The Private Credit Trap: How Family Offices Got Stuck Chasing Yield
The Million Dollar Question: In the second quarter of 2026, investors in Blue Owl’s technology-focused private credit fund asked to withdraw 38% of the fund’s shares. How much of each investor’s request actually got paid?
A) All of it B) About 75% C) About 13% D) NothingRead on for the answer.
Private credit spent most of the last decade being sold as the sensible alternative: steady income, senior claims, none of the stomach-turning swings of the stock market. Then 2026 arrived, and a lot of people discovered that the thing they owned and the thing they thought they owned were not quite the same object. This piece explains what private credit actually is, who ended up stuck in it, and why the trap turned out to be the packaging rather than the loans.
What it is
Private credit is a loan that never goes to a public market. Instead of a company borrowing by issuing bonds that trade every day, it borrows directly from an investment fund — one lender, or a small club of them, negotiating terms in a room. The borrowers are typically mid-sized businesses, often owned by private equity firms, with annual earnings before interest, taxes, depreciation and amortization somewhere in the $10 million to $100 million range. These are companies too big for a community bank and too small or too complicated for the bond market.
The category grew from a niche into something systemic. The Financial Stability Board, the international body that watches for cracks in the global financial system, put the market at between $1.5 trillion and $2 trillion in its May 2026 assessment. For most of that growth, the money came from pension funds, insurers, and endowments — investors with decades-long horizons who genuinely did not care whether they could sell.
What changed is the container. A large share of the newer money arrived through business development companies, or BDCs — closed-end funds regulated under the Investment Company Act of 1940 that hold portfolios of these loans. Some BDCs trade on a stock exchange like any other share. The ones at the center of this story do not. Non-traded BDCs are sold through financial advisors, priced off net asset value rather than a market price, and offer investors a limited quarterly window to sell shares back to the fund — an industry-standard cap of about 5% of net asset value per quarter, or roughly 20% a year.
That structure is the whole story. Hold onto the 5%.
Who uses it
Start with the group in the headline, because the data is not what you would expect. UBS surveyed 307 family offices for its 2026 Global Family Office Report, covering families with an average net worth of $2.7 billion and an average of $1.3 billion under management in the office itself. Private credit came in at roughly 3% of the typical portfolio — a real position, but a modest one, and most of those offices said they intended to keep it there.
That is not the behavior of a group that piled in. Families at the $1 billion-plus level tend to hold private credit the way institutions do: in drawdown funds with locked capital and a stated ten-year life, where illiquidity is the acknowledged price of the yield and nobody expects a quarterly exit. When you have already accepted that your money is gone for a decade, a redemption queue is not a thing that can happen to you.
The pressure showed up one rung down. Over the past five years the growth engine for private credit was the private wealth channel — households in the $1 million to $30 million range, and the advisors serving them, buying semi-liquid funds on brokerage platforms. The BDC sector grew from just over $100 billion in assets in 2020 to about $475 billion by early 2025. Blue Owl’s flagship non-traded credit fund alone reported roughly 90,000 shareholders and a $35.5 billion portfolio.
Ninety thousand shareholders is not a family office. It is a retail distribution business. And the FSB flagged exactly this drift in its report: an asset class that was “available only to institutional investors” is “becoming more accessible to retail investors.”
Why they use it
The pitch was good, and it was mostly honest.
Private credit loans are floating-rate. They price off the Secured Overnight Financing Rate, which has stayed above 3.5% since late 2022, plus a spread. That combination produced cash yields around 10% a year on new issuance — an equity-like return from an instrument sitting at the top of the capital structure, senior and secured. In a decade when a 60/40 portfolio felt increasingly like a bet on a handful of technology stocks, that was a genuinely attractive proposition.
There was a second, quieter appeal. Private loans do not trade, so they do not get marked to a screaming market every afternoon. They are valued quarterly, using models. For an investor who dislikes watching a portfolio lurch around, that smoothness reads as stability. Contractual cash flows, senior position, no daily valuation drama.
The subtle problem is that the smoothness is a reporting artifact, not a property of the asset. The IMF has been explicit about this, noting in its private credit analysis that these loans “rarely trade” and so are valued using models that “may suffer from stale and subjective valuations.” A number that does not move is not the same as a value that does not change.
How it works
A manager originates loans, funds them with investor capital plus some borrowing at the fund level, and passes the interest through as monthly distributions. Blue Owl’s diversified credit fund, for example, has paid a monthly distribution of $0.0701 per share unchanged since August 2023 — an annualized rate of about 9.2%.
The redemption mechanism is where things get interesting. Each quarter, the fund’s board approves a tender offer: it will buy back up to 5% of net asset value. Shareholders submit requests. If the requests come in under the cap, everyone gets paid in full. If they come in over the cap, the fund fills the cap and prorates — every shareholder gets the same fraction of what they asked for.
Through 2025 this was invisible, because nobody was asking. Then sentiment turned. Two high-profile bankruptcies in September 2025 — the auto-parts maker First Brands and the subprime auto lender Tricolor, both involving allegations of double-pledged collateral — put private credit underwriting on the front page. A separate worry about artificial intelligence eroding the business models of software companies, which private credit had lent to heavily, arrived on top of it.
Redemption requests in Cliffwater’s index of perpetual non-traded BDCs went from 1.6% in the third quarter of 2025 to 4.8% in the fourth — right up against the cap. Then the door jammed. In the first quarter of 2026, Apollo Debt Solutions received requests for 11.2% of shares outstanding, Ares Strategic Income 11.6%, HPS’s HLEND 9.3%, and Blue Owl’s two funds 21.9% and 40.7%, according to a Bank of America analysis reported by PitchBook. Every one of those is a multiple of the 5% cap.
