Blue Owl on the Ropes

When the going gets tough in private credit

Boxing lore has few scenes more enduring than the 1974 showdown between Muhammad Ali and George Foreman, the heavyweight title fight famously known as the Rumble in the Jungle.

For most of the fight, Foreman appeared to be dominating Ali, using his power advantage to punish his opponent against the ropes. It looked to almost everyone, including Ali’s trainer, Angelo Dundee, like Ali was losing the fight.

“Muhammad, don’t play with that sucker!” Dundee reportedly shouted at one point, imploring his fighter to get off the ropes.

Ali shrugged Dundee off.

Round after round, Ali would return to the ropes, bobbing and weaving while trying to hit counter shots on the formidable Foreman.

It would come out after the fight that Ali was intentionally letting Foreman wail on his body, using the sagging ropes to avoid some of the punishment. This “rope-a-dope” strategy was meant to get Foreman to punch himself out.

By Round 8, Foreman was compromised and Ali sprung his trap, dancing around his opponent before knocking him out.

Like Ali in the middle rounds of the fight, Blue Owl is on the ropes right now. The stock (Ticker: OWL) is down more than 50% over the last year. And its flagship public BDC, OBDC, trades at a 23% discount-to-NAV as of February 20, 2026.

The firm, rightly or wrongly, has become the focal point for worries about private credit. While its peers are also down, OWL has taken the biggest hit.

Investors have begun looking for cracks in private credit following prominent defaults such as First Brands and Tricolor, along with comments from figures like Jamie Dimon warning about “cockroaches” in direct lending.

Blue Owl appears to be in the crosshairs because of its explosive growth and rumors of loose underwriting, particularly in its loans to software companies.

Like Ali shrugging off his trainer, Blue Owl’s CEO, Marc Lipschultz, thinks his firm has things under control, telling Reuters on February 5th: "The book is strong. We don't see meaningful losses. We don't see deterioration in performance."

Lipschultz hopes that, like Ali’s fight with Foreman, this period is temporary hardship setting his firm up for later success.

But is Blue Owl likely to emerge victorious from this period of adversity? This is my attempt to evaluate the facts.

Beginnings

Blue Owl is one of the largest names in private credit and alternatives, with more than $300 billion of AUM. It competes directly with the biggest platforms in the space: Apollo, Ares, Blackstone, KKR, and the rest of the modern private credit oligopoly.

Compared to those firms, Blue Owl is a relative upstart. Founded in 2016 as Owl Rock, in less than a decade Blue Owl has built a scaled franchise across direct lending, GP stakes, real assets, and private wealth distribution.

Co-founders Doug Ostrover, Craig Packer and Marc Lipschultz were all big shots before forming Owl Rock / Blue Owl.

Ostrover co-founded GSO Capital Partners (the “O” in GSO), which became Blackstone’s credit arm and grew into one of the largest alternative credit platforms in the world.

Craig Packer had been co-head of leveraged finance in the Americas at Goldman Sachs and before that ran high-yield capital markets at Credit Suisse.

Marc Lipschultz had spent 20+ years at KKR, sitting on the management committee and running their global energy and infrastructure business.

The founders saw an opportunity to build a scaled credit platform as post-crisis regulation pushed banks out of middle market lending. They were early in recognizing that the BDC structure, still a relatively sleepy corner of the market at the time, could offer two strategic advantages: durable capital and a bridge into retail distribution.

Those advantages would become far more valuable as private credit grew and wealth channels emerged as a major funding source for the asset class.

They launched their inaugural private BDC, Owl Rock Capital Corporation, with $5.5 billion in equity commitments from institutional investors, a massive opening raise that instantly made them a private credit player.

The LP base included marquee institutions such as the State of New Jersey, Brown University’s endowment, and Michael Dell’s family office (MSD Private Capital).

Growth was fast. By 2019, they took Owl Rock Capital Corporation public, raising about $1.1 billion. Shares started trading on the NYSE in July 2019 under the ticker ORCC (later renamed to OBDC).

In roughly three years, the firm had gone from launch to an established private credit platform with a public BDC, a pace that foreshadowed how aggressively the firm would expand from there.

Then came the bigger move. In December 2020, Owl Rock announced a merger with Dyal Capital Partners (a business that provided capital solutions to GP firms) through a SPAC vehicle called Altimar Acquisition Corp.

The combined entity was named Blue Owl Capital, with an enterprise value of ~$12.5 billion and over $45 billion in combined AUM. The deal closed in May 2021, with Blue Owl listing on the NYSE under the ticker OWL.

Ostrover and Lipschultz became Co-CEOs of the combined entity, while Packer and Michael Rees (Dyal’s founder) became co-presidents.

The trajectory from $5.5 billion at founding to $45 billion five years later, with an IPO, a SPAC merger, and a NYSE listing along the way, is one of the fastest scaling stories in alternative asset management history.

The founders timed the private credit boom almost perfectly, launched with enough credibility and capital to compete for large deals immediately, and then used the SPAC window to create a diversified public platform before that window closed.

But when a platform grows this fast, there are always questions around whether corners were cut in the quest for growth.

Why OBDC Matters (and Why It’s the Right Lens)

If you want to understand what public markets think about Blue Owl’s credit underwriting, OBDC is the cleanest place to look. It trades every day, reports a quarterly NAV, and right now the market is valuing it at a steep 23% discount to NAV.

