Semi-Liquid Private Credit Funds: Liquidity Promises, Liquidity Strains
Private credit has moved from niche to mainstream, and with that growth has come a less glamorous but increasingly important question: what happens when a fund promises investors periodic liquidity while holding assets that are inherently hard to sell? That is the central issue addressed by Chuck Fang, Itay Goldstein, and Yao Zeng, authors of the June 2026 study The Fragility of Semi-Liquid Private Credit Funds.
The authors examine a rapidly growing segment of the private credit market: business development companies, or BDCs, that invest primarily in private loans but offer investors periodic repurchase opportunities, usually on a quarterly basis and typically capped at 5% of shares outstanding. These structures are meant to give investors some access to liquidity without forcing the fund to hold a large amount of cash or highly liquid assets. But the authors argue that this design creates a hidden fragility: when investors want out, the fund may not be able to meet those redemptions without taking costly actions that hurt remaining shareholders.
That conclusion matters because semi-liquid private credit funds sit in the middle of an important policy debate. They are being marketed to broaden access to private credit, including to retail investors and retirement savers. The paper asks whether that access comes with more liquidity risk than the headline fund structure suggests.
What The Authors Examined
The authors built a regulatory-filing-based dataset from SEC reports and identified 59 semi-liquid BDCs. One important caveat is that Cliffwater has used the same SEC data for more than 10 years to inform investors and advisors about private debt and private debt funds, including liquidity; the data also underlies Cliffwater’s Direct Lending Index, a widely used private credit benchmark. They use those filings to track balance-sheet items, loan holdings, share issuance, repurchases, debt issuance, and repurchases payable. That gives them a detailed view of how these funds handle liquidity pressure, rather than relying on a fund database that may only show high-level performance or asset composition.
They also compare semi-liquid BDCs with loan mutual funds, ETFs, and conventional closed-end BDCs. That comparison is important because it places semi-liquid funds within the broader spectrum of liquidity transformation. Traditional loan mutual funds generally hold more liquid broadly syndicated loans and offer daily liquidity, while closed-end BDCs offer limited direct liquidity to investors. Semi-liquid BDCs, the authors argue, are unusual because they pair illiquid private loans with periodic NAV-based repurchase rights.
The authors’ approach is especially focused on how redemptions are funded. Instead of asking only whether funds experience inflows and outflows, they ask what happens when outflows rise: Do funds use cash? Do they sell loans? Do they borrow? Do they delay payment to redeeming investors? Those questions are the backbone of the paper.
What They Found
Semi-liquid BDCs have expanded rapidly, from about $10 billion in assets in 2019 to more than $300 billion by 2025.
These funds hold illiquid assets. The paper shows that roughly 80% of the loans held by semi-liquid BDCs are unrated, and that these loans are far less widely held and less tradable than the loans found in traditional loan mutual funds. In the authors’ view, this means the funds are offering investors periodic liquidity on the liability side while holding illiquid assets on the other side of the balance sheet.
Ordinary liquidity sources are not enough to absorb repeated quarterly redemptions. Cash buffers are modest, investment income is generally distributed rather than retained, and near-term principal payments are too small to cover a 5% redemption cap on their own, according to the authors’ calculations. “Principal payments from loans maturing within a quarter contribute very little, at less than 1% of TNA.” In other words, the repurchase cap may limit how much can leave at once, but it does not make liquidity management easy.
There are significant problems with this finding. First, investment income must be distributed, rather than retained, so it cannot be used to meet redemption requests. Second, the claim that principal payments are too small to cover a 5% redemption cap on their own may be too strong. The authors appear to rely on reported maturity schedules and infer principal payment from next quarter’s principal due. What that can miss is that borrowers and lenders regularly refinance loans. As I explained in my June 6, 2026 Substack column, principal repayments are typically the main source of cash flow. Organic cash inflows from loan prepayments, maturities, and credit refinancings have historically run around 25-30% annually—well more than the 5% quarterly gate. In 2005/06 the refinancing rate exceeded 50%. Even during the Global Financial Crisis, prepayments continued, though they dropped to about 5%. However, the shortfall was short-lived. By late 2009 and into 2010, prepayments rebounded back to double digits as high-performing borrowers successfully sought opportunistic refinancings. According to Pitchbook, the lowest level of refinancings since then occurred in April 2023 at 12.8%—more than sufficient to cover two full quarters of redemptions assuming no new cash flows and no dividend reinvestment.
This is quite a different story than their finding: “Principal payments from loans maturing within a quarter contribute very little, at less than 1% of TNA.”
In addition, the authors appear to have underweighted the fact that approximately 50% of dividends are typically reinvested, currently equal to roughly 1.25% per quarter, which by itself offsets about a quarter of the stated redemption request.
The authors also failed to consider that private loans typically have a stated maturity of five to seven years. Consequently, a diversified loan portfolio should have an average maturity of approximately three years, with principal payments averaging over 8% per quarter on gross loan assets. Since BDC leverage averages 1:1, principal payments might reach 16% of net assets.
A look at Cliffwater’s Direct Lending Fund (CCLFX) is instructive. While CCLFX was only required to redeem 5% of NAV in the March and May redemption periods, it redeemed 12% in total—7% in March and 5% in May. Offsetting that outflow was 7% in new subscriptions, about 1% in reinvested dividends, and about 12% in maturing payments. In other words, the fund’s net cash flow was positive.
