Private Credit Investing in 2026 - Katie Fowler

Written By Ryan Morrison

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Table of Contents

  1. Introduction

  2. Guest Snapshot

  3. The Six-Month Cascade: How the Narrative Built

  4. What the Headlines Are Actually Getting Wrong

  5. The Floating Rate Mechanic Most Investors Are Misreading

  6. Software Exposure: What 20% Actually Means

  7. How Direct Lenders Manage When Borrowers Struggle

  8. The Liquidity Mismatch Problem and Why the Structure Holds

  9. What Would Actually Signal Systemic Risk

  10. FAQ

  11. Memorable Quotes

  12. Links You Might Find Valuable

 

Introduction

Private credit has spent the better part of six months at the center of a financial media storm. Fraud cases, high-profile redemption gates, software sector anxiety, and a cascade of headlines invoking 2008 have combined to push institutional and individual investors toward the exits, often faster than the underlying data would justify.

In Episode 20 of Navigating Wealth, hosts Tad Fallows and Matt Shechtman sit down with Katie Fowler Principal, Private Wealth Direct Lending Strategy at Blue Owl Capital, to work through what they are seeing inside private credit portfolios right now.

The conversation covers loan performance, default mechanics, software exposure, redemption structure, and what signals investors should be watching that the headlines are not.

This is not a defense of the asset class. It is a practitioner's account of how to read a noisy market environment when the noise is running well ahead of the data.

 

Guest Snapshot

Name: Katie Fowler

Title: Principal, Blue Owl Capital

Current Focus: Direct lending portfolio strategy and investor communications for Blue Owl's BDC vehicles, with a specific focus on the wealth management channel

Credentials: Katie has been with Blue Owl since April 2025. Blue Owl manages over $150 billion in credit assets. She works directly with wealth investors on fund structures, performance expectations, and portfolio transparency, and has been navigating the current redemption environment in real time.

 

The Six-Month Cascade: How the Narrative Built

To understand where private credit stands today, it helps to trace exactly how the media narrative compounded over six months. The panic did not arrive fully formed. It was built, event by event, each one layered onto the last.

It started in September 2025 with the bankruptcies and fraud cases involving First Brands and Tricolor, which included allegations of double pledging of collateral. The media framing was swift: this was the beginning of a private credit collapse. Jamie Dimon's "cockroaches" comment, implying many more defaults were hiding in the dark, amplified the narrative before the underlying facts had been established. What emerged later, and received far less attention, was that those loans had far more to do with bank lenders than with non-bank private credit managers like Blue Owl.

The second act came in November 2025, when Blue Owl announced the wind-down of OBC2, a fund with nearly a decade of history that had always been structured for a planned liquidity event. The mechanics, merging into the publicly listed OBC or returning capital on a pro rata basis, were interpreted as distress signals rather than as the pre-planned conclusion to a finite vehicle. When Blue Owl sold approximately 30% of OBC2's loan book at 99.7% of par to accelerate the wind-down, the headlines that followed focused on the 30% rather than on the 99.7%.

The third act was the AI-driven software anxiety that intensified in early 2026. As SaaS companies saw their equity valuations fall on concerns about AI displacement, commentators pointed to the roughly 20-25% of private credit loans sitting in software and asked the natural question: if the companies are worth nothing, what happens to the credit? That question is worth taking seriously, but the answer requires understanding how those loans are structured, which the episode addresses directly.

What followed was a surge in redemption requests across major private credit managers. Blackstone funded $150 million of redemptions from principal capital to meet a 7.9% tender request. BlackRock held its 5% gate and blocked the remainder. Cliff Water reported redemption requests exceeding 10%. And asset managers across the board saw their share prices fall 30% or more, with BDCs trading at discounts of 20-30% to NAV.

In Fowler's view, each of these managers was "operating in good faith within the terms of their strategies," and yet every response, whether funding redemptions, holding the gate, or accelerating a wind-down, was met with negative media coverage.

 

What the Headlines Are Actually Getting Wrong

The core misunderstanding driving the current anxiety is straightforward, though it is obscured by the volume of overlapping stories. A handful of high-profile credit events, mostly involving bank lenders rather than private credit managers, have been treated as evidence of a systemic problem across an asset class that is performing differently than the headlines suggest.

Third-party default data shows approximately 2-3% defaults across the private credit market, a figure Fowler characterizes as average, not alarming. Interest coverage ratios specific to Blue Owl, the ratio of a borrower's cash flow to their interest expense, have been improving, not deteriorating, as the Federal Reserve's rate cuts reduced the cost of debt for floating rate borrowers. Cash flows are covering interest expense by approximately two times.

