Semi-liquid private credit funds are facing their first real test
- Robin Powell
- 23 minutes ago
- 8 min read
Through the first half of 2026, several of the largest retail-facing private credit funds received more redemption requests than their rules allow them to honour. A new study published in June explains why the structure — not just the market moment — is the story: the quarterly gates that promise liquidity do not actually remove the incentive to run.
Through the first half of 2026, investors in some of the largest semi-liquid private credit funds tested that liquidity promise. Blackstone's $82.5 billion BCRED fund received $3.8 billion in redemption requests in the first quarter alone, equivalent to 7.9 per cent of assets.
Blue Owl's $36 billion OCIC fund faced requests for 21.9 per cent of shares in the same period. Apollo, Ares and BlackRock all encountered similar pressure. Requests were capped, queued and prorated. Investors who wanted out did not get out on schedule.
In June 2026, three financial economists — Chuck Fang of Drexel University, and Itay Goldstein and Yao Zeng of the Wharton School — published the first systematic evidence on how semi-liquid private credit funds behave under redemption pressure. The study examined 59 semi-liquid BDCs through regulatory filings from 2024 to 2026, tracking cash flows, asset sales, debt issuance and delayed payments in granular detail. What they found raises cautions about the liquidity on the label.
A $300 billion experiment in liquidity
Semi-liquid funds hold a contradiction. They invest in private loans — the most illiquid asset class there is. Yet they promise investors a periodic exit: typically the right to sell shares back at net asset value each quarter, capped at 5 per cent of shares outstanding. An individual investor can exit entirely in one quarter if total requests stay below the cap; above it, all requests are prorated and queued.
Semi-liquid private credit funds have grown at exceptional speed. Assets under management expanded from around $10 billion in 2019 to more than $300 billion by 2025, overtaking traditional loan mutual funds and ETFs (flat at roughly $100 billion over the period) and conventional closed-end BDCs (which grew from under $100 billion to almost $250 billion). Roughly 80 per cent of their loans are unrated, against less than 35 per cent for loan mutual funds. More than 80 per cent of all loans sit in fewer than ten distinct fund families. Software accounts for roughly 20 per cent of portfolios on average.
The researchers' headline conclusion, stated plainly: quarterly gates and redemption caps do not eliminate run-like fragility in semi-liquid private credit funds, raising cautions about expanding retail access to private credit markets. The finding sits atop a novel dataset built from SEC filings — the granular balance-sheet and flow data that commercial databases do not carry — and documents what happens when the promise is tested.
How semi-liquid private credit funds meet redemptions
The proponents' case is straightforward. A five per cent cap is modest, and cash plus loan income should absorb it. The paper tests this claim directly, and the arithmetic does not support it.
Cash holdings average 5.6 per cent of net assets — about one quarter's worth of the standing offer. The reason is structural. BDC status requires at least 70 per cent of assets in qualifying assets, and management fees are typically charged on gross assets excluding cash, which discourages holding it. The incentive works against liquidity.
Net investment income averages 2.8 per cent of net assets per quarter, but funds must distribute at least 90 per cent of investment income to preserve pass-through tax treatment. That income is paid out as dividends, not retained to meet redemptions. One caveat: that income figure includes payment-in-kind interest recognised without cash changing hands, so the actual liquidity shortfall is arguably larger.
Loans maturing within the next quarter average under 0.5 per cent of net assets. Most holdings sit at five-to-seven-year maturities; less than 2 per cent of all holdings mature within a year. For scale, fixed-income mutual funds saw aggregate net outflows of 4.7 per cent of assets in 2020Q1 during the COVID market disruption, so a 5 per cent quarterly outflow is not a trivial redemption by the standards of past stress.
The cash-and-income picture is clear: standard sources of liquidity cannot fund repeated 5 per cent quarterly redemptions from the published prospectuses. Something else is happening when the requests arrive.
What funds do when the money leaves
When redemptions rise, funds have four mechanisms to meet them: attracting new inflows, selling loans, borrowing more and delaying payment. The data shows the machinery of stress.
Inflows collapse at precisely the moment they matter most. The time-series correlation between aggregate new share issuance and aggregate share repurchases, both scaled by net assets, is −0.44. In the cross-section, each percentage point of net outflows associates with 0.162 percentage points less new issuance. By 2026Q1, quarterly repurchase outflows reached $8.4 billion, nearly matching combined new issuance and reinvestment inflows.
Loan sales are costly. When funds face net outflows of one percentage point of net assets, they sell 0.872 percentage points of unrated (illiquid) loans and 0.311 percentage points of liquid loans. Bid–ask spreads on corporate loans run around 1.5 per cent on average and climb to 3 per cent for loans held thinly. The maths is unforgiving: a fund forced to sell $10 million of illiquid holdings at a 3 per cent spread loses $300,000 that redeeming investors will not recover.
Leverage rises. The same one-percentage-point-of-net-assets outflow is associated with 1.260 percentage points of new net debt issuance. Funds incur fresh borrowing to pay leavers, and the cost of that borrowing varies with fund quality and market conditions.
