After many years of swift growth and significant uptake by the private wealth channel, private credit is facing its first serious test as a product for individual investors.
Investor requests to redeem capital from non-traded business development companies (BDCs) and interval funds have spiked. In aggregate, only about 53% of redemption requests were fulfilled in Q1 2026. At the same time, publicly-traded BDC shares have fallen and are trading, on average, at about 80% of their net asset value (NAV) as of May 14, 2026, raising questions about private credit valuations more broadly.
Faced with liquidity constraints and uncertain market conditions, investors must make difficult decisions about their private credit investments. Do they keep trying to get out, stay invested, or see this as a buying opportunity?
While there is no right answer for all investors, this article provides a practical framework for how individuals can make choices that align with their personal investment needs and outlook on the broader economy, analyze their funds’ asset quality in an informed way, and assess their liquidity prospects and options.
The Rise of “Semi-Liquid” Private Credit Funds
According to various industry data sources, two significant credit-focused products sold into private wealth channels – non-traded BDCs and interval funds – have grown substantially over the last five years. Non-traded BDCs reached $357 billion in assets in 2025, up from about $21 billion in 2020, and credit-focused interval funds had about $83 billion in assets – almost 10x (58% p.a. growth) the approximately $8 billion they held in 2020. In contrast, publicly-traded BDCs also grew, but by a much smaller amount ($50 billion), from $106 billion to $156 billion during the same period.
Non-traded BDCs and credit-focused interval funds are regulated fund vehicles that typically provide loans to small- and mid-market companies. They are often described as “semi-liquid” because they typically provide liquidity only through periodic repurchase offers. When a fund’s liquidity is constrained, its manager can limit or curtail redemptions under various circumstances (often referred to as “gating”). Accordingly, these vehicles do not offer immediate liquidity.
Private credit wealth products have grown in part because of the potential benefits of investing in private assets, including potentially higher returns, perceived lower volatility than public markets, and increased diversification. The products’ periodic liquidity features, limited as they may be compared to many public market products, may make them more appealing to individuals concerned about the longer tie-up periods in traditional drawdown funds, which are often purchased by institutional investors.
But the same features that made these products attractive are now being tested.
Cracks Appear in Private Credit
After tremendous growth, questions about portfolio credit quality started to rise in late 2025. First, the bankruptcies of First Brands and Tri-Color raised concerns about loan underwriting, even though loans to those entities were mainly held by traditional banks. Concerns accelerated in early 2026 as investors focused on the potential impact of AI on SaaS providers’ business models and on the realization that loans to those companies constitute a significant portion of many private credit books. Investors have started to worry that SaaS companies’ future earnings will deteriorate as AI continues to improve business processes, leading to weaker credit protections – and potentially losses – for lenders.
Beyond a few high-profile bankruptcies and fears of “SaaSmageddon,” several other factors are weighing on investors’ minds:
- The U.S. has not experienced a prolonged economic downturn resulting in meaningful credit losses (broadly, a “credit cycle”) since the Great Financial Crisis in 2008–2010. The COVID-19 pandemic initially threatened a credit event, but the economy benefited from government intervention through stimulus programs and an eventual return to consumer demand. Despite mostly positive business indicators since then, many are worried that we are “due” for a recession that will lead to credit losses.
- Related to that point, since private credit has grown so much in the absence of a credit cycle, some investors are worried that “a rising tide has lifted all boats” and that the market has not needed to, or been able to, distinguish between fund managers who are exceptional credit underwriters and those who simply booked loans. Additionally, because the private credit market does not offer the same level of transparency and disclosure as public markets, the extent of any issues is perceived to be shrouded in mystery.
With these considerations in mind, many investors have begun to worry that private fund valuations do not reflect fair value and will need to be written down over time. If those fears materialize, some view that redeeming capital now, if possible, is the best way to avoid the full extent of those future losses.
Important Questions for Investors and the Industry
The inability of some investors to receive their full redemption requests raises a few questions: 1) Did investors fully understand that managers could gate their redemption requests? 2) Is gating a sign of bigger issues at funds and a sign that non-traded BDCs and interval funds are not working properly? and 3) What should investors do now? Let’s break those down one by one.
- Did Investors Fully Understand Redemption Provisions? Regulators, ratings agencies, and industry executives have periodically warned that, despite adequate disclosures, retail investors may not fully appreciate how liquidity in these products can be constrained, especially in stressed markets.
While disclosure documents may describe redemption provisions and the risk of being gated, the concern is whether investors and their advisors considered the wide range of possibilities that could reasonably lead to their redemption requests being gated, including scenarios in relatively stable economic environments. Also, are individual investors with a particular interest in liquidity over-allocated to semi-liquid funds more broadly and potentially exposed to liquidity constraints across multiple funds in a more severe economic environment?
- Is Gating a Sign of Bigger Issues? The broader issue of some semi-liquid funds now limiting redemptions is, by itself, not an indication of bigger problems in the industry. These products are designed to address an inherent mismatch between the illiquid assets the funds acquire and investors’ liquidity needs. The gating mechanism is a structuring technique designed to minimize a “run on the bank” and avoid forcing a fire sale of assets to meet investor demand, thereby allowing managers to preserve value for investors as a whole. At a minimum, the volume of redemptions indicates heightened investor concern and insufficient information to quell their fears.
