Blue Owl, HPS Join Private Credit Funds Stung by February Losses

Blue Owl Capital Inc. and BlackRock Inc.’s HPS Investment Partners reported negative returns in February for their private credit funds. The losses marked the worst monthly performance for these funds in more than three years. The decline aligns with the leveraged loan market’s steepest monthly drop since 2022.

The Blue Owl Credit Income Corp. fund, a non-traded business development company, lost 0.86% in February. In comparison, the HPS Corporate Lending Fund declined by 0.3%. Both funds have faced a challenging start to 2026. Blue Owl’s fund posted a 0.75% loss for the year, its worst since 2021. The HPS fund, on the other hand, showed a 0.51% return for the year so far.

Apollo Debt Solutions also posted a 0.39% gain for the year, making it one of the few major funds to remain in positive territory. These performance trends come as private credit funds face heavy redemptions. Investors have grown anxious about the sector’s heavy exposure to software businesses, which are now under pressure from AI disruption.

Why Did This Happen?

The February losses reflect broader stress in the private credit market. Several large funds have reported declines, including those managed by Blackstone Inc. and Ares Management Corp. The heavy redemptions are partly driven by concerns about loan quality and the software sector’s vulnerability to AI-driven changes. This has led to increased scrutiny from investors seeking liquidity.

BlackRock and Blue Owl have taken steps to manage redemption pressures. BlackRock capped redemptions at 5% of the HPS fund’s net asset value, following investor requests for 9.3%. Blue Owl, meanwhile, permanently ended quarterly redemptions at one of its funds and replaced them with periodic distributions funded by asset sales. Apollo also limited redemptions after investors sought to pull 11.2% from its fund. These measures highlight the sector’s struggle with liquidity requests amid illiquid asset portfolios.

What Are Analysts Watching Next?

The next few quarters will be critical for private credit managers. They must navigate the challenge of fulfilling investor demand for liquidity while managing portfolios with limited short-term liquidity. This balancing act will determine whether the current market stress remains contained or escalates. Analysts are watching how fund managers handle redemption requests and whether defaults in the portfolio increase. Performance and default metrics will provide insight into the sector’s resilience.

S&P Global Ratings has noted that the private credit market has grown significantly and now competes with traditional syndicated lending for lower-rated borrowers. The market will also be tested as leveraged borrowers face rising refinancing needs through 2028. The impact of AI on the technology sector will be a key factor in assessing the long-term stability of private credit investments.

The default rate for private credit reached 9.2% in 2025, the worst on record. Fitch reported a trailing 12-month default rate of 5.8% as of January 2026, with some analysts projecting it could rise to 8% or even 15%. These trends raise questions about the long-term sustainability of the sector and whether private credit can continue to outperform the leveraged loan market.

Blue Owl and other major firms are engaging with large family offices to explain their strategies and reassure investors. Executives have emphasized the robust performance of their portfolio companies and the lack of a significant increase in defaults. However, the challenge remains to ensure investors understand the liquidity limitations inherent in private credit investments.

The broader market is also watching how the U.S. Federal Reserve’s rate policy and regulatory changes may affect liquidity. S&P analysts have suggested that the Fed may pursue measured rate cuts in 2026, which could help ease some pressures in the credit markets. Clear regulatory guidance on bank capital and stablecoin rules will also be important in shaping the market’s direction.