The Venus Fly Trap of High-Yield and Private Credit Funds.

MetaAi: The Venus Fly Trap of High-Yield and Private Credit Funds.

The Venus Fly Trap of High-Yield and Private Credit Funds.
 
Blue Owl Capital Corporation II gated investor redemptions. Apollo Global Management (Atlas Partners) and Barclays have exposure to the Market Financial Solutions (a U.K. mortgage finance company) bankruptcy. Are investors aware than anytime we reach for yield, we’re adding risk and clauses in the fine print that could be a Venus Fly Trap?


 
Over the past few years, private credit has been offered to retail investors as a great way to earn a better income than CDs and T-Bills. The risks are downplayed by broker-salesman, who may not understand the downsides themselves. If losses appear, clients are told not to worry about “paper losses” or advised that the yield has gone up. Many are told to just “buy and forget about it.” However, on Feb. 18, 2026, when Blue Owl Capital gated redemptions in one of their funds, anxiety about the $1.8 trillion private credit sector exploded into the news. The sector has been one of the worst performers on Wall Street. Blue Owl Capital has been out of favor for the past year, losing more than half of its value over that period – which exacerbates their liquidity challenges. Many other publicly traded private credit companies have seen their share prices sink, including Apollo Global Management, KKR & Co., Blackstone and Ares.
 
Investors who wanted to exit their investment, including those who bought into the Blue Owl Capital Corporation II, undoubtedly discovered that they were unable to. Certain funds, including many private credit funds, lure people in with dreams of high yield without an exit strategy. The redemption gate is listed clearly in the fine print, often in candid language. (This is their legal protection.) In the disclosures of the Blackstone private credit fund, it reads, “You should not expect to be able to sell your shares regardless of how we perform.”

Do you own one of these funds? How worried should you be about it? Does the income outweigh the risks? Is it okay to marry a private credit fund forever?
 
Below are the topics I’ll cover in this blog.
 
What is High Yield?
Blue Owl Capital and Other Private Credit Companies and Funds
Redemption Gates & Illiquidity
Loss of Principal vs. Income
High Expenses
High Yield = High Risk!
 
And here is more information on each point.
 
 
 
What is High Yield?
High yield is often called junk. It is a category of investment that involves very low credit quality. What is promoted is the income, while the risk is often downplayed. In today’s world of very low interest rates, high yield can be as low as 4-5% interest, a small return for taking on elevated risk, when you consider that 5-year Treasury bills are offering 3.5%.
 
Blue Owl Capital and Other Private Credit Companies and Funds
Jamie Dimon, the CEO and chairman of JPMorgan Chase, has warned of “cockroaches” in the U.S. credit market. On February 24, 2026, he said, “I see a couple of people doing some dumb things to create NAI.”
 
Over the past week, many Wall Street professionals have issued warnings. The current default rate in the private credit market is 3-5%. UBS is warning that it could go as high as 15%. According to a report by Bloomberg, “The UBS strategists also see higher default risk for US leveraged loans of up to 10% — and high-yield bonds of up to 6% — in a worst-case scenario.” Institutional investors, including insurance companies, pensions and endowments, would be the hardest hit.

This is a sector where the expenses can be outlandish, and the credit quality can be quite low. Investors are placated with promises that if the principal drops, the yield rises, which is true. However, that doesn’t mean that the income can come close to covering the losses. KKR & Co., Ares and Blackstone have lost -37-41% in share price from their 52-week high and are only offering a yield of 0.77%, 4.71% and 4.07%, respectively. You can get the same or more interest without any loss of principle with a carefully calculated plan. Our fixed income education has been teaching self-directed investors how to achieve a competitive market return, without paper losses, for over two decades. Join us at our Spring Financial Freedom Retreat. Register by Saturday, Feb. 28, 2026, for the best price.
 
Redemption Gates & Illiquidity
There are many ways that your money can enter a Venus Fly Trap. Redemption gates, where the fund limits or prevents you from selling your shares, is one way. Illiquidity is far more common. If the fund has very low volume, or if you’re talking about a bond fund or a long duration bond, there aren’t a lot of investors on the other side of the table who want to buy that asset from you.
 
