Private Credit's Liquidity Problem: A Disagreement Worth Disentangling

The recent wave of redemption gates across major private credit funds has triggered a familiar pattern: one side calls it a crisis, the other calls it the system working as designed. Both positions contain truth. Neither captures what actually matters for policymakers and investors trying to understand what just happened.

This is precisely the kind of structural question that benefits from direct conversation rather than position papers. For those interested in how Europe should think about financial innovation and investor protection, Human x AI Europe in Vienna on May 19 offers a space where these debates can happen in real time.

What Actually Happened

The facts are not in dispute. Over the past several months, BlackRock restricted withdrawals from one private credit fund. Blackstone faced elevated redemption requests at BCRED. Blue Owl paused redemptions entirely in one vehicle and sold $1.4 billion in loans across three funds. Apollo and Ares limited quarterly withdrawals to 5% of net asset value after investors sought to redeem more than 11% of assets.

The interpretation of these facts, though, splits sharply depending on who is speaking.

Two Positions, Both Partially Right

The first position, articulated clearly by AllianceBernstein's Matthew Bass, holds that illiquidity is a feature, not a flaw. Investors allocate to private credit precisely to earn an illiquidity premium. The 5% quarterly tender limits exist to protect all investors from fire sales that would destroy value. When managers honor these limits rather than exceeding them, they are maintaining the integrity of the structure. Gates are not evidence of failure; they are the mechanism working as intended.

The second position, represented by critics like those at Fair Observer, holds that something more troubling is happening. When the world's largest asset manager tells investors they cannot have their money, it signals that the liquidity promises embedded in these products were never structurally sound. The $3 trillion private credit industry has been selling retail and near-retail investors a proposition that cannot survive contact with actual market stress.

The question worth asking: are these positions actually in conflict, or are they describing different aspects of the same phenomenon?

The Real Disagreement

Strip away the rhetoric and the disagreement becomes clearer. It is not primarily about whether gates are contractually permitted (they are) or whether private credit assets are genuinely illiquid (they are). The disagreement is about what investors understood when they bought these products.

McNeill Capital's analysis puts this precisely: "The asset has not changed. What changed is the promise attached to it, and that promise is the one that breaks first."

Semi-liquid structures, including interval funds, non-traded business development companies (BDCs), and tender offer funds, were designed to give investors access to private market returns without the multi-year lockups of traditional institutional vehicles. The pitch was straightforward: access the return premium of private markets without giving up the liquidity of public ones.

That pitch contains a structural contradiction. Private credit assets are bilateral loans that do not trade on exchanges. They are valued quarterly using models rather than market prices. When a borrower encounters difficulty, resolution happens through negotiation, not through a bid-ask spread. These characteristics are why private credit historically delivers a premium over public bonds. They are also why the assets cannot be sold quickly without significant costs.

Placing these assets inside a wrapper that offers periodic exits does not change the underlying reality. It changes investor expectations.

The Valuation Problem Compounds Everything

There is a second dimension to this disagreement that receives less attention but matters enormously: valuation opacity.

As GHPIA notes, private credit assets are not marked to market daily. During periods of stress, publicly traded credit instruments sell off sharply, reflecting real-time sentiment. Private credit portfolios may continue to carry positions at or near par for quarters after conditions have deteriorated.

This creates what some analysts call "return laundering." Investors who redeem early, before valuations are marked down, exit at prices that overstate the portfolio's current value. Remaining investors absorb the subsequent markdown. In a structure with frequent liquidity provisions and retail investors, this is not a minor technical issue. It is a fairness problem that compounds the liquidity mismatch.

Why This Matters for Europe

CEPS argues that this should not be dismissed as a US-only phenomenon. The European Savings and Investment Union is explicitly designed to channel more retail capital into capital markets, including alternative investments. The regulatory choices being made now will determine whether European investors encounter similar structural tensions.

The question is not whether private credit is a good asset class. For institutional investors with genuine long-term horizons and sophisticated understanding of liquidity constraints, it can be. The question is whether the structures being used to democratize access to these assets are honest about what liquidity investors actually have.

This is a values disagreement masquerading as a technical one. Those who emphasize that gates are working as designed are prioritizing the integrity of the investment structure. Those who emphasize that investors are discovering liquidity they thought they had does not exist are prioritizing investor expectations and consumer protection.

Both concerns are legitimate. The policy question is how to weight them.

What Would Have to Be True

For the "feature not flaw" position to be fully satisfying, investors would need to have genuinely understood that "periodic liquidity" means "conditional liquidity that may not be available when you want it most." The disclosure documents say this. Whether investors internalize it is a different matter.

For the "structural problem" position to be fully satisfying, there would need to be evidence that the products were marketed in ways that created expectations the structure could not support. The growth of retail-facing private credit vehicles suggests this concern is not unfounded.

The honest answer is that both things are probably true simultaneously. The structures are working as legally designed. And many investors did not fully understand what they were buying.

The Question That Remains

Private credit's current stress test is revealing something important about the gap between product design and investor understanding. For European policymakers, the relevant question is not whether to allow retail access to alternative investments. It is how to ensure that the structures used for that access are honest about their limitations.

The strongest version of the industry's argument is that gates protect all investors from the destructive consequences of forced selling. The strongest version of the critics' argument is that products should not be marketed in ways that create expectations they cannot fulfill.

Both arguments deserve serious engagement. The policy response should address both concerns, not pretend that acknowledging one requires dismissing the other.