Is private credit illiquidity really a feature, not a bug?

Private credit is structurally illiquid by design, and this illiquidity has historically been viewed as a core feature that enables higher yields (the “illiquidity premium”) and better alignment with borrowers’ long-term financing needs.

Historical Context on Private Credit Liquidity Levels

Private credit (primarily direct lending, mezzanine, and asset-based loans originated by non-bank lenders) has always been overwhelmingly illiquid compared to public credit markets (e.g., leveraged loans or high-yield bonds). Here is the evolution based on available data:

• Pre-2010s to ~2020 (traditional era): Nearly 100% of the market was in closed-end/drawdown funds with multi-year lock-ups (typically 5–10+ years total commitment, often with 3–5 year investment periods followed by harvest). Investors committed capital that could not be redeemed early; managers called capital as deals were originated and held loans to maturity (usually 3–7+ years). There was no meaningful secondary market, and liquidity for limited partners (LPs) was essentially zero until fund wind-down. This structure perfectly matched the underlying assets’ illiquidity.
• Post-2020 “retailization” and semi-liquid growth: The market exploded from roughly $300–500 billion in 2010 to $1.7–3 trillion by 2024–2025. A new layer of semi-liquid/evergreen/interval funds (e.g., non-traded BDCs, interval funds) emerged to attract retail and high-net-worth investors. These offer periodic redemptions (usually quarterly) but with strict caps—typically 5% of net asset value (NAV) per quarter (or sometimes 2% monthly + 5% quarterly). Evergreen/semi-liquid AUM grew from ~$200 billion in 2020 to $700 billion+ by late 2024 for evergreen structures overall, and private-credit-specific semi-liquid AUM rose from ~$75 billion in 2022 to $188–349 billion by 2024 (still only ~5–15% of total private credit AUM). Traditional closed-end funds remain the vast majority.
• Recent stress test (2025–early 2026): Redemption requests surged (e.g., multiple large managers like Blue Owl, BlackRock, and Morgan Stanley saw requests of 11–40% in a quarter). Funds honored the contractual 5% quarterly cap, creating queues and partial fulfillment. This is the first major redemption cycle for semi-liquid vehicles and is widely viewed as a liquidity management exercise rather than systemic distress—managers use maturities (20–30% annual portfolio turnover), cash flows, and credit facilities to meet the cap without forced asset sales.

In short, “most private credit was (and still is) illiquid” is accurate. The core market has always been—and remains—highly illiquid; the newer semi-liquid slice is growing rapidly but remains a minority.

What Level of Liquidity vs. Illiquidity Is Considered “Good” or “Safe”?

There is no single numerical threshold (e.g., “X% liquid is safe”) because safety is defined by structural alignment between investor redemption rights and the underlying loans’ true liquidity—not by daily tradability. Industry consensus (from regulators, managers, and analysts) is:

• High illiquidity (traditional closed-end structures) is considered the safest and most appropriate for the asset class. Long lock-ups eliminate run risk, prevent fire sales at distressed prices, and allow managers to negotiate better terms with borrowers. The Federal Reserve and others have repeatedly noted that redemption/fire-sale risks are low precisely because of these long commitments (up to 10 years). This structure delivers the full illiquidity premium (historically 150–400 basis points of extra spread/yield over comparable public credit, though it has compressed recently to ~193 bps vs. broadly syndicated loans).
• Limited liquidity in semi-liquid vehicles is “good” only when it is capped and matched to asset realities. The industry-standard 5% quarterly redemption cap is viewed as prudent and safe—it forces alignment and gives managers time to use natural cash flows rather than sell loans at discounts. Exceeding the cap triggers queues or gates, which protect remaining investors. Offering more liquidity than this (or mismatched daily/weekly access) would be considered unsafe because the loans themselves have no deep secondary market and cannot be liquidated quickly without losses.
• Key risk if misalignment grows: Too much retail capital chasing semi-liquid structures without proper gates could create liquidity mismatches in a prolonged downturn. However, current structures (caps + queues) are explicitly designed to mitigate this—the 2026 redemption wave is seen as validating the safeguards rather than exposing a flaw.

Bottom line for investors:

• If an investment horizon is short-term (<3 years), private credit (even semi-liquid versions) is generally not appropriate.
• For long-term capital, the traditional high-illiquidity model is safest and has historically delivered the best risk-adjusted returns. The semi-liquid 5% quarterly option adds flexibility but still requires accepting that liquidity can be restricted in stress.
• The illiquidity premium exists precisely because you are providing patient capital; recent compression in that premium has raised questions about whether some newer structures offer adequate compensation.

Most private credit remains illiquid, and that level of illiquidity—when properly structured—is widely regarded as both normal and safe for this market. The real risk is not illiquidity itself but any erosion of the alignment between investor terms and asset liquidity.