Blue Owl’s Misfire Offers a Lesson in Semiliquid Fund Risks

The wild ride of Blue Capital Corporation II schooled the firm and holds lessons for would-be semiliquid fund investors as well.

What Happened?

Blue Owl seems to have underestimated the negative response to its Nov. 5, 2025, announcement of plans to merge its unlisted business development company Blue Owl Capital Corporation II OBDC II into its listed BDC Blue Owl Capital Corporation OBDC at net asset value. That could have badly hurt ODBC II investors, though, and the market spoke quickly and decisively. Over eight trading days between Nov. 6 and Nov. 17, shares of Blue Owl’s publicly traded stock (ticker: OWL) dropped nearly 11%, 6.5 percentage points worse than the VanEck Alternative Asset Manager ETF GPZ, which holds Blue Owl along with shares of its competitors. The acquiring BDC, OBDC, also dropped 9% over the same period.

With its stock price waning, including a 5.8% fall on Nov. 17 alone, Blue Owl canceled the merger on Nov. 19. The firm instead said it would “reevaluate alternatives in the future.”

What Was Blue Owl Thinking?

Blue Owl likely reasoned that the merger’s synergies and past precedent would be enough to quell any objections. After all, the firm estimated a 98% overlap in the private loans to middle-market companies between the two BDC portfolios. There had also been other successful instances of such mergers, including another Blue Owl unlisted BDC into OBDC, and the firm had previously been clear about wanting to streamline its product lineup.

Even if shares of unlisted BDCs can be redeemed at NAV, their liquidity is usually available only quarterly and only for 5% of fund assets, whereas listed BDCs offer the convenience of transacting with other investors, including selling to them, any day the market is open and any price agreed upon.

What Was the Market Thinking?

The problem is that those market prices can—and often do—diverge from NAV. In the cases of similar completed BDC mergers identified by Morningstar, that divergence was either minimal or even a benefit to the funds being merged away since shares of the acquiring listed BDCs traded at a premium.

But in this case, it would have hurt, and badly. With OBDC’s market price trading at a roughly 20% discount to its NAV, the merger made it highly likely that OBDC II investors would immediately suffer a 20% markdown on their investment (made all the more notable due to the high overlap between the two portfolios), especially since Blue Owl suspended the unlisted BDC’s quarterly redemptions at NAV prior to the merger. Blue Owl itself acknowledged this risk at its 2023 BDC Investor Day when they said “obviously ORCC’s [OBDC] trading price is a pretty important factor” in any potential merger with an unlisted sibling.

The market likely wasn’t just responding to the deal’s inherent unfairness, though. Subscriptions for OBDC II’s last two tender offers in May and August of 2025 exceeded the fund’s 5% offer. Blue Owl met all those requests in line with a provision allowing asset managers to repurchase an additional 2% at their discretion and avoid prorating redeeming investors. But with the ensuing bankruptcies of subprime auto lender Tricolor and the automotive parts company First Brands fueling speculation about inflated valuations and liquidity in private credit, the Nov. 5 merger announcement may have been taken as a signal that OBDC II couldn’t, at some point in the future, source enough liquidity to keep its 5% quarterly redemption at NAV commitment.

What’s Next for OBDC II’s Investors?

Blue Owl will reinstitute redemptions at NAV for OBDC II beginning in 2026’s first quarter and now says “all options are on the table” regarding a more permanent liquidity solution. In practice, though, there are only three probable avenues, each with benefits and drawbacks.

OBDC II can remain an unlisted BDC and use income and repayments from its loans alongside tapping its credit facilities (in other words, borrowing money against the portfolio to pay departing investors) to meet redemption requests, or prorating investors’ cash-out requests if necessary. But that could increase leverage risk, and it might take years for some investors to get all their money back.

OBDC II could merge with a different unlisted BDC like Blue Owl Credit Income OCIC, which shares more than half its assets in common with OBDC II. While OCIC’s recent repurchase offers have not come close to being fully subscribed, it’s possible a merger with OBDC II could change that, leaving the same liquidity problems for the merged fund.

Finally, Blue Owl could use an IPO for OBDC II to generate liquidity. But if the already-listed OBDC with nearly identical holdings is trading at a 20% discount, investors would have little reason to expect anything different from listing OBDC II.

What Can Investors Learn?

Whatever Blue Owl decides to do, investors considering an allocation to illiquid assets in semiliquid funds can learn a lot from the drama surrounding Blue Owl. One lesson is not to fear proration but to appreciate its role. Combined with intermittent redemption windows, proration enables semiliquid fund managers to own less liquid or illiquid assets without worrying about meeting large, unplanned redemption requests. This protects shareholders from each other by helping to guard against fire sales.

It’s only when a semiliquid fund must turn to options beyond proration, such as converting to a listed fund, that investors should start to worry. While it may be too late by then, a warning sign before it reaches that point is when a fund’s redemption requests are at or above its repurchase offer.

Thus, investors should be wary of semiliquid funds with consistently high redemptions. They are prone to burn through liquid assets to meet them, further exacerbating liquidity risk. Below is a select list of interval funds whose recent redemption requests appear to meet or exceed their offered amount.

A related lesson is to look for interval funds that disclose the percentage of shares they originally offered to repurchase alongside both the percentage they ultimately did and the percentage requested by investors. Not all funds do that, but those that do allow prospective investors to gauge potential liquidity risks, though inflows may ease those pressures to a degree.

Investors should also recognize an important distinction in the potential redemption offers for interval funds versus unlisted BDCs. While interval funds are required to make at least one 5% redemption offer at NAV per year, unlisted BDCs are under no such obligation. A 5% quarterly offer is typical, but a BDC could elect to suspend redemptions for years if necessary.

A final lesson from this saga is the simplest and most important of all. The hype surrounding claims of “democratizing” private assets should not obscure the reality that, by design, semiliquid funds traffic in illiquidity relative to conventional open-end and exchange-traded funds. Thus, only investors with the financial ability to weather long stretches without needing their money should consider them. That puts an inherent limit on their democratization potential. Just because asset managers are selling doesn’t mean investors should be buying.