Private Credit at an Inflection Point: Recent StressEvents, Structural Vulnerabilities, and the Case forSmaller, Institutionally Anchored Managers

November 2025

Introduction 

Rapid growth has reshaped the private credit market over the past decade, transforming a once niche segment into a cornerstone of institutional and retail portfolios. This expansion has coincided with rising complexity across fund structures, greater reliance on internal valuations, and the proliferation of semi-liquid products targeting non-institutional investors. Recent events involving BlackRock, Blue Owl, and BREIT illustrate how these dynamics can create vulnerabilities particularly when liquidity, valuations, and underwriting discipline come under pressure. 

This paper examines the underlying factors driving recent stress across several large private credit platforms, assesses the structural weaknesses they reveal, and outlines why smaller, specialized managers backed by long duration institutional capital may offer more resilient performance in the current environment. 

Recent Stress Events Across Large Platforms 

BlackRock: Renovo, Valuation Adjustments, and CLO Test Failures 

BlackRock’s challenges centered on its exposure to Renovo Home Partners, a sponsor backed home services rollup that filed for bankruptcy. The loan, which had been carried at par, was subsequently written down to zero. The sharpness of this adjustment raised questions regarding the timeliness of internal valuations and the depth of underwriting assumptions in certain sponsor-driven transactions. 

At the same time, one of BlackRock’s CLOs breached key over-collateralization tests as underlying loan values deteriorated. Once these tests failed, cash flows were diverted from equity and reinvestment buckets toward senior noteholders, limiting the manager’s ability to reposition the portfolio. To stabilize the structure, BlackRock elected to waive a portion of its management fees. Fee waivers of this nature are rare and typically signal significant internal pressure within a credit vehicle. 

Taken together, these developments highlight the sensitivity of large, multi-product platforms to underwriting weaknesses and valuation volatility particularly when portfolio structures include leveraged components such as CLOs. 

Blue Owl: Merger Breakdown, Redemption Gates, and BDC Discounts 

Blue Owl confronted a different structural challenge stemming from the proposed merger of its non-traded OBDC II vehicle into the publicly traded OBDC. The merger contemplated a one-for-one exchange of shares. However, because OBDC traded at a material discount to its stated net asset value (approximately 20%), the merger would have immediately crystallized equivalent losses for OBDC II investors. 

In anticipation of elevated redemption activity ahead of the transaction, Blue Owl imposed redemption limits within OBDC II. The gating of redemptions, combined with investor pushback and ongoing market volatility, led to the cancellation of the merger. The public BDC continues to trade at a discount, reflecting market skepticism around valuation marks and underlying asset quality. 

The episode underscores structural vulnerabilities inherent in linking illiquid credit portfolios with semi-liquid investor bases and public market valuation mechanisms. When asset values diverge from reported NAVs, redemption dynamics can accelerate, creating chain reactions that strain the platform. 

BREIT: Valuation Lag and Distribution Sustainability 

Concurrent issues have emerged in the private real estate space, most notably at BREIT. Independent analysis by Buchanan Street Partners highlighted several areas of concern, including the use of sub-4% cap rates to support valuations at a time when both private and public market cap rates have widened materially. Normalizing valuations to more market reflective cap rates would imply significant reductions in NAV. 

BREIT’s adjusted funds from operations (AFFO) yield, estimated around 2.4%, is also meaningfully below its stated distribution rate of approximately 5%. This gap indicates that distributions increasingly rely on non-operating sources such as asset sales, leverage, or return of capital. Together, these factors raise questions about the sustainability of the current payout structure and the accuracy of valuation marks within retail oriented real estate vehicles. 

Structural Drivers Behind the Stress 

Complexity and the Interdependence of Product Stacks 

Large alternative asset platforms operate across a broad range of vehicles including CLOs, BDCs, interval funds, private funds, and non-traded REITs. While this diversification can enhance distribution capabilities, it also introduces interdependencies that become problematic when valuations or liquidity tighten. Weaknesses in one product can quickly transmit to others through shared assets, investor sentiment, or redemption activity. 

Valuation Opaqueness and the Pace of Adjustment 

Private credit portfolios rely heavily on internal valuation methodologies. During periods of credit stability, slower moving valuations may not pose an issue. In a more volatile environment, however, delayed adjustments can mask underlying risk and lead to sharper, more disruptive markdowns when losses finally crystallize, as seen in the Renovo case. 

Convergence Of Large Private Credit and Public Credit 

As private credit funds have grown, the largest transactions in the market increasingly resemble public syndicated loans rather than bespoke private financing. These large “private” deals share the same borrowers, sponsors, EBITDA adjustments, leverage levels, and covenant structures that define the public leveraged loan market. In effect, mega funds are originating delisted versions of public credit rather than differentiated, idiosyncratic loans. 

