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- 🔒 Why private credit funds are locking investors out
🔒 Why private credit funds are locking investors out
Idin Sabahipour & Laura White
February 25, 2026
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Private credit funds tell investors they can take their money out regularly, but the loans the funds make with companies can lock cash up for five to seven years. If enough investors ask for their money back at once, the money might not be there.
When that happens, the fund’s documents decide if the manager can block withdrawals, sell loans, or slowly return cash back over time. The legal risk gets bigger when the fund is sold to ordinary people, because regulators like the FCA may ask whether investors were clearly warned that their money could be locked in.
EDITOR’S RAMBLE 🗣
February feels like a bit of a weird time if you’re an aspiring lawyer.
Most applications are closed, and open days are done. So, unless you’ve got an AC, you're just... waiting.
But there are a couple things you can be doing right now to help yourself get a training contract.
If you're at uni:
Lock in on your degree (it's summative season right now)
Your grades are a first-stage filter for law firms — they check your transcript before they read your application
Aim for a strong 2:1
If you're not at uni (or you've got spare time):
Try Forage. We've partnered with Clifford Chance on a free virtual work experience you can do from wherever you are right now
Start reading commercial news (I know you’re doing that already)
Revisit your rejected applications. What would you do differently? That reflection helps next cycle.
Even though applications aren’t open now, you can still use this time to help your future self.
– Idin
FEATURED REPORT 📰
🔒 Why private credit funds are locking investors out
What’s going on here?
An asset manager called Blue Owl blocked all investors in one of its funds from withdrawing their money — including the cash they originally put in and any returns they've made on it.
In the asset management industry, this is called "gating" a fund. It's a drastic move — and it’s raised some big questions in the world of private credit.
How does a private credit fund work?
A private credit fund pools money from a group of investors — mainly large institutions like banks, pension funds, and insurance companies. But there’s been an increase in ordinary people (called “retail investors”) who are investing in private credit too.
That pooled money is then lent directly to companies, usually as a loan secured against the company's assets. The private credit fund charges interest on those loans, which is how the fund makes money for its investors.
The appeal for investors is that, compared to buying bonds (loans made to governments or companies that are traded publicly), private credit funds tend to offer higher returns. That's because the loans are hard to exit early and tie up money for a long time, so investors are rewarded with a higher interest rate for accepting that risk (this is called an “illiquidity premium”). Investors accept that trade-off in exchange for better returns — but, like it’s done with Blue Owl, it can backfire.
So, what’s the problem?
The loans that private credit funds make are typically long-term (usually between five and seven years) — and companies repay the full amount in one go at the end of the loan. This is called a “bullet repayment”. The loans also can't easily be sold to other lenders in the meantime (unlike bonds, which are traded between investors all the time).
That means the fund's money is essentially locked up for years. But investors still want the option to withdraw their cash if they need it. The fund doesn't always have that cash available — because it's sitting inside a loan that won't be repaid for years and is difficult to sell.
That mismatch is the structural problem every private credit fund has to manage — and it's exactly the issue Blue Owl faced.
What has Blue Owl done, and why?
Until recently, investors in Blue Owl Capital Corporation II (the specific fund that Blue Owl gated) could request withdrawals from the fund each quarter — but total withdrawals (called “redemptions”) were capped at 5% of the fund's overall value. So on a fund worth £1 billion, that's a maximum of £50 million withdrawn every three months.
That works fine when only a few investors want their money back at any one time (the fund would cover those using interest payments from the companies it had lent to).
But recently, far more investors than expected asked to withdraw their money at once, and the fund couldn't cover it. So Blue Owl did the most drastic thing it could do — it gated the fund entirely, blocking all withdrawals.
It's now planning to return cash to investors gradually — by selling some of its loans and waiting for others to be repaid naturally — but that will take time.
Why are investors withdrawing money fast right now?
Blue Owl received far more redemption requests recently because confidence in private credit has suffered for two reasons.
💸 Borrowers are failing: A handful of companies financed by private credit funds have gone bankrupt in the past year — including US auto lender Tricolor Holdings and automotive parts company First Brands. When borrowers go under, the fund loses money, and investors start wondering whether the fund managers really knew which companies were safe to lend to.
🤖 AI is making the software sector nervous: A large proportion of the companies private credit funds lend to are software businesses. Recently, AI has been disrupting the software industry — automating tasks that software products used to charge for, and making it easier for companies to build their own tools rather than buy them. That’s led to concerns that software companies will suffer financially, which could mean they’ll struggle to repay their loans.
These are the main reasons private credit investors are nervous.
The share prices of major asset managers with large private credit operations — including Blackstone, Ares, and Apollo — have all fallen following Blue Owl's announcement.
Blue Owl itself dropped nearly 10%.
Source: FT
Why does the involvement of retail investors matter?
Blue Owl's problems have been made worse by its decision to target retail investors (ordinary individuals) rather than large institutions like pension funds and insurance companies.
💰 Unpredictable cash needs: Institutions can usually predict when they'll need to access their money. Individual investors can't as well — they might suddenly need cash for a medical bill, or because of a job loss. That makes their redemption requests much harder to plan for.
