The Gate Swings Shut

In February 2026, investors in a retail-facing private credit fund called Blue Owl Capital Corporation II discovered something the fund's marketing materials had not made entirely clear. Unfortunately, their money was not really liquid.

Redemption requests had been piling up for months.

In late 2025, Blue Owl had tried to solve the problem by merging the fund into its publicly traded sibling, OBDC.

That plan collapsed when investors realized the merger would effectively mark their shares down by around 20%, the price at which OBDC was trading relative to its stated book value. Then, in late February, the other shoe dropped.

Blue Owl permanently ended quarterly redemption offers for the fund, replacing them with periodic capital distributions on the firm's own timeline. Shares in Blue Owl Capital fell nearly 6% that day. Structured notes tied to the fund and held by retail investors were quoted below 50 cents on the dollar.

Two weeks later, Blackstone's $82 billion private credit fund, BCRED, received record redemption requests equal to 7.9% of assets - roughly $3.8 billion - forcing the firm to expand its usual 5% quarterly cap and invest its own capital to satisfy withdrawals. Blackstone's stock fell 8% the morning the news broke.

First we need to establish the fact that private credit is a legitimate asset class. It is based on real loans with real performance. The question is whether the vehicles now being sold to everyday investors actually deliver what they promise, and whether the investors buying them understand what they own.

How Private Credit Actually Works

Private credit is lending - specifically, lending to middle-market companies that are too small or too complex for traditional bank loans and too private for the public bond market.

A private credit fund pools capital and deploys it as direct loans, typically senior secured, to these companies. The loans are floating-rate (benchmarked to SOFR), meaning the yield rises and falls with interest rates. The borrowers pay a spread above that benchmark.

New originations at Kayne Anderson BDC, for instance, averaged 529 basis points over SOFR in Q4 2025. That's why yields in the 8–11% range are possible without taking equity-level risk.

The structure that makes private credit accessible to retail investors is the Business Development Company, or BDC.

Congress created the BDC in 1980 specifically to channel capital into smaller private companies. BDCs must invest at least 70% of assets in companies with market capitalizations below $250 million, and are similar to REITS in the fact that they must distribute at least 90% of taxable income to shareholders, and register with the SEC.

In exchange for those requirements, they pay no corporate tax on distributed income, similar to a REIT structure.

There are two flavors of BDC that matter here, and the difference is crucial. Publicly traded BDCs, think Ares Capital (ARCC), Main Street Capital (MAIN), or Blue Owl Capital Corp (OBDC), list on a stock exchange like any other company.

You can buy and sell shares during market hours. The price fluctuates. Non-traded BDCs, by contrast, do not list on an exchange. They are sold through broker networks and financial advisors, typically at a stated NAV, and they offer "semi-liquidity"- which in practice just means periodic redemption windows, usually quarterly, capped at 5% of assets.

When times are good and redemption requests are low, that structure works smoothly. When sentiment sours and requests pile up, funds gate. That is what happened to OBDC II. It is also what's putting pressure on BCRED.

The Opportunity and the Complication

There is a real opportunity embedded in this story.

The private credit market has grown to roughly $1.5–2 trillion in direct lending assets as of early 2026, on track to reach $3 trillion by 2028 per Cleary Gottlieb's analysis.

That growth happened because banks retreated from middle-market lending after 2008, and private lenders stepped in with more flexible, customized capital. The fundamentals of the asset class - with senior secured loans, floating rates, private negotiation over terms - are sound.

The underlying loans in both Blue Owl's and Blackstone's funds are performing. Blue Owl sold $1.4 billion of loans from OBDC II to four institutional buyers including CalPERS, the Ontario Municipal Employees Retirement System, British Columbia Investment Management Corp., and Kuvare Insurance at 99.7% of par value.

The loans are fine. It's the structure that failed. Cliffwater LLC, an investment advisory firm focused on alternatives, argued in a February 20 research note that OBDC II's difficulties stem from an outdated fund model - which they call the "BDC 2.0" feeder structure - not from any deterioration in the loan book. OBDC II delivered a 9.11% annualized return from inception through September 2025, in line with the Cliffwater Direct Lending Index return of 9.19% over the same period.

The complication is that the structure matters as much as the underlying assets, and the structure sold to most retail investors has a flaw baked in.

Michael Shum, CEO of Cascade Debt, put it plainly to CNBC:

"When times are good, cashflows cover normal redemption requests. When times are bad, requests surge and it becomes a race to the bottom."

Private credit funds hold multi-year loans. They cannot be sold overnight to meet investor redemptions. Offering quarterly liquidity on top of fundamentally illiquid assets was always a structural mismatch. It just took a stretch of negative headlines to expose it.