- What Should Investors Do Now? Market dislocations, such as those we are seeing in private credit, often create price dynamics where investor views can differ significantly. In this environment, some funds may be exposed due to their weak underwriting, aggressive valuations, or insufficient liquidity. Others, however, may benefit from ample liquidity, allowing them to hold their best assets and make new loans at wider spreads and with stronger covenants.
An investor’s decision to redeem, hold, or add should not be a reaction to worrisome headlines, but should instead be based on their assessment of a fund’s asset quality, valuations, and liquidity, as well as their own overall liquidity needs, exposure to the asset class, and risk tolerance.
A Practical Framework: Focus on Asset Quality and Fund Liquidity
Regardless of an individual investor’s personal financial situation, unless they need immediate liquidity from all their investments, they can benefit from a consistent due diligence framework to evaluate their private credit holdings and potential investment opportunities. This diligence falls into two principal buckets: asset quality and fund liquidity.
Asset Quality
When assessing asset quality, investors should review managers’ disclosures over time to evaluate how well the assets’ overall performance has held up against forecasts. Investors should also track the managers’ commentary and explanations on the portfolio and any areas of particular concern.
Key areas to focus on include both the number of assets and the general trend in the portfolio of investments that:
- have been placed on non-accrual for default or breach of material covenants;
- have converted from paying interest timely and currently to payment in kind (i.e., accruing and being added to principal);
- have been subject to internal ratings reductions;
- have undergone unanticipated losses, reserves, or markdowns; or
- disclose concentrations in stressed or economically challenged asset classes.
Getting a clear picture of a fund’s asset quality is essential. If the fund’s underlying loans are of poor quality and/or deteriorating, gating or ample liquidity levers will likely not be able to preserve their value.
Fund Liquidity
When assessing fund liquidity, investors can consider the following to evaluate the viability of redemption, preserve value, and make new investments:
- whether the fund is still attracting inflows of new capital from new or existing investors;
- the pace and amount of redemptions in the fund;
- whether the fund’s investment portfolio cash flow can support meaningful redemptions while meeting obligations;
- whether the fund has available credit facilities with sufficient capacity and terms that permit them to be used for redemptions; and
- whether the fund’s credit rating, an indicator of its borrowing costs and ability to meet its general obligations, is stable or deteriorating.
If assessing these factors raises no additional red flags, a fund’s decision to gate redemptions is not necessarily a sign of insufficient liquidity; it may reflect a manager’s sound decision to preserve value or retain sufficient dry powder for exceptional investment opportunities. Understanding why a fund gates redemptions and its underlying liquidity levers is essential for investment decision-making.
Now Is the Time to Reassess Fund Selection
Investors have raised concerns about the prospects of many private credit funds, as evidenced by the volume of redemption requests from semi-liquid funds and price-to-NAV ratios for public vehicles. What has not yet been determined is whether investors are exhibiting herding behavior – acting because others are acting, not necessarily because their own analysis informs their decisions – or whether they are seeing real issues that may lead to underperformance or outright losses. Regardless of the cause, investors in many semi-liquid funds have been unable to fully access their capital.
The current situation is a good reminder for investors and industry leaders to question and understand liquidity features when buying or selling products such as non-traded BDCs and interval funds. This means reading the disclosure documents and underlying vehicle agreements to understand when redemptions are available and under what circumstances they can be limited. It also requires a bit of thought and imagination to consider the types of scenarios that could lead to gating or curtailment of redemptions. Finally, it prompts investors to ask tough questions about the liquidity levers managers have at their disposal to manage periods of stress.
Private markets have historically exhibited wide dispersion of returns among fund managers. While that may not have been obvious in private credit during the prolonged benign environment the U.S. has experienced, it will become critically important if credit losses start to rise. Investors will have meaningful data to evaluate managers based on their sourcing and underwriting capabilities, as reflected in the asset quality of the funds they manage.
Individual investors should not wait for further signs of credit erosion or liquidity constraints. They should review their overall exposure to private credit, reassess their own liquidity needs, and carefully evaluate the asset quality and liquidity of the funds they own. Periods of stress often lead to greater dispersion in returns among funds, and now is the time to identify which funds may struggle and which are positioned to outperform.
Steve was formerly the Chief Investment Officer and Head of Private Markets at Manulife Investment Management. In this role, he was responsible for leading global investment teams across a wide range of asset classes, including private equity and credit, real estate, infrastructure, timber, and agriculture. Steve has served as a director of many public and private companies during his career, including two of Manulife’s U.S. SEC-registered investment advisors.
Nathaniel is an experienced lawyer, business partner, and strategic advisor. He spent several years leading legal teams at a major financial services firm, most recently as chief counsel of a global team responsible for the proprietary balance sheet investments of the firm’s various operating subsidiaries and its private markets business (private equity and credit and real asset funds and other products), across North America, Asia Pacific, and Europe. Throughout his career, Nathaniel has covered investments in both debt and equity across a wide range of asset classes and business types.
Important Notice: Private Markets Navigator does not provide investment advice, and the information should not be construed as such. Investing in private asset funds is risky, with potential for total loss and long-term liquidity restrictions. Read our full dislaimer.
