Private Credit News Weekly Issue #104: The Bank That Built Blue Owl's Fund Helped Kill It
UBS advised clients out of the vehicle it helped design, mutual funds mark private software down 20%, and direct lending volume falls by half
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The run on Blue Owl’s technology fund didn’t start with retail panic. It started with the bank that built it.
UBS helped Blue Owl design OTIC in 2022, a $3 billion direct lending fund tailored for the bank’s wealth clients. At least 60% of the money came through UBS, most of it from Asia, double the concentration most executives would tolerate from a single distributor. Then late last year, after First Brands and Tricolor collapsed, UBS told clients over-allocated to private credit to cut back. The advice didn’t name Blue Owl. It didn’t have to. Investors pulled 15.4% of the fund in the fourth quarter. Requests hit 40% in the first.
UBS had its own reasons to sour. Its O’Connor unit had 30% of one fund’s exposure tied to First Brands, and the bank grew worried that spread compression was eating prospective returns. But the mechanics are the story: the wealth platforms that fueled private credit’s retail boom hold the power to reverse it, one model-portfolio memo at a time.
The redemption picture split this quarter. KKR’s K-FIT saw requests collapse to 1.65% from 6.3%, paying everyone in full. Goldman and Oaktree also cleared the 5% bar. Apollo went the other way, gating after 16.8% sought out, up from 11.2%. Ares capped for a second straight quarter at 14.4%. Roughly 10 BDCs quietly expanded credit facilities in recent months, building borrowing capacity so redemptions never force a fire sale.
The valuation reckoning arrived from an unexpected direction: mutual funds. Bloomberg reviewed marks on nearly 50 private software companies across hundreds of mutual fund portfolios and found an average 20% markdown, with some cut more than half. DataRobot down 50.8%. Outreach down 51.4%. Epic Games down 22%. The same assets sit in private fund books at gentler values. Goldman’s own review of 700 private software firms found 10% facing imminent disruption.
And the market itself is shrinking. PitchBook recorded $33 billion of US direct lending across 149 deals in the quarter, down from $74.1 billion across 217 in the first. HSBC began pulling credit lines from riskier private credit funds. The Bank of England flagged AI-related leverage accelerating at an “unprecedented” pace, then proposed easing bank capital rules anyway.
Key Market Themes
1. UBS Turns on the Fund It Helped Create
Blue Owl launched OTIC in 2022 after consulting UBS on a vehicle suited to the bank’s wealth clients. At least 60% of the fund’s money came from UBS clients, mostly in Asia. One executive at a rival firm said they cap any single platform at 20-30% of a retail fund precisely to avoid what happened next.
After Tricolor and First Brands collapsed, UBS advised over-allocated clients to trim private credit. The bank’s own O’Connor unit had 30% of one fund’s exposure tied to First Brands, and it worried spread compression was eroding returns. The advice never targeted Blue Owl specifically, but with the fund’s concentration, it didn’t matter. Investors pulled 15.4% in Q4, roughly $400 million in net outflows per KBRA. First-quarter requests topped 40%. Blue Owl noted the fund’s 0.2% non-accrual rate and 9.2% distribution rate. OTIC was also heavily exposed to the software selloff.
What it exposes
The retail boom shifted power from managers to distributors, and this is what that looks like in practice. Blue Owl built a fund around one bank’s client base, and that bank’s asset-allocation committee effectively controlled the redemption queue. The 60% concentration was the original sin. A fund with ten distributors absorbs one platform’s change of heart. A fund with one dominant channel is a hostage. Every manager racing to sign exclusive wealth partnerships should study OTIC before celebrating the next distribution deal.
2. Redemptions Split Down the Middle
KKR’s K-FIT received repurchase requests of just 1.65% in the second quarter, down from 6.3%, and paid everyone in full. Its sister fund K-FITS saw 3.43%. Goldman’s private credit fund stayed under 5% both quarters. Oaktree cleared its threshold last month. K-FIT has returned roughly 13% annualized.
