Blue Owl Capital Faces Investor Lawsuit as $295 Billion Private Credit Giant Grapples With Liquidity Strain
The push to "democratize" private credit—once the exclusive domain of institutions and the ultra-wealthy—is facing a severe reality check. A New York federal lawsuit now spotlights the risks borne by retail investors, alleging that asset management titan Blue Owl Capital moved to quietly limit cashouts as anxiety spread through one of its flagship funds.
Blue Owl Capital (OWL), a $295 billion shadow bank and a dominant force in channeling capital into private equity, real estate, and infrastructure, finds itself at a critical juncture. The lawsuit, filed in the Southern District of New York, centers on the firm's OBDC II private credit fund. It claims the manager faced a surge in withdrawal requests totaling $150 million in the first nine months of 2025, a 20% jump from the prior year, while publicly stating its asset base was under "no meaningful pressure."
According to the complaint, redemption pressures peaked in the third quarter of 2025, hitting $60 million—roughly 6% of the fund's value. In response, Blue Owl is alleged to have orchestrated a controversial plan: merging the private OBDC II with its publicly traded sister fund, OBDC. The maneuver would have effectively frozen all investor withdrawals until the merger's completion in 2026, locking in retail investors as valuations potentially fell.
The firm's financials showed signs of strain. Its Q3 2025 report missed consensus estimates, with fee-related earnings of $376.2 million and a 33% year-over-year plunge in performance revenue. Facing fierce investor backlash and a declining stock price, Blue Owl called off the proposed merger on November 19, 2025.
The legal action names Blue Owl's Co-CEOs, Douglas I. Ostrover and Marc S. Lipschultz, accusing them of making false statements regarding the fund's stability. The case underscores a broader tension in private markets: the scramble for liquidity when the era of "easy money" fades.
Compounding its challenges, Blue Owl recently withdrew from a high-profile $10 billion data center partnership with Oracle in Michigan, a project linked to OpenAI's growth. Reports suggest the firm retreated from Oracle's escalating debt requirements, raising questions about its capacity for large commitments. This retreat coincided with the liquidity squeeze affecting its funds.
Investor Reactions:
"This is a classic bait-and-switch," said Michael R. Chen, a financial advisor in San Diego whose clients are invested in the fund. "They sold Main Street on the idea of institutional-grade returns, but when things got tough, the first move was to lock the doors. It betrays the very idea of 'democratization.'"
"We need perspective," countered Eleanor Vance, a portfolio manager at a Boston-based wealth firm. "Private credit funds have longer lock-ups by design. While the handling of communications appears flawed, retail investors entering this space must understand the inherent illiquidity risks, especially during market stress."
"It's outright deception," fumed David Park, a retired engineer and individual investor. "They touted stability while a silent run was happening. Now regular people are stuck, watching their savings potentially evaporate because a $295 billion firm can't manage its cash flow. Heads should roll."
"The Oracle exit is the tell," noted Simone Garcia, a banking analyst at a mid-Atlantic research firm. "When a firm of this scale walks away from a strategic, marquee project over debt concerns, it's a clear signal of internal liquidity prioritization. The lawsuit allegations, if proven, fit that pattern of defensive capital preservation."
The lawsuit's first major hearing is set for Monday, February 2, 2026, marking a pivotal moment for Blue Owl and the wider private credit industry, which has aggressively marketed itself to everyday investors.
This story was originally published by TheStreet on Feb 2, 2026, where it first appeared in the Investing section. Add TheStreet as a Preferred Source by clicking here.