Unlike illiquid private equity, private credit funds provide a steady stream of cash flow through coupon payments. This self-liquidating feature perfectly solves the liquidity needs of the private wealth channel, making it a far more suitable and popular alternative asset for that investor base.

The term "semi-liquid" for private asset funds is misleading. Retail investor behavior is procyclical; during a downturn, redemption requests will surge simultaneously. This reveals the assets' true illiquidity, turning a perceived feature into a systemic risk.

Funds offer investors quarterly liquidity while holding illiquid, 5-7 year corporate loans. This duration mismatch creates the same mechanics as a bank run, without FDIC insurance. When redemption requests surge, funds are forced to sell long-term assets at fire-sale prices, triggering a potential collapse.

The structure of modern private credit vehicles, particularly non-traded BDCs, replicates a classic asset-liability mismatch by funding illiquid loans with potentially liquid investor capital. This fundamental flaw predictably leads to liquidity crunches during redemption waves, which can escalate into broader credit crises as forced selling begins.

Permira's Ian Jackson argues that redemption limits in retail-oriented credit funds are working as intended to manage the mismatch between investor demand for liquidity and illiquid private loan portfolios.

Limiting redemptions in private credit funds, often seen negatively, is a crucial defense. It prevents a run on the fund by stopping a mismatch where illiquid loans would have to be sold to meet liquid redemption demands, which could cause a collapse.

Historically, investors demanded an "illiquidity premium" to compensate for the bug of being unable to sell. Now, firms market illiquidity as a feature that enforces discipline. In markets, you pay for features and get paid for bugs, implying this shift will lead to lower future returns for private assets.

The 5% quarterly redemption limit in non-traded BDCs is not a panic-induced "gate" but a deliberate structural feature. It aligns investor liquidity with the illiquid nature of the underlying loans, preventing forced sales at distressed prices and protecting the fund's integrity for all investors. The term "gate" misrepresents this contractual design.

Many investors mistakenly believed private credit funds offered semi-liquidity, not understanding the underlying assets are fundamentally illiquid. The realization that liquidity is a discretionary feature, not a guarantee, is causing a healthy but painful exodus from the asset class as mismatched expectations are corrected.