The cockroach narrative that followed First Brands and Tricolor assumed those cases were representative of a broader credit quality problem. But as Katie notes, those borrowers were primarily financed by banks, not by non-bank private credit managers. Treating them as a signal about the direct lending market was, in her framing, a fundamental misunderstanding of who the lenders were.

 

The Floating Rate Mechanic Most Investors Are Misreading

Private credit direct lending returns are not fixed. They float with base rates. When investors see returns falling from 13-14% to 8-9%, the instinct is to read that as deteriorating credit quality. In most asset classes, that instinct would be correct. In direct lending, it is not.

Floating rate loan: A loan whose interest rate adjusts periodically based on a benchmark rate, typically SOFR (the Secured Overnight Financing Rate), plus a fixed credit spread. As base rates fall, the total return on the loan falls mechanically, regardless of the borrower's credit quality.

Private credit direct lending loans are almost universally floating rate. The total yield a lender receives is the benchmark rate (SOFR) plus a credit spread. When the Fed cuts rates, SOFR falls, and the total yield falls with it, even if the underlying credit quality of every borrower in the portfolio is unchanged or improved.

Fowler puts the numbers plainly: base rates have declined by approximately 2% over recent quarters driven by the Fed, and credit spreads have compressed from as high as 6.5-7% to more normalized levels. The result is a mechanical reduction in absolute returns that has nothing to do with whether borrowers are paying their bills.

The irony she surfaces is pointed: lower base rates and tighter spreads are actually indicators of a more credit-positive environment. Cheaper debt means borrowers have more cash flow coverage. Better fundamentals mean lenders can accept tighter spreads because the risk is lower. The conditions producing 8-9% returns are, in important ways, healthier for the credit than the conditions that produced 13-14% returns.

This does not mean private credit returns will return to peak levels. It means that using the absolute return decline as evidence of credit deterioration is the wrong read.

 

Software Exposure: What 20% Actually Means

Software is approximately 20-25% of the direct lending market by loan volume. Given the anxiety around AI disruption of SaaS business models, that concentration has become a focal point. The question is legitimate, but the answer requires understanding the structure of the loans, not just the size of the exposure.

As Fowler explains, the primary use of proceeds for direct lending loans in the software sector is to finance leveraged buyouts on behalf of private equity sponsors. The PE sponsor contributes equity; the direct lender provides debt financing to complete the transaction.

This structure matters for two reasons. First, the PE sponsor has equity at risk, in most cases about 2x more equity than the lenders. They have a strong financial incentive to support a portfolio company that runs into trouble, whether through additional capital injection, management changes, or operational intervention. Second, the direct lender sits above the PE sponsor's equity in the capital stack as a senior secured creditor. If a company fails entirely, the lender has the first claim on assets.

First lien senior secured loan: A debt instrument that gives the lender the highest priority claim on a borrower's assets in the event of default, ahead of all other creditors and equity holders.

The software sector is not monolithic. Katie draws a clear distinction between vertically integrated enterprise software businesses with deep domain expertise in specific niches, owned by high-quality PE sponsors with long track records, and the broader SaaS category that is more exposed to AI displacement.

Blue Owl, she notes, has been underwriting AI-specific risk in their software book for years, pointing out that "ChatGPT is four years old" as of the recording. The AI disruption risk did not emerge overnight, and sophisticated lenders have been pricing it into their analysis accordingly.

The claim that software loans will go to zero if SaaS valuations fall is, in this framing, a category error. It conflates equity valuation with credit recovery. A company whose equity is worth very little may still be generating sufficient cash flow to service its debt, and if it cannot, the senior lender's recovery position is meaningfully different from the equity holder's.

On the other hand, with SaaS multiples coming down dramatically, that equity cushion is narrowing, and advancements in AI have come so fast that it is hard to say where things will land when these loans mature. Time will tell.

 

How Direct Lenders Manage When Borrowers Struggle

One of the underappreciated advantages of direct lending versus broadly syndicated credit is what happens when a borrower runs into trouble. In the syndicated market, hundreds of lenders hold a piece of a loan, making coordinated action slow and difficult. In direct lending, there is typically one lender or a small club, and that lender has covenants, a relationship with the PE sponsor, and a seat at the table the moment something goes wrong.

Covenant: A contractual condition in a loan agreement that the borrower must maintain, often expressed as a minimum interest coverage ratio or maximum leverage ratio. A covenant breach gives the lender the right to take action before the borrower defaults outright.