As you can see from the chart below, Long-term bonds do not have a lot of interest. This is why they have lost a lot of value. The only way to woo a buyer is to offer steep discounts on the price, locking in those paper losses. What is also interesting about the chart below is that the Dow Jones industrial average is far less liquid than the S&P 500. So, there is more risk in investing in that index. I outlined some of the reasons why in my recent blog on Chevron and Caterpillar.
 

 

Loss of Principal vs. Income
As you can see with the examples above, the losses of high yield can far exceed any income that might be offered. Additionally, if the yield goes too high, the company will have to cut their dividend, which means that the stock will plunge even further. The worst-case scenario is a bankruptcy filing, where the yield is cut completely and bond holders will take a very significant loss on their principal investment. In 2011, MF Global was completely wiped out by the Greek Bond Crisis. Existing holders of Greek treasuries agreed to a 53.5% reduction on the face value of their original bonds in 2012 – losing more than half of their principal and all the promised income.
 
The Virtus Private Credit ETF (symbol: VPC) offers a 15.85% yield, with losses of -30.0% over the past 12 months and -40% over the 5-year period. This fund has very low trading volume. The owners of the fund, Virtus Investment Partners, have a market cap of less than $1 billion, adding more risk, should the fund or company get into trouble.

High Expenses
Another bugaboo of these kinds of funds is that they can include very high expenses. This is on top of the expense of a managed portfolio, which is usually $5-$15,000 per year per million. Eagle Point Credit (ECC) expenses are 8.58%, while Xai Octagon (XFLT) charges 7.56% in expenses. When you subtract the expenses from the yield, Xai Octagon offers a yield of about 16.5%, with principal losses over the past year of -47%.
 
In addition to high expenses, if the fund gets into trouble and gates investor redemptions, they might also impose a special management or liquidity fee. Liquidity fees are mandatory for money market funds that get into trouble. Money market funds are not FDIC-insured, can lose value, and can impose unexpected fees, such as the liquidity fee, if they get into trouble. Additionally, the yield of an MMF goes down with each interest rate cut. (We’re underweighting MMFs on the fixed income side at this time.)

High Yield = High Risk!
The bottom line is that the higher the income or yield being offered, the higher the risk. If the company could borrow from a bank at a market rate, they would not be borrowing from us at such a high price. Retail investors are known to be less sophisticated about their due diligence, and more easily lured in by the promise of income. Salesmen downplay the lack of liquidity or the redemption gate with the line that everything works out in the end. Meanwhile, the disclaimers tell a different story in the fine print.
 
Bottom line
Private Credit funds target retail investors who are chasing income, who are not necessarily advised of the risks and might not conduct forensic due diligence.
 
Are you being hooked into mortal losses with high yield bait? Wouldn’t it be better to get a stable income on the safe side without any loss of principal? The at-risk portion of our wealth plan should be age-appropriate and properly diversified. If we add hots, such as our samples of silver, Peru, and even clean energy, performance on the at-risk side can be far above the market average – increasing our wealth more than any income we might be promised.
 
Now is the time to know exactly what we own and why. Stocks are still very close to an all-time high. While there is already tight liquidity in the bond market, things will only get worse the more we hear about redemption gates and bankruptcies of the underlying loans and positions of the high-yield credit fund.
 
You can learn more about achieving income safely on day 3 of our Financial Freedom Retreat. You can also get an unbiased second opinion for me personally through my private coaching program. Email [email protected] for pricing and information. Register for the Spring Financial Freedom Retreat by Saturday, February 28, 2026, for the best price.



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Natalie Wynne Pace is an Advocate for Sustainability Financial Literacy & Women's Empowerment. Natalie is the bestselling author of The ABCs of Money (6th edition) and The Power of 8 Billion: It's Up to Us, and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 6th edition of The ABCs of Money and the 2nd edition of The ABCs of Money for College are the most recent releases of these books. Follow her on Instagram. 
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Important Disclaimers
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly-traded companies, funds or projects mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect an age-appropriate, diversified wealth plan, which has been designed strategically, with the assistance of financial professionals who are familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge, patience and diversified strategy.  
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Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.