The other side looks grimmer. Apollo Debt Solutions gated at 5% after 16.8% sought out, up from 11.2%. Ares capped its Strategic Income Fund for a second consecutive quarter after requests rose to 14.4% from 11.6%. More than $14.5 billion of investor cash got trapped in the quarter through June, and Q1 marked the first time non-traded BDCs ever saw outflows exceed inflows.
What it exposes
The exodus stopped being uniform and started being a referendum on individual managers. KKR, Goldman, and Oaktree stemmed the tide. Apollo and Ares watched requests accelerate. Some of the divergence is portfolio quality, some is distribution mix, and some is the compounding math of gates: blocked investors resubmit bigger requests, so funds that gated early keep inflating their own queues. The industry talked about redemptions as weather. It’s turning out to be judgment.
3. BDCs Stockpile Borrowing Power
Roughly 10 BDCs expanded credit facilities in recent months. Apollo Debt Solutions doubled one facility to $1 billion days after securing a new $500 million line. Goldman’s flagship boosted a revolver to $1.5 billion from $1.1 billion. Ares Strategic Income lifted a funding line to $4.1 billion from $3.25 billion. KKR’s K-FIT added $180 million to reach $750 million, partly to manage redemptions. Several funds also upsized accordion provisions that allow capacity increases without renegotiating.
The funds aren’t drawing more, according to Robert A. Stanger’s Michael Covello, just building the option. Fitch said liquidity across the eight non-traded BDCs it rates is sufficient to meet maximum quarterly redemptions for the next year, though “sustained increases in leverage or weakening liquidity profiles could drive negative rating action.”
What it exposes
The credit-line expansion is the industry’s quiet insurance policy against the fire sale everyone fears. Borrowing to fund redemptions beats selling loans at a discount, because a sale sets a price and a price forces markdowns everywhere. Bloomberg Intelligence’s David Havens called it “the impression of strength,” which is a careful phrase. Leverage that pays out exiting investors leaves remaining shareholders holding a more levered claim on the same assets. It works as a bridge if sentiment turns. It compounds the damage if it doesn’t.
4. Mutual Funds Break the Valuation Truce
Bloomberg reviewed marks assigned to nearly 50 private software companies across hundreds of mutual fund portfolios. The average markdown: 20%. Some positions fell more than 50%. DataRobot was cut 50.8%, Outreach 51.4%, Epic Games 22%, Databricks 16%, Canva 15%. More than three-quarters of the companies also have private equity backing.
MSCI’s benchmarks show the bifurcation: VC portfolios concentrated in AI-native firms returned 5.3% while buyout portfolios weighted toward mature software posted -1%, the first meaningful negative quarter since 2022. Goldman’s review of 700 private software companies found 10% facing imminent disruption, 10-15% set to thrive, and the rest could go either way. “That’s the $64,000 question,” said Goldman’s Michael Brandmeyer. ClearBridge’s Aram Green called the markdowns a harbinger: “We’re going to see more of this.”
What it exposes
Mutual funds just did what private funds wouldn’t: publish the marks. The same companies sitting in BDC and PE books at defensible values now have public price tags 20-50% lower, and the gap is documented in regulatory filings anyone can read. This is the valuation discrepancy the SDNY said it was probing, handed over in spreadsheet form. Managers can argue their marks reflect superior information. The harder problem is explaining why superior information always points in the flattering direction.
5. The Market Itself Is Shrinking
PitchBook LCD recorded $33 billion of US direct lending deals across 149 transactions in the quarter, down from $74.1 billion across 217 transactions in the first. The drop reflects both lower demand and a lender pullback. HSBC began halting lending to private credit funds that expose it to higher risks, telling certain clients their facilities won’t renew, per the FT.
The Bank of England, meanwhile, warned that debt use by AI-related companies has “accelerated rapidly” and is set to increase further, calling the pace of investment “unprecedented historically.” It then proposed easing bank capital rules anyway, cutting leverage-ratio requirements by 20 bps and letting big UK banks dip into buffers during stress. AI-related bond issuance is already more than double all of last year’s, with hyperscalers accounting for over 20% of the year’s dollar-bond volume and dragging on high-grade returns. Moody’s expects Asia Pacific private credit growth to slow over the next 12-18 months.
