Frozen Exits... and a Private-Equity 'Reckoning...

Frozen Exits... and a Private-Equity 'Reckoning

When you can't get your money back... We're due for a private-equity 'reckoning'... The next 10 days will be big for oil prices... The 'make or break' point... Getting greedy when others are fearful...

Booms are fun. The busts? Not so much...

We'll begin today's Digest with two big headlines in the market. First, here's Bloomberg with an update on the AI boom...

OpenAI Funding on Track to Top $100 Billion in Latest Round

On the surface, the ChatGPT creator appears to have plenty of investors. However, its biggest funders are still the mega-cap companies that use its products: Amazon (AMZN), Nvidia (NVDA), and Microsoft (MSFT). That doesn't do anything to stifle concerns about "circular funding" in AI.

Meanwhile, Main Street investors are getting caught up in a new form of pain: private-equity investing gone wrong. Here's global news service Reuters with the story...

Blue Owl halts redemptions at one of its funds, deepening selloff in private equity shares...

Private capital firm Blue Owl Capital (OWL) is selling $1.4 billion in assets from three of its credit funds so it can return capital to investors and pay down debt, and permanently halting redemptions at one of the funds, the company said, as direct lending and software stocks come under pressure.

"Permanently halting redemptions" is code for not getting your cash back. And the "you" in this case is retail investors who hopped aboard the private-equity investing buzz via Blue Owl's first private retail debt fund that launched in September 2025.

It's an investing tale as old as money: Booms always bust.

The catalyst this time appears to be the 'SaaSpocalypse'...

As we've written in these pages before, investors are panic selling software stocks among increased fears around AI's growing footprint and capabilities, real or imagined. But investors are also selling tech stocks as they start to wonder about the payoff for all these AI investments. Private-equity firms are involved in financing both of these sectors.

Blue Owl's shares have lost more than 50% of their value since their January 2025 high. They were down 6% today alone.

Obviously, that's bad news for Blue Owl investors. But the headline also raises questions about the stability of the credit markets in general.

Even more concerning, real financial crises are always about credit... And fear-based sentiment can quickly rattle parts of the broad market in unexpected ways.

In short, panic spread in Silicon Valley when it became obvious that Silicon Valley Bank was sitting on billions of bond losses in a higher-interest-rate environment. Venture capitalists rushed to pull their money from the bank as sentiment soured and clients worried they would never get their cash back. It was the largest bank failure since Washington Mutual's demise in 2008 amid the financial crisis.

The thing is, Silicon Valley Bank was already insolvent. The run by clients merely killed it. And it set off a U.S. regional-bank crisis that caused the Federal Reserve and Treasury Department to step in with a "fix."

As we wrote at the time, the "crisis" was avoidable. Silicon Valley Bank simply had too much interest-rate risk and made a series of other bad decisions. Yet the episode upended the market for a while.

We're due for a 'reckoning' in private equity...

If you haven't already, I urge you to check s' Warwick 10 about a year ago. In it, we discuss a "reckoning" coming in private equity and how it could play out. 

The business is fundamentally taking very small companies, very small private companies, and changing their capital structure to a mix of debt and equity that's funded by pension funds and endowments through these private-equity funds...

These days, there's this whole market where 40% or 50% of the transactions are sponsor-to-sponsor. So, one private-equity firm sells it to another private-equity firm and it just creates this sort of cyclical thing where the more money in the asset class, the higher the valuations and the higher the trailing returns...

Everyone sort of benefits as long as this sort of closed system keeps taking in new money... The challenge is that, what happens when the money starts drying up?

Freezing the exits (permanently halting redemptions) is one thing that can happen. If we see enough of that, and if enough private firms can't pay each other, "crisis mode" arrives soon after.

For now, the Blue Owl pain appears to be isolated. But shares of private-equity and credit firms Carlyle (CG) and Ares Management (ARES) lost 3% today in sympathy with the news, continuing their sharp 20%-plus downtrends over the past month. Most of the major U.S. stock indexes were also down today, except for the small-cap Russell 2000 Index, which gained 0.1%.

What's going on between the U.S. and Iran (and oil prices)...

Earlier this week, U.S. and Iranian representatives met in Switzerland to discuss a new agreement about Iran's nuclear program.

As we reported in the Warwick 10 positive sentiment around the talks appeared to ease some concern in the market – with oil prices falling.

However, just a day after the talks wrapped up with the promises of more discussion, an unnamed White House official signaled that we could soon see more U.S. military presence in the Middle East.

Earlier today, President Donald Trump said he'll decide whether to make a deal or "take it a step further" (i.e., attack Iran) sometime over the next 10 days.

Now, this could be another way for the U.S. to apply negotiating pressure on Iran, or it could be a signal of the U.S. going to war with Iran, or both. In the meantime, oil prices are up about 6% over the past 48 hours.

Are oil prices about to take off?

Possibly. They're trading near a major "make or break" point. And price action in the coming days and weeks could say a lot about which direction they go.

Warwick 10 wrote last week, oil prices have been stuck in a technical trading "range" for three years...

Range-bound assets bounce back and forth within a predictable price channel. Often, this channel appears during a longer-term price move.

Range-bound trading reflects an indecisive market. Bears and bulls are negotiating fair prices for oil... and the price is bouncing between two levels as this negotiation plays out.

You can see oil's range-bound trading in the chart below...

Warwick 10

 noted that the top end of oil's channel sits at about $70 for a barrel of West Texas Intermediate ("WTI"), the U.S. benchmark. Should the price of WTI break higher, it would "act as strong confirmation that the bulls have won the day and oil is going higher."

I suspect the outcome of U.S.-Iran talks will have something to do with which direction prices ultimately move. But for now, there's too much uncertainty to put money on it either way.