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Saba Capital Management entered the private credit market with an aggressive strategy to unlock liquidity for investors—but early results suggest limited appetite for selling at steep discounts. The hedge fund’s recent tender offers targeting non-traded funds managed by Blue Owl Capital and Starwood Capital have delivered mixed outcomes, underscoring the complexities of this increasingly scrutinized asset class.

In March, Saba launched a liquidity initiative aimed at investors locked into illiquid private credit vehicles. The firm offered to purchase shares in Blue Owl Capital Corporation II (OBDC II) at a 35% discount to net asset value, positioning itself as a buyer of last resort in a market where redemption options have become increasingly constrained. A parallel offer was made for shares in Starwood Real Estate Income Trust (SREIT), with discounts ranging between 24% and 29% depending on the share class.

Despite the scale and urgency of the pitch, investor participation fell short of expectations. Saba reported that it acquired approximately $10 million in aggregate face value across 190 transactions, with the overwhelming majority tied to SREIT. The Blue Owl tender, by contrast, attracted minimal interest—reportedly less than 1% of the targeted amount—highlighting a reluctance among investors to exit positions at deeply discounted levels.

This subdued response comes at a time when private credit funds are facing mounting pressure from redemption requests. Across the sector, non-traded business development companies have seen elevated withdrawal demands, driven by concerns over liquidity, interest rates, and credit risk. Blue Owl’s OBDC II fund became a focal point earlier this year when it suspended quarterly redemptions in February, opting instead to return capital gradually through asset sales.

The scale of investor demand has been significant. In the first quarter alone, investors sought to redeem roughly $5.4 billion from two of Blue Owl’s other private credit funds. Like many firms in the space, the manager imposed redemption limits—typically capping withdrawals at 5%—to manage liquidity and avoid forced asset sales.

Saba’s strategy was built around this friction. The firm identified a gap between investor demand for liquidity and the structural limitations of non-traded funds, which often restrict redemptions during periods of stress. By offering immediate cash—albeit at a discount—Saba aimed to create a secondary market solution for retail investors who might otherwise be locked in.

However, the results suggest that many investors are still unwilling to crystallize losses, even in exchange for immediate liquidity. This dynamic reflects a broader behavioral trend in private markets, where valuations are less frequently updated and investors may be more inclined to hold positions in hopes of eventual recovery.

Saba has indicated that it is not stepping back. The firm is actively exploring similar opportunities across other illiquid investment products, including interval funds and additional private credit vehicles. Its long-term thesis is that structural stress within the sector will intensify, particularly as higher interest rates and refinancing risks begin to weigh more heavily on credit portfolios.

The firm also pointed to broader systemic concerns. Hundreds of billions of dollars are currently tied up in private credit products held by retail investors, many of which offer limited or no secondary liquidity. As credit cycles evolve and potential defaults rise into 2027 and 2028, Saba believes the demand for liquidity solutions could increase significantly.

Interestingly, Saba’s involvement may already be influencing market behavior. Following its activity in SREIT, Starwood’s leadership, including CEO Barry Sternlicht, announced plans to inject additional equity capital to help meet redemption requests. This move was seen as a proactive step to stabilize investor confidence and manage outflows more effectively.

In the case of Blue Owl, Saba acknowledged that the opportunity set was somewhat constrained by the relatively small remaining capital pool in OBDC II, estimated at around $332 million. This limited the volume of shares available for tender, further contributing to the muted outcome.

Looking ahead, the private credit sector is entering a critical phase. While it has benefited from years of strong inflows and yield-seeking behavior, rising borrowing costs and tighter financial conditions are beginning to test the resilience of underlying assets. For investors, the trade-off between liquidity and valuation is becoming increasingly pronounced.

Saba’s early efforts highlight both the challenges and the potential of creating liquidity pathways in private markets. While initial participation has been modest, the structural issues remain unresolved—and could become far more visible as the credit cycle continues to evolve.

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