There is also a subtler risk developing in the portfolio itself. Payment-in-kind income, where borrowers pay interest with more debt rather than cash, had risen to represent 8% of total investment income at some public BDCs by early 2026.

PIK income is accrued, not received.

A fund can report strong earnings while the actual cash coming in the door is declining. The Fed's 75 basis points of rate cuts since September 2025 have also compressed the floating-rate income BDCs collect. BIZD's full-year 2025 distributions fell 8.1% year-over-year, from $1.82 per share in 2024 to $1.67 in 2025.

JPMorgan characterized BCRED's redemption surge as a "significant expression of souring investor sentiment on direct lending," noting that requests jumped from 1.8% in Q3 2025 to 4.5% in Q4 2025 to 7.9% in Q1 2026.

That trajectory is worth sitting with.

What Could Go Wrong

The most immediate risk is the structural one already on display.

A non-traded BDC or semi-liquid private credit fund restricts redemptions when you most want out during a period of stress. Unlike a listed BDC or a stock ETF, there is no market mechanism to force the fund to honor your redemption request. You are dependent on the manager's liquidity buffer and goodwill.

Credit quality is a second risk that hasn't fully arrived yet.

Historically, private credit performs well in moderate downturns because lenders can restructure loans quietly, but it performs poorly in severe credit contractions where defaults cluster. Non-accrual rates across the BDC universe ticked up to a median 2.5% of investments at cost by Q3 2025, per KBRA data, up year-over-year even in a relatively benign environment.

Software sector exposure is a specific concern. Blue Owl's tech-focused vehicle OTIC saw redemption requests jump to 15% of NAV, reflecting anxiety that AI disruption could erode the SaaS business models underpinning many portfolio companies.

Fee drag is quieter but persistent. Non-traded BDC fees include management fees, incentive fees, distribution charges, and administrative expenses. These fees together regularly total 3–4% annually, compared to 0.10–0.40% for a publicly traded BDC or ETF. Over a decade, that gap compounds into a significant performance wedge.

Finally, the regulatory environment is shifting faster than most investors realize. The SEC held a roundtable on March 4, 2026 specifically on private market valuations and "responsible retailization." The direction of travel under the current administration is toward broader retail access - but with increased scrutiny on disclosure and governance. Rules could tighten in ways that disrupt existing fund structures.

How to Size It

The answer for most self-directed investors is not to avoid private credit completely, but if you are going to look for exposure, you must access it through the right vehicle.

Publicly traded BDCs like Ares Capital (ARCC), Main Street Capital (MAIN), and Kayne Anderson BDC (KBDC) give you genuine exposure to private credit with real-time liquidity, SEC-regulated financial reporting, and for ARCC, a track record stretching back to 2004 through multiple credit cycles.

ARCC covered its Q1 2026 dividend of $0.48 per share at a comfortable 1.04x ratio. Main Street has paid monthly dividends without interruption for years.

These are not the funds that were gating investors in February.

I would not touch a non-traded BDC right now.

The structural mismatch is exposed, investor sentiment is soured, and the fee drag relative to publicly traded alternatives is hard to justify. The SEC's attention is intensifying. And the marginal yield premium, if it even exists after fees, does not compensate for surrendering liquidity control.

For investors who want allocated exposure to private credit, a 3–7% portfolio position in a diversified mix of publicly traded BDCs, skewed toward internally managed, conservative underwriters, is reasonable.

You need to understand that this investment is designed for income exclusively, and not growth. Size it accordingly and do not chase the highest yielding names without understanding the portfolio quality underneath. Individual names with strong track records and internally managed structures are worth the extra research.

I currently hold ARCC and MAIN in The Earnout Investor portfolio and have no position in any non-traded vehicle.

The Bigger Picture

Private credit is a legitimate asset class that has funded real businesses and delivered real returns for decades. The institutional investors who bought $1.4 billion of Blue Owl's loans at par in February 2026 understood that. They also understood the difference between an asset that performs well and a fund structure that fails under pressure.

Self-directed investors have an advantage here that most don't use.

You can choose the structure. You don't have to accept the semi-liquid, high-fee wrapper that an advisor gets paid to sell. The same underlying exposure is available through exchange-listed vehicles at a fraction of the cost, with real liquidity and transparent daily pricing. That structural clarity is what Wall Street doesn't advertise.

The lesson from OBDC II isn't that private credit is broken. It's that how you hold an asset matters as much as what you hold.

The Earnout Investor provides analysis and research but DOES NOT provide individual financial advice. Jamie Dejter may have a position in some of the stocks mentioned. All content is for informational purposes only. The Earnout Investor is not a registered investment, legal, or tax advisor, or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.