The bust in private credits won’t be new
Blue Owl halted the redumption of its inaugural private retail debt fund (Blue Owl Capital Corp II). Like every economist would say, this is just a maturity mismatch between the asset and liability. A bank run and a fire sale is inevitable. WHile they claim that their assets are in good quality with a 99.8% recovery rate, it does not alleviate the information asymmetry which drives the large redemption request since early 2025.
Blue Owl characterised the asset sale as a validation of the quality of its portfolio and pointed to the prices it was able to secure in the sale. The company said its funds would maintain significant stakes in the loans after the $1.4bn worth of sales are completed.
The potential reason for the redemption comes from the concerns over those AI infrastructure and lendings to SaaS companies. With the dramatic shock of AI applications, SaaS firms are facing a large negative shock to their future cash flow, especially their terminal values. Investors are concerned about the dramatic landslide of their revenues in the medium to long future.
The $1.4bn portfolio includes loans to 128 companies across 27 industries, with 13 per cent of the loans made to internet and software businesses.
Would this be a “SaaSapocalypse”? I don’t think so. Of course, many SaaS firms will die under the attack from AI firms, such as OpenAI and Anthropic. Those who stands out with their customer services will survive and integrate AI into their new generation of products. For the sector in general, an adjustment is inevitable and this will be particularly sever for the private credit funds. First, investors don’t really know what they are exposing to and the wise thing for them is to leave the market when the hurriance hits. Second, the structure of the debt exposes investors to the downside risk with no upside benefits. This put option structure on the real assets will amplify negative shock through the Gamma.
So, the winter is coming to private credits!
Now let’s shift to EU
There seems to be a huge interest in non-US assets over the past several months (the end of 2025 to the start of 2026). This inflow in EU equity synchronises with the large inflow in EM equity and outflow in US equity. The underlying narrative is that US institutional investors are seeking new places to diversify the overconcentration and overvaluation risk in US tech.
Based on this FT article[\^2], this flow to developed and emerging EU markets started after Trump’s “illegal” tariff, reversing the persistent outflow since 2022/2023 (potentially the Ukraine-Russia War). This narrative is consistent with Ray Dalio’s statement about Gold. However, analysts view on the exact approach to EU, Germany + UK, markets differently. Some argues that the macro condition in EU will improve and thus a large exposure to the EU market should be the way. Others remain sceptical about this macro turnaround and focuse on specific industry exposure, defence in particular. Personally, I am interested in how this trend will play out with Trump’s tariff blocked by the US Supremem Court.
In the short run, this should further strengthen the EU market. First, now EU exporters do not need to worry too much about the trade uncertainty. Although the Trump administration can use other clause to impose tariffs, the impact of future tariffs on the EU economy and the market should be limited. Second, governments in the Euro area won’t dramatically shift their spending policy, e.g. military spending. This means that the current themes should continue. With the interest rate cuts to continue, we should expect the EU market to continue its momentum in 2026.
[\^1] Blue Owl permanently halts redemptions at private credit fund aimed at retail investors