earth. [3]  In particular, if you selected a jury of 12 random New Yorkers and asked them “is it okay for an investment bank to make its junior employees work for days on end without sleep,” the jury would probably say “no, what, that’s monstrous, we will make them pay for that.” Anyway:

Centerview Partners LLC settled a lawsuit by a former analyst who claimed the boutique investment bank wrongfully fired her for asking to be able to sleep more than eight hours a night.

Jury selection had been set to begin Monday morning in the case, which highlighted the grind culture of Wall Street, especially at junior levels. Centerview had taken the position that a need for a full night’s sleep every night is incompatible with “the essential functions of the analyst role.”

Kathryn Shiber sued Centerview in 2021, claiming she was fired just 10 weeks into a three-year analyst program, shortly after she informed the firm that she had mood and anxiety disorders requiring her to sleep at least eight hours a night on a consistent schedule. Shiber, who had been expected to take the stand during the weeklong trial, was seeking $5 million in damages.

The Financial Times notes that “at a pre-trial hearing last week, a judge said details of Centerview’s revenues, profits and financial performance could be disclosed during the trial,” overruling the bank’s objection that “such disclosure could create a ‘David versus Goliath narrative.’” I just feel like, if you are the bank that makes your young employees work all night, you are not going to win that jury trial, and even $5 million — presumably they settled for less — is a small price to pay to make it go away.

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