The D&O Diary has chronicled mounting stress in the private credit market, underscored by the high-profile collapses of borrowers such as Tricolor and First Brands, and the resulting migration from borrower insolvency into securities litigation against private credit lenders themselves. This escalation highlights sharpening scrutiny from private credit fund investors and public shareholders alike. Exemplifying this trend, Blue Owl Capital Corporation (“Blue Owl”) recently moved to limit redemptions following a historic surge in withdrawal requests. This liquidity strain coincides with putative class actions filed in December 2025 and January 2026 (Blue Owl SCAs) as well as a derivative suit filed on April 27, 2026 (Blue Owl Suit).  

While the Blue Owl SCA alleges that Blue Owl’s leadership concealed pressures on the firm’s direct lending vehicles, the Blue Owl Suit additionally alleges that Blue Owl was acting in a dual capacity when determining illiquid private credit fund valuations.  Below, we discuss the allegations against Blue Owl and the developing D&O and E&O risks for private credit funds.

The Blue Owl Litigation

The Blue Owl SCAs, both filed in the United States District Court for the Southern District of New York (SDNY), allege that Blue Owl misrepresented the firm’s liquidity and mounting investor redemption pressures within its business development company (BDC) vehicles. Both cases claim that the firm artificially inflated its stock price by keeping shareholders in the dark about these material operational risks and, once redemption news became public, Blue Owl’s share price dropped significantly.  

The Blue Owl Suit, also filed in the SDNY, is brought by a shareholder on behalf of Blue Owl Capital Corporation, a publicly traded business development company (BDC), against its investment adviser, Blue Owl Credit Advisors LLC. The derivative complaint asserts claims under Section 36(b) of the Investment Company Act of 1940, alleging that the adviser breached its fiduciary duty by charging excessive fees that were not the product of arm’s-length bargaining.

The Blue Owl Suit centers on what it characterizes as a structurally conflicted arrangement. According to the allegations, the adviser serves both as portfolio manager and as the “valuation designee” responsible for determining the fair value of the fund’s largely illiquid private credit investments. Because the adviser’s compensation is tied to asset values, the plaintiff alleges that this dual role creates an inherent incentive to inflate valuations. The complaint contends that the adviser systematically overstated portfolio values, thereby increasing management and incentive fees.

The derivative lawsuit plaintiff also challenges the adviser’s compensation structure, which includes a management fee based on gross assets and an incentive fee tied to investment income, including non-cash income. A key focus is the use of payment-in-kind (PIK) interest, under which borrowers satisfy interest obligations by adding to the principal balance rather than making cash payments. The complaint alleges that PIK income was included in both net asset value and income calculations, increasing fees even where the income may never be realized. The Blue Owl Suit further alleges that the advisory agreement lacks a clawback provision, allowing the adviser to retain fees tied to unrealized or uncollectible income.

Discussion

The Blue Owl litigation highlights several structural features of private credit that are increasingly relevant to D&O and E&O risk.

Valuation opacity sits at the center of the derivative allegations and represents a growing source of D&O and E&O exposure for private credit funds. Because private credit portfolios frequently consist of illiquid Level 3 assets lacking observable market prices, valuations depend heavily on internal models and judgment. In the Blue Owl Suit, the plaintiff alleges that this risk was exacerbated by a structurally conflicted arrangement in which the investment adviser both determined asset values and benefited economically from higher valuations through management and incentive fees.

When compensation is directly tied to internally generated marks, plaintiffs may argue that boards failed to exercise adequate oversight of valuation processes or to manage disclosed conflicts. From an E&O perspective, these allegations implicate the adviser’s professional services in valuing and managing portfolio assets, potentially giving rise to claims that valuations were unreasonable, biased, or inconsistent with prevailing credit conditions.

The litigation also highlights increasing scrutiny of private credit fee mechanics, particularly where compensation is linked to gross assets or non‑cash income. The Blue Owl derivative complaint focuses on the adviser’s receipt of management fees based on gross assets and incentive fees that include payment‑in‑kind (PIK) interest, income that may never be realized in cash. According to the plaintiff, the absence of meaningful clawback provisions compounds this risk by allowing the adviser to retain fees tied to unrealized or uncollectible income. While framed as a fiduciary-duty claim under the Investment Company Act, these allegations also carry potential E&O implications, as they challenge how advisory services are structured, administered, and disclosed to investors.

Liquidity management is emerging as another potential fault line for both disclosure‑based liability and professional liability exposure. Many private credit vehicles offer periodic redemption features while holding inherently illiquid assets, creating a structural tension during periods of increased withdrawal requests. The securities class action allegations against Blue Owl, that management failed to disclose mounting redemption pressures and the likelihood of withdrawal limits, illustrate how liquidity strain can translate into allegations of misleading statements or omissions. Similar claims may also support E&O exposure where investors contend that liquidity risks, redemption mechanics, or product suitability were inadequately explained in offering materials or marketing disclosures.

Finally, broader market concerns about loan quality are amplifying these risks. Recent reporting has highlighted that large direct lenders may be extending increasingly risky loans to highly leveraged borrowers, raising concerns about default rates and portfolio resilience. These concerns are consistent with the allegations in the Blue Owl litigation regarding sector concentration and borrower stress. As credit conditions tighten, these underlying risks may translate into both performance deterioration and increased scrutiny from investors, regulators, and plaintiffs’ firms.

From a D&O insurance perspective, the Blue Owl litigation could highlight the importance of governance, disclosure, and oversight of conflicts. Boards of private credit vehicles may face heightened scrutiny regarding their approval of advisory agreements, oversight of valuation processes, and management of liquidity risks. At the same time, from an E&O perspective, there may be increased scrutiny over a private credit fund’s underwriting standards, portfolio construction, and fee mechanics. The convergence of these risks suggests that claims may have the potential to implicate both coverages.

With respect to credit funds themselves, the Blue Owl case may represent an early indicator of how private credit risks will be litigated in the coming years. As the asset class continues to grow and encounters more challenging economic conditions, issues of valuation, liquidity, underwriting discipline, and fee alignment are likely to remain at the forefront.