[Week 48 of 2025] Funds, Frenzy, Faultlines

Welcome back to Price and Prejudice with a few musings from Week 48 of 2025.

Blue Owl Squeeze

Blue Owl is one of the big modern private-credit shops, the kind that raises money from regular investors through “semi-liquid” vehicles that feel like mutual funds on the surface but own loans you can’t actually sell on short notice. One of the products they have is a business development company (BDC), which is a specialized vehicle that lends to middle-market companies and passes most of the income back to investors.

This article discusses the firm's attempt to merge one of its BDCs with its publicly traded sibling and how that seemingly routine move ran headfirst into the brick wall of market pricing. The issue here was straightforward: Blue Owl tried to merge its unlisted lending fund with its publicly traded one at net asset value, even though the public fund’s stock traded about 20% below that value. That meant unlisted investors were about to be converted into listed investors at a 20% instant loss, which the market treated with the enthusiasm you’d expect. The backlash was swift enough that Blue Owl canceled the whole thing within days.

The thing is, liquidity is the real problem child. Semiliquid funds exist to make illiquid assets feel less scary, but the liquidity they offer is bottled and rationed, not conjured out of thin air. When too many people line up for the exit, that liquidity doesn’t vanish; it just moves into gates, delays, suspended redemptions, or, in this case, a merger proposal that offloaded the cost onto investors. This is yet another useful reminder that finance rarely destroys risk or illiquidity; it mostly hides them in corners until someone accidentally turns on the light.

ETF Frenzy

This article talks about the recent rise in new ETFs and finds that a majority of them are focused on providing investors to undertake highly leveraged bets in the stock market. The economics probably make sense: it takes very little capital to launch an ETF these days, and with an expense ratio of, say, 25 bps, you only need to gather a modest pool of assets before the whole thing becomes a tidy little annuity.

The usual interpretation for a sudden increase in supply is that either the cost of production has fallen or the expected benefit has risen. In this case it’s likely both. AI has made product design, portfolio construction, and even marketing vastly cheaper, while retail investors have become more excited, more speculative, and more willing to click “buy” on something with a ticker that sounds fun. That combination – cheap to build, easy to sell – is a perfect storm for financial-product proliferation.

And like most storms, it doesn’t tell you much about fundamentals; it tells you about mood. A market with hundreds of new ETFs, many of them levered, isn't purely about allocating capital, but it’s expressing enthusiasm. And excessive enthusiasm is a wonderful leading indicator for regret.

Debt Déjà Vu

This article digs into conduit debt financing, the structure tech companies use to build data centers without putting the associated debt on their own balance sheets. It’s a simple trick: create an SPV, have it borrow the money, build the facility, and lease it back. But as with mortgage-backed securities, the danger isn't the structure – it's what happens when everyone stretches the same assumption at the same time. Here, that assumption is that compute demand will rise forever, and that the SPV’s shiny new data center will always have a willing tenant.

The easiest way out of this, of course, is for AI demand to truly explode, so much so that every hyperscaler, enterprise, government agency, and corner bakery needs GPU clusters and is happy to pay for them. It’s possible! It might even be likely. We’re still too early in the cycle to grasp the actual economic footprint of large-scale AI, and too early to know whether these data centers are truly highways to the future.

But financing structures don’t care about long-term potential; they care about staying solvent in the short run. SPVs work beautifully as long as the lease payments keep flowing, but they’re brittle if demand pauses, costs spike, or tenants walk away right as debt service comes due. In bubbles, the risk isn’t that the technology fails; it’s that the financing needs to stay upright longer than the optimism that built it.