From the lender perspective, when a borrower breaches a covenant, the typical first response is not immediate enforcement. It is a conversation with the PE sponsor. Because private equity sponsors work with direct lenders across many transactions over many years, the reputational cost of walking away from a struggling portfolio company is significant. A sponsor known for abandoning companies finds it harder to access financing on the next deal.

Managers point to this relationship dynamic as a structural feature of the direct lending market, not an informal courtesy. It creates a buffer between covenant breach and actual credit loss that does not exist in the same way in public credit markets. Naysayers would say that this is the definition of manager bias and has shown up in the data regarding PIK loans (payment in kind), where lenders transition a loan from paying to an accruing loan that may be paying less than the initially originated debt service amount.

What actually causes a sponsor to stop supporting a portfolio company? Katie's answer is specific: when the sponsor has concluded that additional capital cannot create sufficient value to justify the concentration of further dry powder in that company, and they are prepared to move on. This is of course rare historically, but private credit has not really shown a true test of the credit cycle yet.

 

The Liquidity Mismatch Problem and Why the Structure Holds

The sharpest tension in the current private credit environment is not about credit quality. It is about liquidity. The loan book is performing. The investors want their money back. These two facts are not in conflict, but they are creating real pressure on fund structures that were designed for a different redemption environment.

The core mechanics are worth understanding clearly. Most evergreen private credit BDC vehicles offer quarterly redemptions, typically capped at 5% of the fund's NAV. This gate exists precisely to prevent a scenario where a manager is forced to sell performing loans at distressed prices to meet redemption requests, which would harm the investors who remain.

The direct lending asset class, Fowler explains, generates 6-8% in natural repayments each quarter as borrowers pay off loans. That means a fund offering 5% quarterly liquidity could, in theory, meet its gate with zero new subscriptions. The portfolio is constantly generating cash through normal loan repayment cycles.

The structural argument is that the gates are not a wall. They are a release valve calibrated to the natural liquidity of the underlying asset class. What the current environment is testing is investor confidence in that structure, specifically whether the gate is proof that loans are bad or proof that the structure is working as designed.

Katie points to Blackstone's BREIT (a private Real Estate REIT), which experienced elevated redemptions in 2022 through a year-long stretch before returning to net inflows, as the most instructive parallel. The real estate portfolio performed throughout. The redemption pressure eventually normalized.

In her framing, "it's credit's turn to undergo this period of elevated redemptions."

The current environment also creates a deployment opportunity that is easy to miss when the headline story is redemption pressure. With $0 in bank leverage lending completed in at least one week before the episode recorded, PE sponsors who need financing for buyouts have nowhere to go except direct lenders who can offer certainty of execution. That should allow managers to deploy at wider spreads, with more original issue discount and tighter terms, conditions that improve future performance for investors who stay in.

Where this could actually create stress, however, is with respect to maturities and refinances when credit spreads widen due to all of these media headlines. That maturity wall should not come until 2027 or 2028 but should be something to watch. Similarly, since these funds are leveraged by bank debt, banks can put tighter restrictions on those loans to the private credit funds, which could further limit their flexibility.

 

What Would Actually Signal Systemic Risk

Given the noise, it is worth asking what Katie and the team at Blue Owl are actually watching. The signals that would cause genuine concern, rather than the ones currently driving headlines, come from a short list of forward-looking indicators.

The most important are interest coverage ratios and default rates, tracked by third-party sources like Houlihan Lokey, Fitch, and Kroll.

The current third-party data shows 2-3% defaults market-wide, a figure Fowler characterizes as average. ICRs have been improving with rate cuts. Neither figure is flashing warning signs, though both bear watching as the environment evolves.

The third-party validation of Blue Owl's portfolio marks is worth noting as a concrete proof point. The 99.7% of par sale of approximately 30% of the OBC2 loan book, executed with institutional buyers, is an arm's-length transaction establishing a market price for that portion of the portfolio. 

What would actually signal systemic risk? A sustained rise in defaults beyond the 2-3% range, a deterioration in interest coverage ratios that suggests borrowers are struggling to service debt even with lower rates, or evidence of widespread underwriting deterioration, particularly in the lower middle market where PE sponsor support tends to be thinner and loan structures less lender-friendly. None of those signals are present in the current data.

While pundits would point to Fitch data that shows defaults hitting close to 9%, it is important to note that between these rating agencies they have different definitions of default, use different sample borrowers over different time periods. Using Fitch as an example, it uses a small pool of much smaller companies than most direct lenders typically lend to and historically has a much higher default rate — for instance, last year it was over 8%. It is important when reviewing headlines to make sure an investor is using apples-to-apples comparisons to understand what is normal.

