Understanding Liquidity in Private Credit Funds: A Primer for Investors
This weekend, BlackRock TCP Capital announced a sobering development: the fund expects to cut its net asset value per share to between $7.05 and $7.09, down from $8.71 as of September 30 - a 19 percent markdown. The culprit? Troubled loans to e-commerce aggregators and a bankrupt home improvement company. Shares tumbled in after-hours trading.
Just two months earlier, in November 2025, Blue Owl Capital made headlines when it froze redemptions on its private credit fund after withdrawal requests exceeded limits. The announcement caused shares to slump about 6% on Monday, and the firm ultimately called off a planned merger of two funds due to investor anxiety.
These aren't isolated incidents - they're symptoms of a fundamental challenge in private credit that every investor needs to understand: the liquidity mismatch. As private credit funds have grown increasingly popular with retail investors seeking higher yields, the question of "when can I get my money back?" has never been more critical.
The Time Lock Problem
Private credit refers to loans made to private companies - businesses that don't trade on public stock exchanges. These loans typically have terms of five to seven years and offer attractive interest rates, often in the 8-12% range, significantly higher than traditional bonds or savings accounts.Here's the challenge: imagine lending your friend $10,000 for five years, but then needing that money back in six months for an emergency. Your friend can't repay you early - the money is tied up in their business. This is the Time Lock Problem that private credit funds face every day.
Fund managers invest in loans that won't mature for years, but investors may need their money back much sooner. Unlike stocks or bonds that trade on public exchanges where you can sell instantly, private credit loans are illiquid - there's no ready market to sell them quickly without taking a significant loss. This creates a fundamental mismatch: long-term assets meeting short-term liquidity needs.
The Scheduled Ferry Solution
Enter interval funds - a structure designed specifically to bridge this liquidity gap. Think of an interval fund as a Scheduled Ferry rather than a taxi service. You can't leave whenever you want, but you know exactly when the ferry departs and can plan accordingly.How Interval Funds Work:
Interval funds offer periodic redemption windows, typically quarterly (every three months). During these windows, investors can request to redeem their shares. However, there's a catch: the fund is only required to redeem a limited percentage of outstanding shares each quarter - typically between 5% and 25% of the fund's net asset value, with 5% being most common.
This structure protects both investors and the fund. By knowing redemption requests in advance, fund managers can plan their cash needs without being forced to sell loans at fire-sale prices. They can hold loans to maturity, maintain portfolio quality, and potentially deliver better returns than if they had to keep large cash reserves for daily redemptions.
For investors, this means accepting a trade-off: less liquidity than a mutual fund, but more liquidity than a traditional private equity fund (which might lock up capital for 7-10 years). In exchange, investors typically receive higher yields that reflect the illiquidity premium - compensation for being patient with their capital.
When the Ferry Reaches Capacity
What happens when too many investors want to redeem at once? This is where redemption gates come into play - and where Blue Owl's November 2025 situation becomes instructive.Redemption gates are protective mechanisms that kick in when redemption requests exceed the fund's quarterly limit (typically 5%). When this happens, the fund can either:
Pro-rate redemptions: If requests total 10% but the limit is 5%, everyone gets 50% of their requested redemption
Temporarily suspend redemptions: In extreme cases, freeze all redemptions until the next quarter
These gates aren't punitive - they're protective. Without them, a rush of redemptions could force the fund to sell quality loans at distressed prices, hurting the investors who remain. It's similar to bank runs during the Great Depression: when everyone tries to withdraw simultaneously, the system breaks down.
The Blue Owl situation demonstrates this in real time. When withdrawal requests exceeded limits and about 6% of the fund was withdrawn, the fund had to halt further redemptions. This wasn't a sign of fund failure - it was the safety mechanism working as designed. However, it underscores a critical point: in times of market stress, your ability to exit may be constrained.
What Investors Should Know
Match your timeline to the fund's liquidity terms: If you might need your money within a year, an interval fund with quarterly redemptions and 5% caps may not be appropriate. These investments work best for capital you can commit for 3-5 years.Understand the trade-off: Higher yields in private credit funds compensate you for accepting less liquidity. The BlackRock TCP situation shows that returns aren't guaranteed - credit risk remains real - but the illiquidity premium is why these funds typically target 8-12% returns versus 4-5% for liquid alternatives.
The diversification paradox: Private credit is often marketed as a portfolio diversifier, but consider this: if redemptions are gated during market stress - precisely when you'd want to rebalance or access capital - how diversified are you really? Diversification only works if you can actually access and reallocate your capital when opportunities arise or when you need defensive positioning. A gated fund becomes dead weight in your portfolio during the exact moments diversification matters most.
Ask about historical gate usage: Before investing, ask the fund manager: Have redemption gates ever been triggered? How often? What percentage of redemption requests were fulfilled during stress periods? This reveals how the fund has handled liquidity pressure in practice.
Read the fine print on redemption terms: Understand the redemption frequency (quarterly, semi-annual), the percentage cap (typically 5-25%, with 5% most common), notice requirements (often 30-60 days), and any fees for early redemption. These details matter when you need access to capital.
Liquidity is a spectrum, not binary: Private credit interval funds sit between daily-liquid mutual funds and locked-up private equity. Recognize where your investment falls on this spectrum and ensure it aligns with your overall portfolio liquidity needs.
The Bottom Line: Understanding Extreme Scenarios
While interval funds and structured liquidity mechanisms represent significant improvements over completely illiquid investments, investors must understand the full spectrum of potential outcomes - including extreme scenarios that can unfold during market crises.When Liquidity Disappears for Years
History provides sobering lessons. During the 2008 financial crisis, many hedge fund managers stopped all redemptions or put illiquid assets into emergency side pockets in 2008 and 2009, with some investors waiting over five years to receive their capital back. This wasn't a theoretical risk - it was a widespread reality that trapped billions of dollars.
More recently, Blackstone's BREIT (Blackstone Real Estate Income Trust) demonstrated how even well-structured funds can face prolonged liquidity constraints. During the 15 months between the end of November 2022 and the end of January 2024, BREIT operated under redemption limits, honoring only the 2% monthly and 5% quarterly withdrawal caps while facing massive withdrawal requests. Investors who wanted out had to wait in a redemption queue, with no guarantee of when they'd receive their full capital back.
The Critical Takeaway
Private credit funds offer attractive yields precisely because you're accepting illiquidity risk. In normal markets, interval funds provide reasonable access through quarterly windows. But in stressed markets - when you might most need your money - redemption gates can extend your investment timeline from months to years.
Before investing, ask yourself: Can I afford to have this capital locked up for 3-5 years or longer in a worst-case scenario? If the answer is no, private credit may not be appropriate regardless of the yield premium. Understanding liquidity isn't just about reading the fund documents - it's about honestly assessing your own financial resilience during the times when markets, and redemptions, freeze up.
---
Advisory Services offered through SYKON Capital LLC, a registered investment advisor with the U.S. Securities and Exchange Commission. This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor. The information contained in this presentation has been compiled from third party sources and is believed to be reliable as of the date of this report. Past performance is not indicative of future returns and diversification neither assures a profit nor guarantees against loss in a declining market. Investments involve risk and are not guaranteed.
[1] Hedge funds have $100 billion still locked up
[2] BREIT meets 100% of redemption requests for first time since 2022
[3] Blackstone's $66 Billion BREIT Limits Redemptions for 12th Month
[4] Blue Owl sinks as investor withdrawals halted at private credit fund