Proration did the rest. In the second quarter of 2026, Blue Owl’s diversified fund fielded requests for 18.8% of shares and satisfied about 27% of each shareholder’s request; its technology-focused fund fielded requests for 38.1% and satisfied roughly 13%. Blackstone’s BCRED prorated after demand hit 10%. Apollo capped at 5% against requests of 16.8%. An investor who wanted $100,000 back from the technology fund received about $13,000 and a place in next quarter’s line.
What it costs
The fee arithmetic is the easy part: typically a management fee somewhere in the 1.0%–1.25% range on gross assets, plus an incentive fee on income above a hurdle, plus fund-level borrowing costs. On a 10% gross yield that leaves something like 9% for the investor — which is roughly what the distribution rates show.
The expensive part does not appear on a fee schedule.
Publicly traded BDCs give us the market’s opinion, because they price every day. By February 2026, public BDCs were trading at an average of about 80% of their net asset value. The S&P BDC Index, which tracks more than 40 listed funds, was down over 20% from June 2025 to June 2026. That gap — 100 cents on the books, 80 cents in the market — is the price of admission to the exit, and it is the number the non-traded funds never had to print.
For a household in the $1M–$5M band, where a private credit allocation might be 5%–10% of investable assets and where an unexpected expense means actually needing the money, that gap is not academic. For a family in the $30M–$100M band with a cash reserve and several other liquid holdings, it is an annoyance and a reallocation problem. For a $1B family office holding the same exposure inside a locked ten-year vehicle, it is a line in a quarterly report. Same asset, three completely different experiences — and the difference is not skill. It is whether you needed the money.
Hidden costs and tradeoffs
Three things deserve more attention than they usually get.
Payment-in-kind interest. When a borrower’s cash flow tightens, a private lender can amend the loan so interest accrues onto the principal balance instead of being paid in cash. This is PIK, and it is one of the real advantages of private credit — a flexibility that a syndicated loan with hundreds of holders simply cannot offer. It is also, at scale, a way for a portfolio to keep reporting income it is not collecting. Across 32 of the largest public and non-traded BDCs, PIK has become a growing share of investment income, running in the neighborhood of 8% of total interest income. Whether that is prudent flexibility or deferred pain is, as Penn Mutual’s analysts put it, still an open question.
Delayed loss recognition. The IMF’s concern is structural rather than accusatory: managers marking their own illiquid holdings, while raising the next fund on the strength of the current track record, face an incentive to recognize losses late. The FSB’s version of the same worry is that the sector “has not been tested during a severe economic downturn.”
Tax treatment. Interest income is ordinary income. A 9% distribution taxed at a top federal marginal rate lands closer to 5.5% after tax, before state taxes — which is why sophisticated holders tend to shelter these positions inside retirement accounts or trust structures rather than holding them in a taxable brokerage account. Compared with the long-term capital gains treatment on appreciated equities or the depreciation shield on real estate, private credit is a tax-inefficient way to earn a return.
What people get wrong
A gate is not a default. This is the biggest confusion of 2026, and it matters. A redemption limit is a contractual term, disclosed in the prospectus, that functions precisely as designed — it stops a run on a fund that holds assets it cannot sell in a week. Meanwhile the underlying loans largely kept paying. The Kroll Bond Rating Agency’s direct lending index showed a trailing twelve-month default rate of 1.5%, against 1.28% for syndicated leveraged loans. Blue Owl’s two funds reported non-accrual rates of 0.2% of portfolio fair value as of March 31, 2026, with no new non-accruals in the quarter. Investors were not fleeing losses. They were fleeing headlines — and, after the first round of prorations, asking for more than they needed in the hope of getting some of it.
There is a precedent, and it resolved. Blackstone’s non-traded real estate fund, BREIT, faced the same dynamic in 2022–2023, with requests peaking around 20% of shares. It fulfilled 100% of them over roughly fourteen months. Credit funds have better mechanics for this than real estate does: about a third of a direct lending portfolio turns over every year through refinancing, and the loans throw off cash continuously. BDC leverage has also stayed conservative, averaging about 0.91x debt-to-equity against a 2.0x regulatory limit.
The mistake was matching, not picking. Nobody in this story bought a bad asset. They bought a reasonable asset in a wrapper whose liquidity was contingent on other people not wanting theirs at the same time. That is a different error, and a much more common one. The family offices that avoided the squeeze did not have better credit analysis than everyone else. They had already priced the illiquidity honestly, sized the position at 3%, and located it in a structure where the exit was never part of the promise.
Bottom line
The answer is C — about 13%. Blue Owl’s technology-focused fund received redemption requests for 38.1% of its shares in the second quarter of 2026, honored its contractual 5% cap, and prorated, satisfying roughly 13 cents of every dollar requested. The fund did nothing improper; it did exactly what its documents said it would do. The investors simply discovered that a door sized for a normal quarter does not widen in an abnormal one.
That is the whole lesson, and it generalizes well beyond private credit. Liquidity you can only use when nobody else wants it is not liquidity — it is a courtesy. The families who came through this without a story to tell were not smarter about credit. They were more honest with themselves about which of their money was allowed to be stuck, and they sized the position accordingly. Yield is easy to compare across products. The exit terms are where the actual differences live, and almost nobody reads them until the quarter they matter.
Related reading: Family Office: How the Very Rich Organize Their Lives and Money · Alternative Assets: Investing Beyond Stocks and Bonds · Wealth Levels: Life at $1M, $10M, $100M, and $1B · Money Management: From Wealth Manager to Family Office · Real Estate as an Investment: How the Wealthy Actually Use Property
