In Private Credit, Illiquidity Is a Feature, Not a Flaw

Liquidity limits in private credit allow the asset class to function.

Private credit is a key pillar of debt capital formation alongside public credit markets and bank balance sheets. But an important part of its value proposition—to borrowers and end investors—is its illiquidity relative to public markets. That distinction is by design, and we think it should stay that way.

Recent headlines have unsettled investors and prompted elevated tenders in certain non-traded business development companies (BDCs) and interval funds. Much of the anxiety has been tied to worries about potential credit losses and AI-driven disruption. These concerns have affected investors across public and private markets.

Managers have responded in different ways—some have adhered to existing quarterly tender limits of 5% of net asset value (NAV). Others have honored tenders in excess of the limits, including for the full amount in some cases.

In our view, accepting tenders in excess of pre-determined limits risks setting a precedent that undermines a foundational aspect of private credit investing. Investors allocate to the asset class in part to earn an illiquidity premium. To deliver that premium, asset managers must align the duration of investors’ capital with the long-term nature of the underlying investments.

Why Liquidity Limits Matter in Private Credit

In private credit strategies, including direct corporate lending, we consider illiquidity a feature, not a flaw. In exchange for setting aside capital for predetermined periods, investors receive higher yields and lower volatility than they would get with comparable public debt, along with the potential downside mitigation that comes with bespoke structuring, negotiated legal documents, and direct borrower-lender relationships.

Meanwhile, borrowers in these transactions—typically middle-market companies with earnings before interest, taxes, depreciation and amortization (EBITDA) between $10 million to $75 million—value speed and certainty of execution. They appreciate alignment with a single lender or small group of like-minded lenders able to tailor structures to their needs.

Respecting the Structure

But there’s no free lunch with private assets: it’s impossible to capture an illiquidity premium and also provide liquidity on demand. By limiting quarterly tenders to 5% of NAV, managers make it possible to provide periodic liquidity to those who want it, while maintaining the integrity of the portfolio for all investors.

Limits also enable managers to meet requests with realized cash flows instead of potential fire sales of existing loans. If requests exceed 5%, managers can honor them up to the limit on a quarterly basis, continuing the process until investors who want to exit are fully redeemed without harming those who want to stay invested.

As we see it, tenders in excess of quarterly limits undermine the ability to deliver an illiquidity premium in the asset class—one of many attractive value propositions for investors.

Yes, private credit is less transparent than its public variant. That’s partly by design. But it shouldn’t be opaque. Unlike traditional private equity-style closed-end funds that remain highly prevalent among institutional investors, semi-liquid structures allow investors to enter and exit at NAV throughout the life of the vehicle. This places more importance on valuation policies and rigor to limit the risk of extreme markdowns in loan values.

Dislocation May Create Opportunity for Disciplined Investors

Volatility often creates anxiety—it’s human nature. But for those who can separate the signal from the noise, dislocations often create opportunities for managers with deep private credit expertise and a stable base of capital from investors.

It has always been critical for asset managers to communicate clearly with investors on the underlying strategy, return attributes and required liquidity terms to meet client objectives. The developments over the past few weeks have only served to underscore the importance of this in private markets. The growth in private credit over the past decade or so has been powered by its critical role in matching investors’ demands for yield and diversification with a multitrillion-dollar gap in the capital markets.

In our view, the asset class will continue to play an important role as long as market participants remain anchored to the principles that have supported its development.