And yet, it’s possible that rather than an issue with private credit specifically, this signifies a wider problem with the asset management industry’s shift to market complex, illiquid products to retail investors.

Appetite for private markets have grown significantly over the last decade as public markets continue to shrink. Morgan Stanley suggests private credit has grown from roughly $500bn in the early 2010s to around $3 trillion now. Most of that has come from institutional investors whose longer time horizons tend to make them less prone to sudden shifts in sentiment.

The key issue facing Blue Capital was the decision to restrict redemptions in its retail facing fund from quarterly to “episodic payments”. While the initial restriction happened in November, it was a few weeks ago that it formalised this to a permanent end to redemptions as it looks to sell assets over the coming quarters … and years.

On the face of it, the other Blue Capital funds appear unscathed despite having had to sell assets – loans are held across the platform rather than in individual funds – to help meet redemption requirements. But when it did sell a portfolio of loans it did so at 99.7% of value, suggesting the issue was less loan quality and more one of liquidity. 

And this is a key issue for the asset management industry, which has been championing the great shift to wealth and retail audiences. Innovative new structures have been devised that open up hitherto inaccessible and more exotic asset classes, but to an audience who do not understand them, and often demand more frequent levels of liquidity than the assets justify. 

Private credit, and private markets more broadly, have been positioned as an important allocation for wealth and retail in recent years. The launch of Long Term Asset Funds (LTAFs) in the UK, ELTIFs in Europe, BDCs and Interval funds in the US, have all been lauded as democratisation. But that can also bring its own challenges, particularly when investor sentiment shifts.

Ten years ago, after the Brexit referendum, we saw similar issues emerge in the UK property sector, as several funds gated withdrawals when investors rushed to exit. Back then retail investors only held about 3% of the entire UK property market but they were the biggest investors in daily dealing property funds, hence the liquidity mismatch when withdrawals began. 

This doesn’t negate the fact of rising defaults and pressures in areas like software lending. But the Blue Owl episode highlights the very real challenge of offering liquidity against inherently illiquid assets. And it is on this last point, where the issue is less about the asset class and more one of perception. Once perception changes, so does investor sentiment. If illiquid asset classes are to be marketed beyond institutional portfolios with longer term mindsets, then the reality of illiquidity needs to be communicated far more clearly to investors. 

If retail-isation is the next phase of the industry’s expansion, then as Blue Capital demonstrates, aligning product design with investor expectations is just as important as returns.