The trust crisis in private equity credit continues to spread! Funds under Blue Owl are experiencing massive redemptions.

Why does AI concern trigger a wave of redemptions in private credit funds?

Cailian Press, April 3 (Editor: Niu Zhanlin) The trust crisis in the U.S. private credit industry continues to spread, as Blue Owl Capital announced to shareholders on Thursday that two of its private credit funds are facing a surge in redemption requests.

Blue Owl stated that its flagship fund OCIC( manages approximately $36 billion in assets) and received redemption requests amounting to about 21.9% of the issued shares in the first quarter; the smaller, technology-focused OTIC fund had a redemption request ratio as high as 40.7% during the same period.

For these two funds, Blue Owl chose to set the maximum actual redemption limit at 5%. The company attributed the abnormal increase in redemption requests to “growing market concerns that artificial intelligence(AI) may impact software companies.”

Such large-scale redemptions pose a risk to asset management firms like Blue Owl, as their core stock price drivers could be affected. This will make it more difficult for the company to attract new investors and weaken the confidence of growth-oriented equity investors.

In a letter to shareholders, Blue Owl stated: “We continue to observe a clear disconnect between market sentiment and the fundamentals of our investment portfolio.”

On Thursday morning, Blue Owl’s stock price plummeted, with peer companies’ stock prices also weakening, before rebounding somewhat. To date, the stock has fallen more than 40% year-to-date.

Over the past year, as several high-profile default events occurred, high-net-worth investors who initially hoped to achieve stable high-yield dividends through private credit funds have gradually withdrawn from this asset class.

In recent months, turbulence in the private credit industry has intensified, driven by market concerns that the industry has excessive exposure to the software sector, which is facing shocks from artificial intelligence.

According to Jefferies data, the software industry accounts for about 20% of the investment portfolio in business development companies. Negative news surrounding default risks in this sector has prompted a small but wealthy group of institutional investors to seek exits from these funds.

Blue Owl owns two such private, non-listed credit funds, which is relatively rare among peers, and its redemption data disclosures are also relatively delayed. The company’s current redemption rate is significantly higher than that of its peers.

Most institutions choose to implement a 5% redemption cap, but some firms, including Cliffwater and Blackstone, allow slightly higher redemption ratios.

Looking back, Blue Owl’s OTIC technology fund received a 17% redemption request in the fourth quarter and has been fully redeemed; the OCIC fund had a 5% redemption request that quarter.

Previously, hedge funds Saba and Cox made tender offers to holders of locked-in shares in these two funds, but the offers were significantly discounted from net asset value.

Blue Owl stated that in the most recent quarter, redemption demand for its technology funds was amplified mainly due to a more concentrated investor base, especially focused on certain wealth management channels and regions. As for the flagship fund, the company said that redemptions mainly came from “a small group of investors,” with about 90% of investors not choosing to redeem.

(Cailian Press, Niu Zhanlin)