Delayed payment is the least visible mechanism and perhaps the most revealing. Funds accumulate about $0.689 of 'repurchases payable' per dollar of committed redemptions — the fund has accepted the redemption but not yet paid the cash. Some funds issue non-interest-bearing promissory notes, with payment terms of up to 30 days in disclosed examples and SEC staff correspondence indicating that payment within as much as 65 days can satisfy the rules. Open-end mutual funds, by contrast, cannot postpone redemption proceeds beyond seven days. The structural delay sits inside what looks like a timely exit.
The costs fall on those who stay
The mechanism runs as follows. Meeting a redemption imposes costs on the remaining investors: liquidation costs from fire sales, leverage costs from borrowed cash, and dilution from delayed payment. Because those costs fall on those who stay, everyone has an incentive to exit before others do. The researchers frame this as 'strategic complementarity' — the same logic long documented in bank-run and open-end mutual-fund literature, traced directly to Chen, Goldstein and Jiang's foundational 2010 work on mutual fund fragility.
The evidence comes from a natural experiment. Concerns about software-sector borrowers emerged around 2025Q2. Funds with above-median software exposure — typically between 25 per cent and 30 per cent of portfolio — saw quarterly net flows fall by 2.726 per cent of net assets relative to funds with below-median exposure. The outflow response was amplified for funds with thinner liquid holdings, higher leverage, higher borrowing costs and more inflated NAVs. High leverage amplified the response by 8.215 percentage points. High borrowing costs amplified it by 4.407 percentage points. Each mechanism that makes redemptions costly for those who stay made the outflow response larger.
The researchers frame the dynamic as a leverage loop: 'leverage can dampen current redemption pressure while sowing the seeds of future fragility.' Borrowing to meet redemptions today improves liquidity today. It does not improve the fund's ability to handle the next shock.
The case for the defence
The counter-arguments are serious and deserve a hearing. Defenders of the structure argue, first, that gates exist precisely for this reason — to prevent forced selling and protect remaining investors. A manager honouring a 5 per cent cap is the product working as designed, not failing. Investors were told explicitly that these were long-term vehicles.
Second, critics of the paper note that it measures only contractual maturities. In practice, loan prepayments and refinancings have historically returned cash at substantially elevated rates. The argument is that the liquidity shortfall is smaller in practice than the contractual analysis suggests.
Third, measured leverage across perpetual BDCs was reported at modest levels as of 31 March 2026, which sits awkwardly with a story of steadily building fragility. The data point is worth stating, though the timing — early in a redemption cycle and before the full force of the outflows came through — may matter.
Fourth, when investors expect proration, they request more than they actually want to withdraw, so headline redemption-request figures likely overstate true exit demand. This caveat cuts against alarmist readings and deserves reporting.
Finally, the paper is a working paper not yet peer-reviewed, covers the US BDC market only, and its main findings rest on a short sample dominated by a single sector shock. The full credit cycle has not yet tested these funds. Aggregate net flows had not turned negative by the end of the sample period.
What 'semi-liquid' turns out to mean
The study does not forecast a crisis. It documents mechanics: the liquidity on the label depends on inflows not declining, loan markets remaining liquid enough to sell into, borrowing costs staying manageable, and remaining investors tolerating dilution. The conditions hold until they don't.
The policy context matters because the researchers frame their caution as bearing specifically on proposals to expand retail access to semi-liquid private credit, including through retirement accounts. US policymakers are considering exactly that. As TEBI's earlier examination of whether retail investors should hold private equity in pensions explored, the trend toward expanding alternative-asset access raises the question of whether complex, illiquid vehicles are suitable for retail portfolios at all. UK and European retail investors face a parallel question through the FCA's Long-Term Asset Fund and the EU's ELTIF regime — different caps and notice periods, same underlying trade-off: how much liquidity can a fund of illiquid loans honestly promise?
The study's findings do not predict failure. They document that the liquidity on the label is conditional, and conditions are most likely to tighten at the precise moment investors need to use it. Research on wealth-management underperformance has found that complex fee-heavy products often fail to deliver promised value, and semi-liquid private credit funds sit squarely in that category — highly structured, heavily managed, and carrying layers of costs that reduce the cash available to meet redemptions. A reader weighing one of these funds now knows what the label leaves out.
Resources
Chen, Q., Goldstein, I., & Jiang, W. (2010). Payoff complementarities and financial fragility: Evidence from mutual fund outflows. Journal of Financial Economics, 97(2), 239–262.
Fang, C., Goldstein, I., & Zeng, Y. (2026). The fragility of semi-liquid private credit funds (NBER Working Paper No. 35385).
Falato, A., Goldstein, I., & Hortaçsu, A. (2021). Financial fragility in the COVID-19 crisis: The case of investment funds in corporate bond markets. Review of Finance, 25(4), 1035–1059.
Santos, J. A. C., & Shao, P. (2017). The higher costs of borrower-firm opacity. Journal of Financial Economics, 123(3), 588–607.
Assessing complex financial products
If this article has raised questions about whether semi-liquid private credit funds are right for your portfolio, TEBI's Find an Adviser directory is a useful starting point. Everyone listed has publicly committed to the evidence-based approach that would apply to evaluating products of this complexity — asking whether the promised benefits are real, whether the costs are justified, and whether simpler alternatives might serve better.
For readers wanting to think through these questions independently, How to Fund the Life You Want by Robin Powell and Jonathan Hollow works through how to evaluate the financial products you're offered and whether they actually deserve a place in your portfolio.
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