Is Private Credit’s $1.8T Boom Turning Into Subprime’s Next Liquidity Crunch?

The value of companies in the private credit market has increased over the past year. But all is not well. The shadow default rate is continuing to climb. The shadow default rate refers to companies that are forced to take on extra and unexpected lending conditions midway through a deal, according to Fortune. 

This shadow default rate has climbed to 6.4% in the fourth quarter of 2025, up from 6.1% in the third quarter of 2025, and a big increase from the 2.5% in the fourth quarter of 2021, according to Lincoln International. 

Blue Owl Closes One of Its Funds

In November, Blue Owl stopped its investors from withdrawing money from one of its credit funds. A freeze such as this pulls money out of the market. It also slows down funding, and increases costs. Blue Owl also canceled a planned merger.

According to Bloomberg, Blue Owl permanently closed one of its funds in the past week.

The move stopped investors from withdrawing cash from the fund every three months as had been allowed. Blue Owl began selling assets to return capital to investors. 

As a result, certain Blue Owl business development companies (BDCs) will be selling $1.4 billion of assets to institutional investors. 

“This transaction underscores the confidence that large, experienced buyers have in our direct lending platform and has meaningful benefits for all shareholders of these funds,” said Craig W. Packer, Chief Executive Officer of Blue Owl’s BDCs in a press release. 

Blue Owl Impact on Stock Market

Not surprisingly, shares of Blue Owl declined last week by as much as 10%, but a broader decline occurred as well. Stocks of money managers with investments in private credit, such as Apollo Global Management Inc., Ares Management Corp., and Blackstone Inc. all fell in value, according to Bloomberg. 

The yearlong picture is even more grim for Blue Owl. Shares of Blue Owl have plummeted almost 60% in the past 13 months even though the firm’s revenue increased in that same time period, Bloomberg reports. 

U.S. Senator Responds to Blue Owl  

U.S. Sen. Elizabeth Warren (D-MA) and Ranking Member of the Senate Banking, Housing and Urban Affairs Committee had much to say about news that Blue Owl had restricted withdrawals from one of the firm’s private credit funds. 

“Do I hear a cockroach? A shadowy private credit firm is suddenly blocking investors from withdrawing their money,” Warren said. “The Trump Administration needs to wake up. Stop pushing these risky investments into Americans’ retirement accounts.

“Increase banks’ capital requirements for private credit exposures. Compel transparent data from these firms. And run a stress test on the market now.”

Worries About the Private Credit Market

The news from Blue Owl and the growing shadow default rates are two recent signs of tremors  in the $1.8 trillion private credit market. In fact, one expert looks into the private credit market and sees parallels with 2007.

“The red flags we are seeing in private credit today are strikingly familiar to those of 2007,” said Orlando Gemes, chief investment officer of Fourier Asset Management to Bloomberg. 

In particular, Gemes said worsening lender protections and difficult to understand liquidity terms in today’s private credit market are similar to signs present in the 2007 market.  

Impact on Subprime Borrowers

Private credit firms lend money to individuals and businesses that may not qualify for traditional bank loans. That makes private credit an essential funding source for people with thin credit files and low credit scores.

When something shakes the private credit market, such as the recent developments involving Blue Owl news, it impacts subprime borrowers’ ability to borrow.

The Bottom Line

Increasing shadow default rates in the private credit market and Blue Owl closing one of its funds are signs of turbulence in the private credit market. Private credit firms lend money to individuals that may not qualify for traditional bank loans.

And when the private credit market gets shaky, there may be a more limited access to credit for subprime borrowers.