📉 More sensitive to bad news: Retail investors are also quicker to panic. When there are concerns about private credit, individual investors were faster to request withdrawals than institutional investors would have been. Blue Owl wasn't the only fund to feel this — other private credit funds that have similarly chased retail money in recent years are now facing the same pressure.
🔍 Regulatory risks: When a fund is sold to institutional investors, regulators generally assume those investors understand the risks — including the possibility that they might not be able to get their money back quickly. With retail investors, that assumption might not be as defensible. In the UK, the Financial Conduct Authority (FCA) is likely to scrutinise whether the liquidity risks of private credit funds have been clearly explained to ordinary investors — and whether the way those funds were marketed was misleading.
How can you use this in your applications?
Private credit is one of the fastest-growing areas of finance, and the Blue Owl story gives you something you can use across different stages of your application.
Insight | Why it’s important | How to use it in your applications |
|---|---|---|
Private credit funds promise investors periodic withdrawals, but the underlying loans are long-term and illiquid. When redemption requests exceed the cash available, the fund's documentation becomes super important. | The legal tension is in drafting redemption terms that protect the fund manager's flexibility to gate the fund, without leaving investors so exposed that they refuse to invest or challenge the fund manager. | If you're writing about your interest in private credit in your application form, talk about the issues surrounding redemption mechanics. Fund managers want control while investors want stronger protections — and the balance needs to be reflected in the drafting. This shows you understand what the work looks like in that industry (not just that you know what private credit is). |
When a fund gates, two groups emerge with different interests. 1. Investors who want to exit, and 2. those who want to remain. If the fund sells its best assets to pay out leavers, remaining investors are left with a weaker portfolio. But if it gates entirely (as Blue Owl did) those trying to exit are frustrated. | The fund has to decide whose interests to prioritise. The fund documentation guides that decision — but it rarely resolves the tension entirely. A good lawyer has to understand both sides' positions before advising on a course of action that can withstand challenge from either group. | This is a good example of empathy as a skill a good lawyer needs. A lawyer advising Blue Owl wouldn’t just tell the client what it wanted to hear. The firm would have to weigh the legal exposure of each option — gating entirely, or selling assets — and advise on the position that's most defensible if either group later brings a claim. That's what commercial legal advice actually looks like. |
Blue Owl's problems were amplified by targeting retail investors who didn't fully understand that their money could be locked in. Regulators like the FCA are now likely to ask whether those investors were mis-sold a product. | Mis-selling is a serious regulatory exposure. If the FCA finds that a fund's marketing materials overstated liquidity or understated the risk of gating, the fund manager faces potential fines, redress obligations, and reputational damage. Law firms play a central role in both defending against that scrutiny and helping funds get their disclosures right going forward. | You might get questions like “tell us about a news story you’ve read about and how it will r clients”. For the right firm, this is a good story to discuss. The specific worry here is mis-selling liability. You can explain that law firms will need to help fund managers review their marketing materials, strengthen their risk disclosures, and prepare for regulatory engagement. That's a strong answer that shows you can think from the client's perspective. |
If you're applying to law firms that do a lot of private credit work (like Fried Frank, Kirkland & Ellis, Clifford Chance, Debevoise & Plimpton, and Dechert) this story will be especially useful to bring up.
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IN OTHER NEWS 🗞
🛍️ eBay is buying Depop (the fashion resale app) for $1.2 billion. Freshfields is advising eBay on the acquisition of the London-based platform from Etsy, which originally bought Depop for $1.6 billion back in 2021. With 7 million active buyers and around $1 billion in annual sales, the deal gives eBay a stronger position in the growing resale market against competitors like Vinted.
🍺 BrewDog co-founder James Watt is putting £10 million of his own money into a rescue bid for the craft brewer he founded in 2007. The company (which owns Punk IPA and operates 72 bars globally) made a £37 million pre-tax loss last year and is now up for sale. Around 220,000 individual shareholders who invested through its "Equity for Punks" crowdfunding scheme could be left with very little in return.
📡 Vodafone is selling its stake in VodafoneZiggo (the biggest telecoms company in the Netherlands) to Liberty Global. The deal values Vodafone's 50% stake at €1 billion in cash plus a 10% stake in a new company called Ziggo Group. Freshfields is lead adviser to Liberty Global, with A&O Shearman advising on commercial aspects and Slaughter and May acting for Vodafone. Liberty Global plans to list Ziggo Group on Amsterdam's Euronext stock exchange in 2027.
AROUND THE WEB 🌐
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STUFF THAT MIGHT HELP YOU 👌
💻️ Free application advice: Check out my YouTube channel for actionable tips and an insight into the lifestyle of a commercial lawyer in London.
📁 Law firm application bank: A growing library of real, verified successful applications for training contracts and vacation schemes. Helpful if you want to learn from others who answered the same questions you’re stuck on.
📝 Write winning law firm applications: A practical course to help you write clearer applications, faster. Avoid common mistakes, learn how to structure answers properly, and get lifetime access to future updates. Try it for 14 days, risk free.
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