That definitely says…a lot.

Using OBDC’s roughly 1.19x debt-to-equity leverage, a 23% discount implies about a 10.5% gross markdown on the portfolio:

\(\text{Implied asset markdown}=\frac{23\%}{1+1.19}\approx 10.5\%\)

That is a very large implied loss for a mostly first-lien BDC book.

We can further break this down to see what it implies about future defaults. If you assume a 50% loss given default (“LGD”), a 10.5% portfolio loss implies about 21% cumulative defaults.

Spread over time, that works out to roughly:

• 11.1% annualized defaults over 2 years

• 7.6% annualized over 3 years

• 4.6% annualized over 5 years

For context, leveraged loan default rates in the worst stretch of the GFC ran at roughly the mid-single digits annualized (around ~6% over the 2008–2010 period, depending on the dataset and methodology).

In other words, if you take OBDC’s discount literally as a pure credit-loss forecast, the market is pricing something like a GFC-level (or worse) loss cycle.

Purely from this lens, the market reaction to OBDC seems overblown.

Software Worries

With no obvious recession on the horizon, the market is probably not pricing OBDC for a broad, indiscriminate credit blow up.

Instead, it appears to be focusing on pockets of weakness within the portfolio. And in private credit today, the area everyone is staring at is software, especially loans where the underwriting leaned more on valuation than on cashflow.

Software is an area of concern because AI may be changing the economics of the sector before the debt matures. And private credit underwriting, especially in software, is highly sensitive to what the market believes those future economics are worth.

That matters because many software loans were underwritten to a valuation framework, not just a cashflow one. If the original deal assumed durable ARR growth, high retention, expanding margins, and a healthy exit multiple, then anything that weakens those assumptions can pressure the credit even if the borrower still looks OK in the quarterly numbers.

Blue Owl reports that internet software and services is OBDC’s largest industry exposure, at 11.1% of fair value as of year-end 2025. Management has pushed back on the idea that this is reckless exposure, emphasizing that the software book is mostly first-lien senior secured and underwritten at roughly 30% LTV, with solid recent operating performance in the cohort.

But if software multiples fall—because the market assumes lower growth, lower margins or lower terminal value—LTV rises. In other words, nothing has to break operationally for the credit to weaken.

If the multiple falls, the equity cushion shrinks and the capital structure becomes riskier. That can make refinancing difficult, if not impossible, without some creativity from the sponsor and lender.

A large chunk of software loans underwritten during the boom years start running into a meaningful refinancing window in 2028. While this may mean amend-and-extends rather than a wave of defaults, it is certainly possible that we see more defaults out of OBDC’s software holdings.

This may not frame out the full scope of the risk, however. In a recent article (Link), Bloomberg reported that across major BDCs, at least 250 investments worth more than $9 billion were not labeled as software by one or more lenders, even though the companies are described as software businesses by sponsors, other lenders, or the companies themselves.

OBDC’s own holdings list shows some questionable labelling choices: names like Kaseya appear under “Business services,” while Cornerstone OnDemand is listed under “Human resource support services,” even though both are software-heavy businesses in economic terms.

11.1% may not be the exposure limit here, then. Instead, it should be considered a floor for exposure most vulnerable to AI.

That is the point. The market is not necessarily saying OBDC’s software loans are all bad. It is saying that in a levered BDC, the combination of valuation-sensitive credits, refinancing friction, and imperfect sector labels is enough to justify a wider discount than headline non-accruals imply.

So Is the Discount Overdone?

The short answer is a cautious yes, but only if you treat OBDC’s discount as a pure forecast of credit losses.

OBDC is not in active distress. Non-accruals are still around 1.1% of fair value, Blue Owl recently produced a mark-validation datapoint with the $400 million loan sale at ~99.7% of par, and the platform still has enough scale and diversification to avoid a single sector blowup driving the entire book.

But the portfolio definitely warrants a higher risk premium today than it did in the recent past. And recent headlines around Blue Owl have probably compounded the issue into a bigger “trust discount” being reflected in the price.

Conclusion

If you believe market prices, Blue Owl is very much on the ropes. OWL has been cut in half, OBDC trades at a steep discount to NAV, and firm leadership has spent the last several months defending the company on CNBC or Bloomberg.

The firm is hoping to use this period of adversity to emerge stronger, much as Ali used the ropes to his advantage in his fight against Foreman.

Like Ali before (and during) the fight, Blue Owl is being questioned by critics. Did they scale too fast? Did they focus enough on underwriting? Is their software exposure going to sink them?

Unfortunately for them, there is no Round 8 knockout that can settle the debate. Blue Owl has to prove their capability over time, via clean refinancings, stable marks, and better transparency.

Until then, they will be discounted.

Their Co-CEOs, Doug Ostrover and Marc Lipschultz, are likely looking forward to the day when they can say, like Ali did after the Rumble in the Jungle:

I told you all, all of my critics, that I was the greatest of all time. ... Never make me the underdog until I’m about 50 years old.

We’ll see what story gets written. We may not have to wait long.

Covenant Lite

This article is for informational and educational purposes only and reflects my opinions as of the publication date. It is not investment advice, legal advice, tax advice, or a recommendation to buy or sell any security. I may hold positions in securities discussed, and my views may change without notice. Readers should do their own work and consult their own advisors before making investment decisions.