This convergence amplifies correlation risk. When economic or financing conditions tighten, these large private loans behave much like public leveraged loans by exhibiting simultaneous declines in coverage ratios, parallel amendment activity, and valuation markdowns that track broader market stress. The only difference is that public credit reprices continuously in liquid markets, while private marks adjust slowly and internally, obscuring the underlying volatility. 

By relying on the same deal sources, underwriting templates, and borrower cohort as the public markets, large private credit platforms become more exposed to systemic rather than idiosyncratic risk. This structural similarity further limits the diversification benefits that many allocators expect from private credit, particularly within large, asset gathering vehicles. 

Liquidity Mismatch and Retail Facing Structures 

Many large managers have introduced semi-liquid vehicles designed for the retail and mass affluent channels. These products offer liquidity terms that often exceed the liquidity of the underlying assets. Under stress, this mismatch can produce gating, redemption queues, or forced asset sales, creating conditions that amplify volatility and strain the entire platform. Blue Owl’s redemption management challenges illustrate this dynamic clearly. 

Incentive Misalignment at Scale 

As platforms grow, the marginal incentive often shifts from investment performance toward asset accumulation. This can result in pressure to deploy capital quickly, accept weaker deal structures, or expand into strategies that dilute underwriting quality. When combined with retail fundraising channels, the risk of valuation optimism or distribution smoothing increases. 

The Case for Smaller, Specialist Managers 

Smaller, sector-focused private credit managers often possess structural advantages that mitigate many of these risks. 

First, specialization fosters deeper underwriting expertise and closer borrower relationships, reducing reliance on sponsor driven structures and model-based valuation assumptions. Second, simpler product architectures, typically limited to one or two commingled funds, avoid the cross-vehicle contagion that can arise in large platforms. Third, meaningful GP commitments and performance driven economics strengthen alignment with limited partners. Finally, these managers tend to operate with long-duration institutional capital, allowing portfolios to withstand market volatility without pressure to meet investor redemptions. 

The Importance of Institutional Capital 

The composition of a manager’s investor base plays a critical role in performance during periods of stress. Institutional investors typically commit capital over multi-year periods, eliminating the liquidity mismatch inherent in semi-liquid structures. They impose rigorous governance, reporting, and oversight frameworks that promote underwriting discipline and timely valuation practices. Unlike retail investor cohorts, institutional LPs seldom redeem en masse, enabling managers to maintain investment discipline across cycles. This stability enhances a manager’s ability to work through distressed situations, negotiate amendments, and pursue long-term value rather than react to short-term liquidity demands. 

Conclusion 

The recent challenges at BlackRock, Blue Owl, and BREIT illustrate a broader turning point for private credit. After years of rapid expansion, the largest platforms are now facing the structural consequences of their scale: higher portfolio correlation, portfolios that increasingly mirror public leveraged loans, slower and more opaque valuation adjustments, and product designs built on liquidity terms that do not match the illiquidity of the underlying assets. These issues are not merely episodic as they reflect fundamental tensions between asset gathering, retail distribution, and the complexity of modern private market structures. 

As these vulnerabilities become more visible, the market is beginning to differentiate among managers. Smaller, specialist credit firms with focused mandates, simpler fund architectures, and long-duration institutional capital are better positioned to manage through volatility. Their portfolios are less correlated, more idiosyncratic, and supported by investor bases that do not trigger redemption cycles or force reactive asset sales. These characteristics enable performance to reflect underwriting quality, not the pressures and compromises associated with scale. 

Private credit remains a compelling asset class, but its next phase will reward depth over breadth, alignment over AUM growth, and true private market expertise over proxy versions of public credit risk. For allocators, the path forward lies in selecting managers whose scale, strategy, and capital base match the illiquidity and complexity of the underlying assets. In a more discerning and less forgiving market environment, those attributes are likely to determine which platforms deliver durable, risk-adjusted returns and which continue to face the stresses now emerging across the largest firms. 

About Divergent Capital Asset Management 

Divergent Capital Asset Management helps RIAs and family offices access and build customized portfolios of private market investments including private credit, private equity, venture capital, and real estate. The firm provides institutional quality infrastructure for sourcing, structuring, and managing alternative investments. Divergent handles everything from due diligence to administration to allowing advisors to offer branded, turnkey private

market solutions. Divergent’s platform bridges the gap between institutional access and independent advisor needs. 

Divergent Capital Asset Management LLC (“DCAM”) is a registered investment advisor offering advisory services in the states of Georgia, Florida, Texas, Louisiana, Colorado, California and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. A copy of DCAM’s current written disclosure statement discussing DCAM’s business operations, services, and fees is available on the SEC’s website at www.adviserinfo.sec.gov or from DCAM upon written request.