Blue Owl, MFS incidents raise private credit red flags. Does India face similar risks?

Globally, private credit has seen massive inflows of capital in the last few years on the back of its promise of being a calmer alternative to volatile public markets with steady yields, floating-rate protection and access to borrowers shunned by banks. But recent developments in the United States and the United Kingdom pose some uncomfortable questions. Scrutiny has intensified after Blue Owl Capital, one of the world’s largest alternative asset managers, capped redemptions in a retail-focused private credit vehicle and sold a chunk of loans to raise capital. Around the same time, the collapse of UK lender Market Financial Solutions revived concerns around collateral quality, leverage and opacity in the private lending ecosystem. The two episodes resulted in sharp correction in the stock prices of private credit players such as Apollo Global Management and Blackstone as well as Wall Street banks like Barclays and Jefferies. These event have ignited a debate at a time when India’s private credit market is growing. Are these problems in the developed markets structural and could they also surface in India? What went wrong at Blue Owl? At the heart of the Blue Owl episode is a classic asset-liability mismatch. Some private credit funds, especially those marketed to wealthy retail investors, offer periodic redemption windows even though the underlying loans are illiquid and privately negotiated. When redemption requests surge, managers can trigger “gates” to contractually restrict withdrawals or sell loans in the secondary market, often at a discount That is what unsettled investors. Private credit portfolios are valued infrequently and largely through models, not market prices. As long as capital stays put, the promise of stable returns holds. When redemptions accelerate, valuation assumptions and liquidity buffers are tested. MFS collapse The MFS collapse, though different in structure, added to the unease by highlighting risks around property-backed lending, enforcement challenges and the potential for hidden leverage, issues that resonate beyond the UK. MFS raised large loans from private credit players such as Apollo and Wall Street banks Barclays and Jefferies. Why private credit keeps growing despite these risks? Private credit has ballooned into a multi-trillion-dollar asset class, as banks retreated from riskier lending post the global financial crisis. Investors have been drawn by yields higher than public bonds, tighter covenants and the perception of lower volatility. India has followed the trend, though from a much smaller base. The domestic private credit market is still a fraction of the GDP but deal activity has surged in recent years, driven by demand for structured financing in real estate, infrastructure-linked businesses, stressed assets and sponsor-led transactions where speed and flexibility matter more than price. According to EY India, the private credit industry saw a deployment of $12.4 billion in 2025, a 35 percent growth over the previous year. Real estate received the highest allocation followed by healthcare and industrial products, with capex funding and refinancing as key drivers. How is India different, for now? Most Indian private credit capital flows through Category II Alternative Investment Funds (AIFs), which are closed-ended vehicles with fixed tenures, typically five to seven years. Unlike some US retail products, investors in these funds cannot demand quarterly or annual liquidity. This structural feature significantly reduces the risk of a sudden “run”, similar to what triggered the Blue Owl redemption cap. The investor base is also narrower and more institutional, dominated by domestic family offices, insurance-linked pools and offshore institutions rather than mass retail savers. Regulators, too, have moved to ring-fence risks. The Securities and Exchange Board of India has tightened valuation norms for AIF portfolios, while the Reserve Bank of India has capped banks’ and NBFCs’ exposure to these fund to prevent evergreening of stressed loans. While India is not immune to stress, these safeguards make it less vulnerable than semi-liquid, retail-facing private credit structures seen in the US. Possible flashpoints for India The vulnerabilities flagged by the Blue Owl episode are not irrelevant for India. Concentration risk could result in an industry-wide contagion. A significant share of Indian private credit has flowed into real estate and construction-linked financing. In a downturn marked by slower sales, regulatory delays or refinancing stress, liquidity could dry up quickly, forcing funds to extend maturities or restructure loans. Even with caps in place, banks, NBFCs and AIFs are linked through co-lending, refinancing and sponsor relationships. Stress in one pocket can transmit through these channels. EY data shows real estate dominates India’s private credit market, accounting for 42 percent of total deal value in 2025, far ahead of healthcare and industrials. With much of the activity driven by refinancing and acquisition financing, this mirrors risks seen in property-backed lending episodes such as MFS, underscoring that India’s key vulnerability lies in sectoral concentration rather than investor redemptions. Such refinancing-heavy structures can appear resilient in benign cycles but may face stress if liquidity tightens or exit windows narrow. Industry insiders say given the lack of direct investments by banks and relatively smaller size of the private credit in the overall private capital ecosystem, any episode similar to those in the US or the UK will have a limited impact. “Unlike in the west where private credit is a bigger asset class than private equity, in India, the private credit industry is just 10 percent of the overall private capital market that includes private equity, venture capital and real assets. There are very few mega funds in the domestic industry, most of the players have raised funds of around Rs 1,000-1,500 crore,” said the head of a private credit fund manager based in Mumbai, who did not wish to be named. For now, India appears insulated from the kind of retail redemption shock seen in the US. But as the asset class grows and innovation blurs the lines between illiquid assets and liquid promises, the questions raised by Blue Owl are ones Indian investors can no longer afford to ignore.