 
 

Frequently Asked Questions

What is actually causing private credit redemption requests to surge right now? 

The surge in redemption requests is being driven primarily by investor anxiety rather than portfolio deterioration. A series of high-profile but largely unrelated credit events, fraud cases at companies primarily financed by banks, a planned wind-down of a Blue Owl fund misread as distress, software sector equity valuation concerns, and falling absolute returns, compounded into a narrative of systemic risk that outpaced the underlying loan performance data. Third-party default rates remain at approximately 2-3%, and interest coverage ratios have been improving with Fed rate cuts. Some more savvy investors may be looking to arbitrage the 100% NAV redemption rates from private funds and then invest into public BDCs which have been trading at 15-30% discounts to NAV since this frenzy started.

Why are private credit returns falling from 12-13% to 8-9%? Does that mean the loans are going bad? 

No. Private credit direct lending loans are floating rate instruments, meaning their yield adjusts with benchmark rates like SOFR. When the Federal Reserve cuts rates, the total yield on these loans falls mechanically, not because borrowers are struggling, but because the base rate component of the return has declined. The absolute return decline is a rate environment story, not a credit quality story.

How much of the private credit market is in software, and should that concern investors? 

Software represents approximately 20-25% of the direct lending market by loan volume. Whether that concentration is a problem depends on the structure of the loans, not just the size of the exposure. Most software loans in the direct lending market finance leveraged buyouts, where the lender sits senior and secured above a PE sponsor's equity. The sponsor has a strong financial and reputational incentive to support portfolio companies that run into difficulty. Sophisticated direct lenders have also been underwriting AI disruption risk explicitly for years. The concern is not new to the practitioners making these loans. Should it concern investors? The answer is a resounding maybe. But we will not know for a while because the impairment has not come yet.

How do private credit managers handle defaults when they do happen? 

Direct lenders have contractual covenants that give them the right to act before a borrower defaults outright. When a covenant is breached, the first step is typically a conversation with the PE sponsor, who has both financial incentive (equity at stake) and reputational incentive (future deal flow) to support the company. This relationship dynamic creates a buffer between covenant breach and credit loss that does not exist in public credit markets. Actual credit losses occur when a sponsor concludes additional capital cannot create sufficient value and the lender cannot recoup its full capital after foreclosure. Historical recovery rates on full defaults are typically in the 50-75% range.

Are the redemption gates at private credit funds a sign that something is wrong? 

Not in themselves. Quarterly redemption gates, typically 5% of NAV, are a structural feature of evergreen private credit vehicles, designed to prevent forced selling of performing loans at distressed prices. Direct lending portfolios generate 6-8% in natural repayments each quarter, meaning the 5% gate can be met through normal portfolio liquidity with zero new subscriptions. The gates are working as designed. The question investors need to answer is whether the current redemption pressure represents a fundamental reassessment of the asset class or a liquidity panic that will normalize, as it did with Blackstone's BREIT after a year-plus of elevated redemptions.

What signals would indicate that private credit problems are actually systemic rather than narrative-driven? 

The indicators worth watching are third-party default rates (currently approximately 2-3%, characterized as average), interest coverage ratios (currently improving with rate cuts), and the quality of new loan origination terms. A sustained rise in defaults beyond that range, deteriorating ICRs suggesting borrowers can no longer service debt comfortably, or evidence of widespread underwriting deterioration, particularly in the lower middle market, would be genuine systemic signals. None of those are currently present in the data.

 

Memorable Quotes

".. if the market or the media or whomever views any example of default as a bellwether for what's to happen in the broader marketplace, that to me is just a misunderstanding." — Katie Fowler

"Lower base rates and tighter spreads mark a more credit positive environment... " — Katie Fowler

"We are very confident that we have delivered on our side of the bargain with our investors since founding the firm." — Katie Fowler

"This is a relationship business, no question about it." — Katie Fowler

"We get, you know, 6 to 8% repayments in any given quarter. By the way, we offer 5% liquidity." — Katie Fowler

"If this is contagion, credit is the least of your worries because equity is going to be completely disastrous if all the things that everybody is saying is true." — Matt Shechtman

"The lenders are saying, look, the book is still great. We're still really happy with it. And then the investor is saying, well, that's fine, but I want my money back now." — Tad Fallows

"I think if I were to lay those out, it would be something along the lines of... the gating redemptions are meant for this exact scenario, right — which is you have a hysteric run and everybody kind of running first and asking questions later. Why fire sale good assets?" — Matt Shechtman

 
 

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Ryan Morrison
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