What it exposes
A 55% drop in deal volume in one quarter is the number that undercuts every “fundamentals are fine” earnings call. Fee streams follow deployment, and deployment just halved. HSBC pulling lines while the BOE eases capital rules captures the strange moment: individual institutions are de-risking their private credit exposure at the exact time regulators are loosening the system-wide constraints. The AI debt wave complicates everything, soaking up the institutional demand that might otherwise have refilled private credit’s fundraising pipeline.
6. Cheese, Meanwhile, Gets Securitized
Italy’s oldest dairy company borrowed against cheese. Brazzale, founded in 1784, raised €10 million from state lender Cassa Depositi e Prestiti and Cherry Bank, backed by wheels aging in its warehouses. A change to Italy’s securitization law now allows financing against non-registered goods including food, raw materials, and manufactured items. A special purpose vehicle called Magazzino Italia will purchase maturing cheese while it sits in Brazzale’s warehouses, structured as a revolving facility.
Italian dairies have pledged parmesan to Credito Emiliano’s vaults for decades, but this is the first deal giving financiers control of the inventory rather than just a guarantee over it. “The hope is to standardize the transaction and replicate it,” said Cherry Bank CEO Giovanni Bossi. Lawyers expect the framework to draw private credit funds into inventory-backed lending for wine, cured meats, and other slow-maturing goods.
What it exposes
File this under where asset-based finance goes next. As corporate direct lending compresses, private credit keeps migrating toward tangible collateral, and a legal framework that turns warehouse inventory into securitizable assets opens a genuinely new lane. The collateral logic is sound: aging cheese, like wine, often appreciates. It can also rot. The pattern to watch is whether ABF’s expansion into ever-more-creative collateral reflects genuine innovation or the same yield-stretching that got corporate direct lending into its current mess.
Deals of Note
Mileway - Blackstone refinanced $7.1B of debt secured against the European portion of its logistics business
Kirkwood Infrastructure - Blue Owl launched a wholly owned fiber-network venture for the data-center buildout, integrating 400 miles of network and 40 data centers from South Reach Networks
Brazzale - Italy’s oldest dairy raised €10M against aging cheese in first-of-its-kind inventory securitization
La Trobe Financial - Brookfield seeking $525M for the Australian non-bank lender
Csquare - Brookfield-backed data center company seeking up to $1.35B in US IPO
Cleveland Cavaliers - Blue Owl’s HomeCourt Partners fund acquired a minority stake
The Reality Check
The OTIC story deserves to be taught. Blue Owl built a fund around one distributor, took 60% of its money from that channel, and discovered that UBS’s asset-allocation view mattered more than the fund’s own performance. A 0.2% non-accrual rate didn’t stop a 40% redemption request. The lesson isn’t about credit quality. Distribution concentration is a risk factor nobody stress-tested, and every manager chasing exclusive wealth partnerships is currently building the same exposure.
The mutual fund markdowns end the phony war over software marks. For months, private managers could dismiss skeptics because nobody had comparable public prices. Now the same companies carry published values 20-50% below private marks, in filings prosecutors have already said they’re reading. The gap either closes through private markdowns or gets explained under oath.
Ten BDCs expanding credit lines while deal volume halves tells you where the industry thinks this goes. They’re not building capacity to lend. They’re building capacity to pay out redemptions without selling anything, because a sale sets a price and a price is the one thing the model can’t survive. Borrowed liquidity buys quarters, not years.
The KKR-Apollo split is the cleanest signal yet that this cycle sorts managers rather than drowning them equally. Requests collapsed at K-FIT and accelerated at Apollo Debt Solutions in the same quarter, same asset class, same macro. Investors are voting fund by fund now. That’s healthier than indiscriminate panic, and far more dangerous for the managers on the wrong side of the ballot.