CalPERS, the nation’s largest public pension fund, is doubling down on private credit even as warning signs multiply. With about $160 billion in unfunded liabilities, the system is chasing yield in opaque markets instead of following low-cost passive investment strategies that have worked well for decades.
Private credit involves non-bank lenders issuing large corporate loans, often to unlisted companies owned by private equity funds. Unlike publicly traded bonds, which are priced continuously in open markets, private loans cannot be valued using market prices because they rarely trade. Managers instead assign values using internal models — a practice the International Monetary Fund has warned creates incentives to delay recognizing losses while new funds are raised and performance fees are collected. Jay Clayton, the former SEC chairman now serving as U.S. Attorney for the Southern District of New York, warned in November 2025 that “sketchy marks” in private portfolios are drawing prosecutorial attention. MSCI analysts have note that “private valuations mask volatility and understate both long-run correlation and tail risk.”
CalPERS’ entanglement with Blue Owl Capital illustrates the risk of holding and valuing illiquid private loans. In February 2026, Blue Owl faced a wave of redemption requests from retail investors in one of its private credit funds and orchestrated a $1.4 billion secondary sale of loan assets to meet them, with CalPERS among the buyers. Blue Owl said the loans sold at 99.7 cents on the dollar. Its shares dropped sharply anyway. Now, just six weeks later, the situation has worsened: investors in Blue Owl’s flagship $36 billion Credit Income Corp. fund requested to withdraw 21.9 percent of shares in the first quarter of 2026 — up from just 5.2 percent the prior quarter. At the firm’s smaller, tech-focused Blue Owl Technology Income Corp., the redemption request reached a staggering 40.7 percent. Blue Owl capped both at the contractual 5 percent limit, leaving approximately $4.2 billion in unfulfilled requests. Blue Owl’s stock fell to a record low Thursday, and the U.S. Treasury Department called a meeting with regulators this week to discuss risks in the private credit sector. For CalPERS, which committed over $2 billion to Blue Owl Diversified Lending vehicles, these are not abstract market concerns.
Several Blue Owl borrowers have faced high risk of default — and the way those risks were reported to investors raises serious questions about BDC valuations. Blue Owl was the lead lender on the debt financing for Pluralsight, a technology workforce training company taken private by Vista Equity Partners in 2021. The loan was structured on revenue growth rather than earnings or cash flow — a novel arrangement that conventional regulated banks are prohibited from offering because it is deemed too risky. As Pluralsight’s growth reversed, Vista marked its equity stake in the company to zero. Yet as analyst Rod Dubitsky reported, most private credit lenders carried their Pluralsight debt near par through early 2024 despite warning signs that had been accumulating for over a year — only to take markdowns of roughly 50% in a single quarter. Blue Owl’s consortium ultimately took ownership of Pluralsight through a debt-for-equity swap that eliminated roughly $1.2 billion in funded debt. The episode illustrates precisely the valuation risk that makes private credit returns look deceptively smooth until they suddenly aren’t.
Portfolios of private credit facilities are often concentrated, subjecting lenders like CalPERS to systemic risk. More than 70 percent of Blue Owl’s 200-plus borrowers are in the software industry, and artificial intelligence is compressing the revenue and margins of traditional enterprise software companies at a pace that was not modeled into these deals. That concentrated exposure is precisely why Blue Owl’s technology fund saw 40.7 percent redemption requests in a single quarter.
Private credit exposures can also run counter to CalPERS’ Environmental Social Governance (ESG) investment goals. The Ares Strategic Income another CalPERS holding, lent $54 million to RealPage, Inc.. RealPage is the rent-pricing software company sued by the Department of Justice for antitrust violations for allegedly enabling corporate landlords to collude on rent increases; its software is banned by more than a dozen cities including San Francisco, Philadelphia, and Minneapolis.
To avoid these problems, CalPERS could follow a simpler investment strategy. Over a 20-year period, a passive 60/40 stock-and-bond index portfolio would have returned 7.7 percent annually, compared to CalPERS’s actual average of 6.7 percent. Nevada’s public employee pension system, managing $58 billion with just three investment employees and a strategy built almost entirely around index funds, has outperformed CalPERS since 2000 at a fraction of the cost.
Private credit is not inherently fraudulent, but for CalPERS it has proven expensive, opaque, concentrated in deteriorating sectors, and ethically compromised. The prudent course is to return the core portfolio to low-cost public market index funds, where valuations are set by millions of market participants rather than by the managers collecting fees to assign them.
Marc Joffe is a Visiting Fellow at California Policy Center.