Private Credit Is Learning All About Liquidity

As private credit boomed, the gray beards of banking questioned how these young firms would cope with failing borrowers when a bust came. But a different problem is rearing its head first for one popular type of vehicle in this $1.8 trillion asset class. Often it’s not bad loan losses that get you, it’s liquidity draining away.

Wealthy investors are increasingly demanding their cash back from some private credit funds, put off by falling interest rates and the prospect of rising corporate defaults. These firms typically lend to companies at terms of five years or so, and they’re having to become inventive about how to balance these hard-to-sell assets against the redemption requests. No one really wants to block quarterly payouts because they worry it would hurt their reputation.