Tag: private credit

Wobbles in the private credit market in the fourth quarter of 2025 spooked those retail investors with investments in private credit funds – a significant segment of the growing shadow banking sector. These funds use investors’ money to finance lending to businesses and individuals who struggle to, or do not want to, access credit from banks and the public market. Therefore, the risks are higher.

The failures of two auto parts suppliers in the USA last year have highlighted the risks involved. Retail investors are exiting such funds in significant numbers. Bcred, Blackstone’s $82 billion private credit fund, saw money equivalent to 8% of its net asset value (NAV) withdrawn. The firm, and employees, put $400m in to maintain confidence.

Blue Owl, another credit manager, closed investors’ usual quarterly redemption window, largely due to unprecedented demand. The fund’s managers have decided that they will wind down the fund and return money back to investors over time, whether that want it or not.

Several other listed funds run by big names, such as Blackrock and KKR, have slashed dividends and written down asset values. This week, both Morgan Stanley and Cliffwater limited withdrawals from their credit funds.

So, what has happened? In recent years, there has been a big growth in private credit funds in the USA aimed at individual retail investors. With interest margins low and fees from public investment products diminishing due to the shift to passive investing, financial institutions spied an opportunity for chunky fees by offering private credit investment to retail investors.

The liquidity–return trade-off

Such investors are attracted by the potential for higher returns that private credit funds offered compared to public funds. The need to provide higher returns was related partly to the higher credit risk associated with the lending, but also to the illiquidity of the private credit assets that the funds invested in.

While much attention in the financial media has focused on the heightened credit risk in private funds, less attention has been given to the liquidity issue. At the heart of the private credit business model is a level of illiquidity that individual retail investors would not be comfortable with. The liquidity–return trade-off is one of the fundamental concepts in finance. Investors must be prepared to trade-off liquidity for higher returns, and vice versa. They cannot have both.

This blog will discuss that trade-off in the context of private credit funds and its lessons for retail investors, particularly in Europe where institutions are gearing up to offer such investment products.

Liquidity preference

One of the fundamental concepts in finance is the maturity mismatch between the preferences of ultimate lenders (typically households) and the requirements of ultimate borrowers (typically firms, but also households and governments too). Typically, lenders want to ‘lend short’ while borrowers want to ‘borrow long’. The financial system reconciles this mismatch by providing two important economic functions – maturity transformation and liquidity provision.

Banks offer maturity transformation by offering current and other accounts to individuals where deposits can be redeemed at short notice. These institutions use the deposits to finance long-term lending for a variety of purposes; examples include property, investment in capital or day-to-day spending. Their effective management of this process is important economically for the smooth running of the payments mechanism and for economic growth.

But, to fulfil this, banks have to hold a mixture of assets with varying degrees of liquidity – some highly liquid, such as cash and short-term government debt instruments, and some illiquid, such as long-term loans. Liquidity is such an important issue for banks that their assets are listed on their balance sheet in order of liquidity – from most liquid to least liquid.

However, there is an inverse relationship between liquidity and expected return. Banks and their customers have to sacrifice return if they want higher liquidity. Therefore, liquid assets tend to offer a low rate of return and illiquid assets a higher rate of return. Consequently, in order to retain sufficient liquidity, the overall return banks can generate is limited compared to a situation where they invest wholly in illiquid assets.

If individuals want to invest directly in long-term financial assets, such as debt and equity, there must be a secondary market where these can be bought and sold – the stock market. Without this mechanism providing liquidity, individuals are less likely to invest in these assets in the first place. Few would want to wait for a debt security to mature or hold a share in perpetuity. Secondary markets mean they don’t have to.

Liquidity and private credit

Private credit funds have existed for a long time as part of the shadow banking sector and have grown in scale. Such funds invest in non-tradable, long-term illiquid loans as a parallel to the better-known private equity sector. Traditionally they have been targeted at institutional investors, who are more comfortable with the higher credit risk and illiquidity involved.

However, while institutions are prepared to forgo liquidity for many years in expectation of higher returns, individual retail investors are not – they have a higher liquidity preference. Funds tailoring private credit funds acknowledged that individual investors required a liquidity incentive to invest. Since there is no liquid secondary market to facilitate liquidation, private funds aimed at such retail investors offered quarterly redemption opportunities. The industry standard settled on around 5% of a fund’s value.

However, offering these ‘liquidity windows’ creates a tension in the private credit business model. Private credit operates on the basis of illiquidity in return for higher returns. This includes borrowers prepared to pay a higher interest rate on debt to avoid exposure to the glare of public market scrutiny.

Further, the prices of private loans are not ‘marked-to-the-market’ like publicly traded debt, so they are not correlated with public markets. This enables fund managers to work out credit problems over time rather than be forced into fire sales to meet the liquidity needs of investors.

Offering liquidity confounds that. To do so, private credit funds end up operating like quasi-public funds. They have to hold sufficient liquid assets to cover redemptions. Indeed, regulations for such funds in Europe are proposing a minimum of 20% of assets in liquid investments so there is a reserve to meet redemptions. But, by doing so, funds will not be able to generate the promised returns. Indeed, returns may be not much higher that that offered by public traded funds.

Further, providing quarterly redemption windows requires fair and timely valuations of the fund. Irrespective of perceptions around credit risk, if investors feel that the valuation is generous then many will want to take advantage of the liquidity window to redeem and no limit on withdrawals, be it 5%, 10% or whatever, is sufficient. However, with no secondary market mechanism to remove the excess demand, those told they cannot redeem their investment will only increase their demands for liquidity further and exit at the next available opportunity.

This irreconcilable tension in offering private credit funds to retail investors is being recognised. Not only are funds like Blue Owl being wound up, but the share prices of providers in the USA have fallen sharply as markets realise that the anticipated returns from selling private credit to retail investors are unlikely to be realised. Blackstone’s market capitalisation has halved from $250 billion at the end of 2024 to $134 billion on 11 March 2026.

But this is the moment when private credit funds are being offered to retail investors in Europe. The lesson for European retail investors from the US experience is that you can’t have high liquidity and high return. As with most allocation decisions, there is a trade-off.

Articles

• Here’s Why Investors Are Worried About a Blue Owl Private Credit Fund—and Why It Matters

Investopedia, Crystal Kim (20/2/26)

• Active managers struggle to prove their worth in a turbulent year

Financial Times, Robin Wigglesworth (11/11/20)

• Private Credit vs. Private Equity: What’s the Difference?

Investopedia, Michael Bromberg (29/1/25)

• Morgan Stanley restricts redemptions at private credit fund after withdrawals surge

Reuters, Manya Saini (11/3/26)

• Private credit – primed for growth as LBOs revive, ABF opportunities accelerate

Moody’s (21/1/25)

• Private debt funds and their distribution to retail markets

Deloitte, Tiantian Liu, Luciano Danieli and Anna Schulze (27/1/26)

Questions