Blue Owl, OBDC II, and the Private Credit Panic That Wasn’t

In a February 20, 2026 research note, Cliffwater LLC—a leading investment advisory firm specializing in alternative assets—directly challenged how the financial press has covered recent turbulence at Blue Owl Capital and its non-traded Business Development Company (BDC), Blue Owl Capital Corporation II (OBDC II).

OBDC II was originally designed as a “feeder” BDC—a vehicle intended to raise and deploy private capital before ultimately merging it into Blue Owl’s publicly traded flagship BDC (OBDC). This “BDC 2.0” model was a popular strategy of the last decade: raise capital in a private fund, invest it over several years, then merge into a public vehicle to give investors liquidity through public market shares.

The strategy largely fell apart industry wide. The core problem was the structural mismatch: when the acquiring public BDC valued OBDC II at net asset value (NAV), investors found themselves receiving shares worth less at the market price than what they saw on their statements. Shareholders rejected the proposed merger. Blue Owl was left holding a $1.8 billion stranded asset with no clean public exit.

The Wall Street Journal covered these events as a warning sign for the private credit industry. Cliffwater’s note examines whether that characterization holds up.

Key Findings

The Problem Was Structural, Not Fundamental

Cliffwater’s central finding is that OBDC II’s difficulties stem from an obsolete fund structure—the BDC 2.0 model—not from any deterioration in the underlying loan portfolio or private credit broadly. The loans themselves have performed well. OBDC II delivered an annualized return of 9.11% from its March 2017 inception through September 2025, right in line with the Cliffwater Direct Lending Index (CDLI) return of 9.19% over the same period.

As further demonstration of the quality of the underlying portfolio, Blue Owl Capital Inc. found four buyers for a $1.4 billion portfolio of loans to help pay out investors: Three of North America’s biggest pension funds and its own insurance firm. Bloomberg reported that Chicago-based insurer Kuvare, along with the California Public Employees’ Retirement System, Ontario Municipal Employees Retirement System and British Columbia Investment Management Corp., bought the debt, at 99.7% of par value—demonstrating there was no problem with the intrinsic value of the loans and that they were marked appropriately. Blue Owl co-founder Craig Packer reported that interest in the deal was so strong that the buyers “would have bought multiple amounts more.”

Blue Owl’s Response Was Shareholder-Friendly

Rather than forcing investors to wait out a slow wind-down, Blue Owl’s sale allowed them to return approximately 30% of investor capital far sooner than a standard liquidation process would have. Clearly this is a sign of market strength—not distress. Most importantly, the fact that the loans sold virtually at the NAV, independently validated the industry-wide valuation methodology used for private credit portfolios.

Redemption Pressures Were Elevated—But Manageable

Q4 2025 saw redemption requests from the retail wealth channel spike to 5% or more among major semi-liquid private debt funds—roughly double the typical 2–3% quarterly run-rate. Much of the requests can be attributed to the negative press coverage rather than fundamental deterioration. Critically, Cliffwater’s redemption requests were honored in full, demonstrating that at least their funds have adequate liquidity buffers.

The Institutional Channel Told a Different Story

While retail investors were redeeming, institutional investors—who tend to be less reactive to press narratives—were increasing allocations to private debt. As noted, institutional buyers were the purchasers of Blue Owl’s secondary loan sale. That divergence between retail and institutional behavior is telling.

BDC 3.0 Is Already Replacing BDC 2.0

The so-called “BDC 3.0” structure—perpetual BDCs with ongoing liquidity provisions—has largely supplanted the flawed feeder model. Blue Owl itself has thrived with this newer approach: its Blue Owl Credit Income Corporation has raised nearly $20 billion over the past five years.

Key Investor Takeaways

1. Don’t confuse structural failure with asset class failure.

OBDC II’s problems were rooted in a fund design that was always going to struggle with the public/private valuation gap. The underlying loans—what private credit investors care about—performed in line with the benchmark. Headlines that conflate the two are a disservice to investors.

2. Liquidity discounts are real—understand what you’re buying.

The BDC 2.0 model failed partly because investors in private vehicles discovered their NAV statements didn’t translate into equivalent market value at exit. The evolution to perpetual BDCs with defined redemption programs addresses this more transparently. Investors should understand the liquidity terms of any private credit vehicle before committing capital.

3. Elevated redemptions driven by sentiment, not fundamentals, can create opportunity.

When retail investors redeem out of fear and institutional investors step in as buyers—as happened here—it’s worth pausing to ask which side is reading the data more carefully. The successful sale by Blue Owl demonstrated that institutional buyers saw value where the press only saw warning signs.

4. Private credit fundamentals remain intact, though conditions have moderated.

Cliffwater’s note acknowledged that private debt is not immune to the recent decline in short-term rates and tighter credit spreads, which compress yields. Still, relative to broadly priced public markets, private debt continues to offer compelling value for investors with the appropriate time horizon and liquidity tolerance. For example, the daily liquid Invesco Senior Loan ETF BKLN has a current yield-to-maturity of 7.3%, while the Cliffwater Corporate Lending Fund CCLFX has a yield-to-maturity of 9.3%. Since the loan portfolios have very similar default loss histories the 2% incremental yield represents a liquidity premium for those that don’t need full liquidity.

5. Secondary market pricing near NAV validates private credit valuations.

One persistent concern about private credit is that NAV-based marks overstate true value. The Blue Owl secondary sale—conducted virtually at the NAV in an arm’s-length market transaction—provided meaningful real-world validation that the valuation process is holding up.

The Bottom Line

Cliffwater’s note provided a useful reminder that not all bad news in a market segment reflects a broken asset class. OBDC II’s story is primarily about the end of an outdated fund structure—one the industry has already moved away from. For investors evaluating private credit allocations today, the more relevant data points are the underlying loan performance, the evolution toward more investor-friendly perpetual structures, and the continued appetite from sophisticated institutional capital. Those metrics paint a considerably more nuanced picture than the headlines suggest.

Larry Swedroe is the author or co-author of 18 books on investing, including his latest Enrich Your Future. He is also a consultant to RIAs as an educator on investment strategies.