Blue Owl and the Growing D&O and E&O Risks in Private Credit

Key Takeaways

• Blue Owl faces securities class actions over alleged liquidity misstatements.
• Adviser also serves as valuation designee, creating conflict of interest.
• Fees tied to gross assets and PIK income may inflate earnings.
• Illiquid Level‑3 assets force internal models, raising D&O exposure.
• Redemption limits highlight liquidity risk, prompting tighter investor scrutiny.

Pulse Analysis

The private‑credit market has entered a period of heightened stress, driven by high‑profile borrower defaults such as Tricolor and First Brands. As investors grapple with illiquid loan portfolios, the focus is shifting from borrower insolvency to securities litigation against lenders themselves. Blue Owl Capital’s recent move to limit redemptions after a surge in withdrawal requests exemplifies the liquidity crunch that is now a catalyst for legal action. The firm’s exposure is amplified by two class actions alleging it misrepresented redemption pressures and a derivative suit that attacks its valuation practices and fee structures.

At the heart of the Blue Owl lawsuits is a structural conflict: the investment adviser simultaneously manages the portfolio and determines fair‑value marks for illiquid Level‑3 assets. Because management and incentive fees are calculated on gross assets and even on payment‑in‑kind (PIK) interest—income that may never materialize—plaintiffs argue the adviser had a direct incentive to overstate valuations. This dual role raises both D&O and E&O concerns, as boards may be accused of inadequate oversight while advisers face professional‑liability claims for allegedly unreasonable or biased valuations. The absence of a clawback provision further intensifies the risk, allowing fees tied to unrealized income to remain with the adviser.

The broader implication for the private‑credit industry is clear: governance, disclosure, and fee alignment will become central to risk management. Boards must scrutinize advisory agreements, enforce independent valuation processes, and ensure transparent communication of liquidity constraints to investors. Insurers are likely to reassess D&O and E&O coverage terms, reflecting the growing probability of litigation tied to valuation opacity and redemption mechanics. As the asset class continues to expand amid tighter credit conditions, firms that proactively address these governance gaps will better protect their reputation, investor capital, and bottom line.