Blue Owl Capital Corporation II’s sad ending represents a harsh lesson for semiliquid fund investors.

Another OBDC II about-face

The firm’s Feb. 18, 2026, announcement that it would stop taking redemption requests didn’t just walk back its prior claim of resuming quarterly redemptions at net asset value for the first time since September 2025, but changed the very nature of the Blue Owl Capital Corporation II (OBDC II) itself. What began life as an unlisted business development company will now effectively become a drawdown fund, returning investors’ money to them over a period of what could be years.

The firm halted what had been its original quarterly redemption cadence in November 2025, when Blue Owl declared its intent to merge this unlisted BDC into listed BDC Blue Owl Capital Corporation (OBDC). An uproar ensued. With the market price of OBDC’s very similar portfolio trading at a roughly 20% discount to its NAV, the merger made it highly likely that OBDC II investors would immediately suffer a 20% markdown on their investment. Days later, Blue Owl canceled the planned merger amid a drop in its own publicly traded stock. Those shares are again on the descent; they fell more than 9% intraday on Feb. 19, 2026, eventually recovering to close down 5.9%.

The bigger picture

In a November we laid out three likely courses of action available to Blue Owl: keep OBDC II operating as an unlisted BDC and attempt to continue meeting quarterly redemptions; merge it with another unlisted BDC; or IPO it, turning OBDC II into a listed BDC.

Blue Owl chose a fourth way: directly returning capital to shareholders. This return of capital will take place whether the shareholders want it or not, and at a time not of their choosing (likely quarterly, according to the firm’s most recent press release, though they’re not required to stick to that prediction). This is effectively the end of this BDC, though it could take years before the last dollar of capital is returned if there are credit problems that keep loans from being repaid or make them difficult to sell.

Interestingly, the firm didn’t announce that it was winding down operations, only that these quarterly returns of capital would “replace” the previous quarterly redemption offers. That’s a positive spin to say that redemptions would remain closed, investors have no control over how much money they receive back, and that returning capital necessitates the shrinking of the BDC’s asset base.

While the BDC hasn’t filed a quarterly report since September 2025, Blue Owl has presumably continued to collect the incentive fee from OBDC II investors since redemptions were suspended in November 2025 and plans to continue collecting that fee despite this most recent about-face. If the firm returns capital to investors close to the current NAV—not a foregone conclusion—the plan still creates substantial timing risk and reinvestment risk for investors, so even the best-case scenario is an adverse outcome for investors. Blue Owl should reconsider collecting incentive fees meant to be earned for positive investor outcomes.

Will shareholders benefit?

At the same time as this market-moving announcement, the firm also announced that it had sold $1.4 billion worth of private direct lending assets from three of its funds at 99.7% of par value. Out of that total amount, $600 million came from OBDC II, representing roughly one-third of the fund’s net asset value. The bulk of that will be returned to shareholders, representing a substantial portion of the fund’s assets and equivalent to more than one full year’s worth of redemption offers.

A charitable interpretation of this is that the firm was able to sell direct lending assets—which have come under pressure in recent months—at a level near par and to the benefit of OBDC II investors. This could reflect the quality of the underlying assets, and so the firm may continue to raise capital by selling loans at or near par value.

A critical interpretation would be that, at a time when direct lending and software assets (the latter of which accounted for 12% of OBDC II’s assets as of September 2025) are under pressure, the firm sold only the assets it was able to, assets that were likely its best, given the environment, and any future asset sales will be more difficult by comparison.

If the former is true, then the firm should be able to consistently sell assets at or near par and generate a steady return of capital in relatively short order. If this occurs, then the firm will deserve praise for getting a decent deal for investors in a difficult situation.

If the latter is true, then this initial 30% distribution is just the initial pop before a slow trickle, over which investors have no control. Third Avenue Focused Credit took over two years to return the last dollar of capital to investors, and that portfolio was of distressed but ultimately public credit assets.

Lessons for investors

The liquidity mismatch is real.

For the last six years, asset managers have rushed to offer private assets to Main Street investors through semiliquid products like interval funds and unlisted BDCs, even though private assets had historically been distributed mostly through listed BDCs or drawdown funds.

But the periodic liquidity required for semiliquid products means asset managers must periodically face reality, where the value that they assign to an asset meets the price at which that asset can trade. The difference between those two numbers can be uncomfortably large, especially if the asset manager is selling into a troubled market or needs the trade to settle quickly.

Put another way, semiliquid funds offer quarterly liquidity while owning assets that do not trade quarterly. This is a classic asset-liability mismatch that has doomed many investors before OBDC II, and one that requires both asset managers and investors to make concessions in the face of that mismatch, such as keeping a percentage of the portfolio in liquid assets. However, using a “liquidity bucket” tends to lower returns, which makes it harder to sell the funds to investors. The prudent are punished and the rash rewarded, at least until the tide turns.

Fund structure matters.

Industry convention is that unlisted BDCs offer quarterly redemptions of up to 5% of assets, but there is no regulatory requirement to do so. Unlisted BDC providers are allowed to restrict redemptions indefinitely, with only reputational damage to bear. On the other hand, interval funds—which have the same 5% quarterly redemption industry standard—are required to offer at least one redemption a year at 5%. They are not allowed to restrict redemptions indefinitely and, like a mutual fund or exchange-traded fund, must instead wind down operations if faced with insurmountable liquidity problems.

Meanwhile, locked-up pools of capital like listed BDCs and traditional closed-end funds don’t face this liquidity mismatch because they never have to meet investor redemptions. The tradeoff, though, is that they often trade at a discount to their net asset value. These discounts, which can persist for years, are what drove frustrated investors and asset managers into the arms of unlisted BDCs and interval funds to begin with. Some might be regretting that decision.

Semiliquid funds are not for everyone.

A final lesson, one that Morningstar has repeated often, is that semiliquid funds should only be used by investors with the financial ability to weather long stretches—years—without needing their money back. This puts an inherent limit on the “democratization” of private assets.