By now, advisors are likely somewhat familiar with Blue Owl Capital (NYSE: OWL) situation, which is unnerving private credit markets.
Admittedly, it’s an oversimplification, but shares of business development companies (BDCs) and private equity firms that made loans to software companies have recently been punished amid fears that artificial intelligence (AI) is going to render cloud computing, cybersecurity and other software varieties obsolete. Those fears were exacerbated when Blue Owl Capital decided to $1.4 billion in loans to raise liquidity and permanently halt redemptions in a vehicle accessible to a broad swath of investors. Severe punishment ensued.
(Chart Courtesy: Y Charts)
Even if advisors haven’t allocated client capital to BDCs, stocks like Blue Owl or related funds, the situation isn’t one to be taken lightly and that’s true for multiple reasons. First, today’s clients are as sophisticated as ever. Some may even be highly knowledgeable of the Blue Owl scare. Second, clients are interested in private credit, confirming related inquiries may increase over the near-term due to the Blue Owl fallout.
Avoiding Complacency and Fear
Working on the premise that advisors have sophisticated client bases, goings on in private credit markets are prompting advisors to strike a delicate balance between complacency and fear. In times like these, nonchalant won’t cut it, but at the same time, clients don’t want to walk away from a conversation or meeting feeling more frightful than when they came in.
There are some tips for finding “just right.” As Y Charts notes, reframing matters. The issue here isn’t as much about Blue Owl as it is about how semi-liquid structures – of which private credit is one – act amid soaring redemption requests. Steer the conversation toward liquidity and structure, not toward systemic risk. It’s also worth discussing BDCs, because those are income-generating assets some clients may find their way into in accounts outside advisors’ purview.
“Private credit is not a single asset class,” observes Y Charts. “Public BDCs, non-traded BDCs, interval funds, drawdown vehicles, and evergreen funds operate under different liquidity, leverage, and valuation mechanics. Risk must be evaluated at the vehicle level.”
The research firm also suggests emphasizing the right forms of due diligence and discussing appropriate liquidity expectations.
“If a client requires liquidity certainty, private credit should be sized as capital that may not be immediately accessible, regardless of periodic redemption language,” adds Y Charts.
Not a ‘Big Short’ Sequel
Another premise on which advisors should work is that clients were alive, working and investing leading up to and during the financial crisis. That’s pertinent in the private credit discussion because when issues in illiquid markets arise, many clients’ minds drift to 2007-08, wondering if another economic catastrophe is in the offing.
Clearly, advisors should not be in the business of attempting to see the future or making bombastic promises that can’t be kept, but Blue Owl is a reminder for wealth managers to emphasize what they know and articulate that to clients.
“Private credit is not automatically ‘the next 2008,’ but the Blue Owl episode is a useful stress test of what matters most in private markets: liquidity plumbing, valuation governance, and investor suitability,” concludes Y Charts. “The right advisor posture is neither panic nor complacency. It is segmentation (who should own it), structure literacy (what clients actually bought), and process (how you monitor risk as the cycle turns).”