Private Credit: Fear, facts and fundamentals

Financial media runs on attention, and nothing captures attention like risk. “Fear travels faster than facts” is not cynicism, it is simply how the ecosystem works. Negative framing travels faster. It generates clicks. It shapes sentiment.

That does not mean concerns around private credit are fabricated. Defaults have occurred. Certain business models are evolving. Liquidity structures deserve scrutiny.

But in recent months, legitimate risks have often been extrapolated into sweeping conclusions about systemic fragility. The tone has hardened. The nuance has faded. And the volume of the headlines has, at times, run ahead of the data.

Three themes dominate current coverage:

1. Discounted BDC prices signalling credit stress
2. AI triggering a software ‘apocalypse’
3. Blue Owl’s OBDC II episode cited as evidence of liquidity cracks.

Each contains elements of truth. Each looks far more measured when examined through fundamentals rather than headlines and, suffice to say, the panic induced by such media is not necessarily backed by facts or fundamentals.

BDC discounts and implied credit losses

Publicly traded BDCs, otherwise known as ‘Business Development Companies’, have recently been trading at discounts to NAV in the mid-teens. The narrative being peddled by the media is that this implies public markets are anticipating meaningful loan impairments within private credit.

A mid-teens permanent impairment to NAV would require cumulative net losses of similar magnitude. By way of example (for illustrative purposes), assuming senior secured recoveries of 60 to 70%, a permanent impairment of 15% to NAV would imply gross default rates in excess of 30 to 40%.

However, underlying credit performance does not necessarily reflect such a scenario.

The Cliffwater Direct Lending Index, which tracks the underlying loan portfolios of BDCs, returned approximately 9.33% in 2025, including 2.22% in the fourth calendar quarter. Realised losses for the year were 0.70%, below the long-term annual average of 1.01%. Fourth calendar quarter realised losses were 0.13%. Non-accruals, another term for default, sits at 1.48% of cost, below their historical average of 2.13%.

These figures do not seem to indicate systemic deterioration.

In addition to misplaced concerns on credit quality, BDC discounts also reflect lower forward dividend expectations as base rates decline and there is a compression in yield assumptions.

History is instructive (though of course, past performance isn’t necessarily indicative of future performance). In prior periods when BDCs traded at deep discounts, subsequent private debt returns met or exceeded prevailing yields. Public market volatility in BDCs did not translate into immediate loan impairment.

Source: Cliffwater, New Private Credit Data Contradicts the Recent Risk Narrative, 23 February 2026. *BDC price discount as measured by the Cliffwater BDC Index at (CWBDC), www.BDCs.com. **Private debt represented by Cliffwater Direct Lending Index (CDLI). Four quarter return is the return in the four calendar quarters after the quarter during which the relevant event occurred.

AI, software exposure and credit risk

Public software equities, as measured by the S&P 500 Software Industry GICS Level 3 Index, have declined approximately ~20% over the year to 19 March 2026 according to Bloomberg, while broader markets have remained modestly positive over the same period. That divergence has prompted concerns about the implications of artificial intelligence for private credit portfolios with software exposure.

Software represents approximately one quarter of private equity buyout exposure and a similarly meaningful portion of direct lending portfolios, given most borrowers are private equity-backed businesses. As at 30 September 2025, technology accounted for 23.09% of the Cliffwater Direct Lending Index. The key question is whether the recent repricing in public equity markets translates into near-term credit risk.

In our view, artificial intelligence is likely to increase dispersion within software, not kill it.

Business models most exposed tend to rely on seat-based pricing vulnerable to automation, offer feature driven products that artificial intelligence can replicate, and exhibit low switching costs or limited proprietary data advantages.

Conversely, vertically specialised platforms embedded in regulated workflows and supported by proprietary datasets and multi-year contractual relationships face materially different risk profiles. In such cases, artificial intelligence may enhance competitive positioning rather than erode it.

Historically, software has exhibited comparatively low default rates in direct lending portfolios. Loan maturities have tended to be shorter than the timeframe over which structural technological displacement typically unfolds.

Equity multiple compression can be seen to reflect recalibration of growth expectations. Credit impairment requires deterioration in cash flows. Those are related but distinct dynamics.

Blue Owl, BDC 2.0 and structural evolution

Blue Owl is one of the largest private credit managers globally and manages several retail-oriented credit vehicles. Its flagship perpetual BDC, launched in 2020, the Blue Owl Credit Income Corporation (OCIC), has raised nearly US$20 billion over the past five years and represents the firm’s primary wealth channel offering.

Recent press coverage has not focused on OCIC, but rather on OBDC II, a legacy structure launched in 2017 under the earlier ‘BDC 2.0’ model. It was a private, non traded vehicle designed to raise capital and ultimately merge into an affiliated publicly traded BDC. A merger was the intended exit pathway when the fund was originally raised, and the vehicle was never designed to exist in perpetuity.

This structure was widely used across private credit and was the primary avenue for retail private credit fundraising in the United States. In fact, OBDC III, which was raised in 2020, successfully completed its own merger into OBDC in January 2025.

The structural tension emerged because public BDC shares often trade below NAV, which was the case when Blue Owl sought to merge OBDC II into OBDC. At the time of the proposed merger, the public vehicle was trading at a meaningful discount, implying that investors would crystallise a loss of approximately 20% if the merger proceeded. Shareholders rejected the transaction.

At approximately US$1.7 to 1.8 billion in assets, OBDC II was modest in scale relative to today’s perpetual vehicles. Without the merger option, it became a smaller vehicle facing ongoing redemptions, which (if it persisted) would have continued to reduce scale over time.

With the merger pathway closed, the decision was made to wind down the fund and return investor capital on an orderly and proportional basis rather than continue operating without its intended liquidity mechanism. What should have been viewed as a rational decision to close a sub scale legacy vehicle was instead reported as Blue Owl restricting redemptions in its retail platform due to liquidity concerns.

Following the closure announcement, a US$600 million secondary sale was executed and described in some coverage as a distressed fire sale. In reality, it cleared close to par and returned roughly 30% of investor capital, a process that would have taken approximately 18 months under normal operations. Secondary markets tend to expose inflated valuations quickly. In this case, pricing validated reported asset values and demonstrated institutional demand for private credit assets, which should provide comfort to retail investors in the asset class.

This episode reflects the sunset of BDC 2.0, not a systemic liquidity breakdown. The industry has already migrated toward ‘BDC 3.0’ perpetual structures such as OCIC, which do not rely on merger events for liquidity and which we consider have scaled accordingly. These newer structures have well-defined liquidity parameters and typically seek to provide 5% of NAV available for redemptions every quarter.

Unfortunately, the media has promoted a narrative that has caused broader concern regarding the liquidity mechanisms of retail oriented private credit vehicles, which has been playing out across markets.

What this means for investors

Private credit is not risk free. Defaults will occur. Manager dispersion is real.

But the current data does not point to systemic stress, and in our view the asset class remains attractive for yield seeking investors.

Media cycles tend to amplify inflection points. That does not make them wrong, but it can distort perspective.

This may not be a cycle that rewards stretching for yield lower in the capital structure. Many investors have been prioritising senior secured first lien lending, where contractual income and priority of claim have the potential to provide a clearer margin of safety.

Headlines will shift. Credit fundamentals move more slowly.

That distinction matters.