Inflows And Outflows
Another key finding of the paper is that inflows and outflows do not behave symmetrically. The paper reports that new inflows tend to weaken when repurchase pressure rises, which means the funds do not necessarily attract fresh capital precisely when they need it most. That is an important point: a fund may appear to have ample gross flows in normal times, but those flows can deteriorate just when stress emerges.
That is why liquidity management plays such a key role in private credit. More importantly, the authors are right that the presence of a repurchase program does not eliminate the possibility of stress. It simply changes the mechanism through which stress is absorbed.
How Funds Respond
The authors find that semi-liquid BDCs sell illiquid loans, increase borrowing, and build repurchases payable rather than paying redeeming investors fully and immediately in cash. This is where the paper’s fragility argument becomes strongest. Redemptions are not just a source of temporary inconvenience; they can force actions that increase leverage and reduce flexibility, potentially making the fund more vulnerable later.
To address this issue, a key liquidity management tool is a committed revolver facility, which allows a fund to quickly draw on or repay funds when cash flows are negative or positive. For example, CCLFX maintains committed lines of credit that are typically sufficient to fully fund a year’s worth of redemption requests even if there were no cash inflows. This financing feature allows the fund to remain fully invested in private loans, maximizing return to investors.
Flow Sensitivity
Another key finding is what the authors call strategic complementarity. Their evidence suggests that outflows become more sensitive to adverse fundamentals when funds are more exposed to illiquid loans. The intuition is simple: if redeeming investors impose costs on those who stay, then investors have more reason to redeem early when conditions deteriorate. That is the classic logic behind run dynamics.
While that is a correct finding, it does not necessarily imply the same kind of classic run risk seen in bank deposits or open-end mutual funds, where investors can demand liquidity immediately. The gating structure of evergreen private credit funds is a feature, not a bug, because it limits redemptions to the 5% quarterly gate.
The paper also claims that semi-liquid private credit funds respond to outflows by increasing leverage. Notably, perpetual BDC leverage was below prior levels as of March 31, 2026, which runs counter to the paper’s story of steadily worsening fragility.
There is one more point worth noting. It is well documented that private vehicles exhibit stale pricing. That is a major problem in private equity and private real estate, where prices have been found to lag by about six months. And while it is less of an issue in private credit, where the lag is about one quarter, it can still create a problem related to strategic complementarity.
Dilution And Pricing
Semi-liquid BDCs hold illiquid private loans whose fair values may adjust slowly to changes in market fundamentals. When reported net asset values are stale or inflated relative to market values, redeeming investors can exit at a price above the economic value of the underlying portfolio. The difference is effectively borne by the remaining investors through dilution. For BDCs whose reported NAVs are close to market values, this dilution cost is small. For BDCs whose reported NAVs are high relative to market values, however, redemptions create a larger wealth transfer from remaining investors to redeeming investors. This gives investors an incentive to redeem before others do, especially when negative fundamental news makes NAV staleness more salient.
That is one of the paper’s more important points, because it shows that fragility can come not only from cash shortages, but also from valuation frictions.
This issue should elevate the concern about reported net asset values, with the potential for them to be too aggressive. If valuations have been too aggressive, we should see realized losses exceeding unrealized losses (markdowns in NAV prior to liquidation or sale). As the chart below shows, the reverse has actually been the case with unrealized losses being roughly 2x that of realized losses. In other words, if anything, BDCs have been too conservative in their marks. Thus, investors seeking to sell to avoid future losses would have been the ones paying the price for redemption.
The Bottom Line
The paper’s claim is that quarterly gates and repurchase caps do not eliminate fragility; they merely shape it. That is true. Funds may avoid instantaneous runs, but they can still face pressure that forces them to sell assets, borrow more, or delay payments.
For investors, the implication is that the liquidity these funds offer is conditional, and in stressed markets that condition may become more binding than investors may expect. For the market, the concern is that redemptions could transmit stress into private loan prices and into the broader credit ecosystem—investors seeking liquidity from their private credit funds, but being gated, might then sell public credit holdings to raise the needed cash.
That said, the historical evidence on the performance of CDLI, with historical credit losses of only around 1%—the vast majority of the loans in the index are senior, secured, and carry low loan-to-value ratios—suggests that well-managed perpetual BDCs can provide both access and performance without the systemic fragility the paper implies. Principal repayments, refinance activity, revolver capacity, dividend reinvestment, and new investor cash flows can all provide meaningful flexibility that may not show up in the paper’s preferred measures.
Takeaways For Investors
The main takeaway is that “semi-liquid” should not be mistaken for “fully liquid.” These funds offer periodic access, but the path from redemption request to cash in hand may involve caps, proration, delays, borrowing, and asset sales. That is a materially different proposition from the daily, par-value liquidity investors get from bank deposits or open-end mutual funds.
A second takeaway is that liquidity risk can move both ways. In good times, these vehicles may look like a convenient bridge between private credit and public-market accessibility. In stressed periods, the same structure can shift pressure onto the fund, the remaining shareholders, and potentially the underlying loan market.
The third takeaway is that investors should perform thorough due diligence not only on loan quality and diversification, but also on the fund’s liquidity management strategy.
Larry Swedroe is the author or co-author of 18 books on investing, including his latest Enrich Your Future. He is also a consultant to RIAs as an educator on investment strategies. This article is for informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice.