Blue Owl Capital permanently halted redemptions from one of its private credit funds last week. The stock fell for eleven straight days — the worst streak since the company went public. UBS published a report estimating that private credit defaults could hit 15% in a tail scenario, with $1.6-1.8 trillion in total drawn exposure, 30-40% of which sits in structures they consider "higher risk." Jamie Dimon warned last month about "cockroaches" hiding in the private credit market. Victor Khosla, founder of $20 billion Strategic Value Partners, told Business Insider this week: "One day it'll really buckle."
I have seen these deals firsthand in the private markets. They call it debt, but some of it is riskier than common equity. When a lender is taking PIK interest, meaning they are not actually receiving cash, just accruing paper returns on a growing note, on a highly leveraged buyout where the sponsor put in 30% equity and the "debt" has structural subordination, covenant-lite terms, and no liquidity, you are not a lender. You are the most optimistic person in the capital structure. You just have a different name for it on the term sheet.
UBS notes that PIK usage is nearing post-pandemic highs. That is not a sign of strength. That is borrowers telling you they cannot service their debt in cash. The illiquidity is the critical feature here. These are not publicly traded bonds that reprice in real time. They sit in funds with quarterly NAVs and gated redemptions. When Blue Owl freezes withdrawals, the assets do not suddenly become worthless — but they also cannot be valued honestly until someone actually tries to sell them. That process takes years.
And when the losses eventually surface, they will be large enough that the government steps in. We saw it in 2008 with mortgage-backed securities. The U.S. government will not allow $1.8 trillion in opaque, illiquid debt to cascade through the financial system, because the dollars behind these investments are those of pensioners, retirement funds, endowments, etc. It is the people’s money, in many cases, that Wall Street gambles with. They will bail it out, one way or another. Which means more money printing, more dollar debasement, and more reasons to own an asset with a fixed supply. Bitcoin is not a solution to the private credit problem. But it is an insurance policy against the inevitability of how that problem gets resolved.