Private Credit In A Liquidity Wrapper

Liquidity, Marks, and the Endgame Question

Private credit itself is not new; what’s new is who it is being sold to, and at what scale. Many of the underlying structures date back decades. What has changed is the aggressive expansion into high-net-worth and retail channels. The current spotlight is less about novelty and more about conditions; publicly traded vehicles are trading at discounts to net asset value, while several high-profile bankruptcies have forced investors to ask harder questions and, in some cases, seek liquidity.

Evergreen vehicles^[1] have made private credit broadly accessible in a format that offers periodic liquidity, simplified subscription mechanics, mark-to-model pricing, and comparatively modest minimums. Capital that historically required long lockups is now available to individual investors with quarterly redemption features.

Assets have followed suit. While not all interval funds, tender-offer funds, or non-traded BDCs^[2] are technically evergreen, evergreen structures in particular illustrate the growth in capital formation. According to PitchBook’s Q4 2025 US Evergreen Fund Landscape, these vehicles have grown from roughly $245 billion in 2022 to nearly $500 billion in 2025, with direct lending representing a substantial portion of that expansion. The appeal is clear: high single-digit to low double-digit net returns, low reported volatility, and steady income. The relevant question is not whether the returns look attractive; it is whether they mean what investors assume they mean.

Two issues merit disciplined examination:

• How should allocators think about liquid private credit vehicles that exhibit highly consistent return profiles?
• What is the realistic endgame for this phase of the private credit cycle, particularly given software exposure and broader concerns around non-bank lending?

The answers require separating structure from reputation, accounting from economics, and cyclical stress from systemic fragility.

The Structure: Technically Sound, Conditionally Liquid

The most common critique of evergreen funds is that they operate with an asset-liability mismatch: multi-year loans paired with a standing obligation to provide quarterly liquidity.

As a structural objection, this seems overstated. Liquid private credit vehicles are designed with provisions that limit or completely shut off redemptions and meaningfully reduce the risk of disorderly forced liquidations. Redemption windows can be capped and liquidity either slows meaningfully or is explicitly conditional. If redemptions exceed limits, the manager can gate or severely limit redemptions. An evergreen investment structure desired by an investor because of its liquidity may become illiquid at exactly the moment that liquidity is most desired; even so, from a balance-sheet perspective, the structure is very likely to function as intended. Portfolio-level leverage is also generally modest. Interval funds, for example, can take on as much as 33.3% leverage. Across private credit more broadly, leverage often approximates 1:1, with public BDCs permitted up to 2:1. These levels are materially below pre-GFC bank leverage ratios; in addition, the risk of “redemption” flight (the equivalent to “deposit” flight for the regulated banking sector) is greatly diminished because of a manager’s ability to limit redemptions.

Ultimately, no structural mechanism would force immediate disorderly liquidation. The more prominent risk is not an imminent collapse of the vehicle, but a gradual erosion of the franchise. In a scenario where asset quality deteriorates meaningfully, pressure would build over time as leverage is paid down and redemption requests are met, potentially forcing asset sales and shrinking the vehicle year by year. If a manager gates redemptions for an extended period, the consequences are largely reputational: falling public stock prices, negative press, frustrated LPs, and potential talent attrition. Although gates are designed to prevent forced sales, a manager overseeing a gated fund can come under significant pressure to generate liquidity and reopen redemptions quickly; that pressure can, in turn, lead to asset sales at prices the manager would otherwise consider unacceptable. The vehicle may continue operating until the final asset runs off, but its ability to grow, or even raise additional capital, may be permanently impaired. Liquidity in this structure is managed, not guaranteed, and it may not be available at NAV when investors want it. That distinction is critical, though not inherently disqualifying.

The Consistency Question: Marks Versus Economic Reality

The more serious critique is valuation. Evergreen funds often show strikingly stable return streams. NAVs tend to appear steady, reported drawdowns are scarce, and volatility, at least in reported returns, looks muted. This stability is largely structural: private credit funds typically invest in performing loans trading near par, upside is generally capped, loans are not marked to market, and vehicles are designed to distribute substantially all income and gains. Therefore, absent subscriptions and redemptions, NAVs would generally be expected to remain relatively stable.

That appearance has a mechanical explanation. A buy-and-hold loan portfolio that is not marked to market will look smooth so long as borrowers continue to stay current. Coupon income accrues; principal remains at par unless impairment is formally recognized. Credit spreads on public securities can widen meaningfully, yet under a hold-to-maturity framework, no markdown is required unless there is an impairment, which is often a subjective assessment. Banks and insurers operate under similar accounting conventions in their held-to-maturity books. There is nothing inherently suspicious about that, but accounting stability is not the same thing as economic resilience.

Private credit portfolios lend largely to sponsor-backed middle-market businesses. Although they are not usually rated by a rating agency, they are typically described as credits that would have a single-B rating. More importantly, “senior secured” describes a position in the capital structure prioritized in the event of bankruptcy, not immune from enterprise value compression. When underwriting assumes elevated EV/EBITDA multiples, the credit begins to take on equity-like characteristics, which may not be reflected in the price.

Loan-to-value ratios below 50% are often cited as evidence of conservatism. That figure, however, is only as strong as the enterprise value supporting it. If a deal is underwritten at 20x EBITDA and the market resets to 10x, the effective leverage doubles in economic terms, and it will be virtually impossible to refinance the loan without some form of a restructuring process. In that scenario, sub-50% LTVs offer far less comfort than they initially appear to provide. In that environment, marks can lag reality.

Mark-to-model methodologies in liquid private-credit vehicles naturally dampen reported volatility. That is a function of the framework and not necessarily a defect, but it does mean that a smooth NAV path should not be mistaken for low risk. Stable marks tell you something about accounting, not everything about economics.

What Lies Beneath the Wrapper

Structure and marks are incomplete without examining composition. Using a well-known semi-liquid private credit fund as an illustrative example, publicly available disclosures indicate:

• Approximately 63% of gross assets in first-lien loans.
• Roughly 32% in private investment vehicles, including middle-market CLOs and non-listed BDCs.
• Exposure across hundreds of borrowers.
• A subset of loans structured with PIK interest.

This portfolio resembles diversified, levered private credit exposure rather than concentrated, control-oriented direct lending. In effect, it is closer to levered private credit beta than to a high-conviction, institutionally structured direct-lending portfolio. That distinction matters. CLO equity introduces structural leverage and equity-like downside, allocations to non-listed BDCs layer in additional fees, and investments in syndicated tranches reduce control in workout scenarios and provide for a second layer of illiquidity.

None of these characteristics are inherently problematic. Diversification mitigates idiosyncratic exposure and levered coupon collection can generate attractive income. But in stressed environments, control rights matter. Institutional direct lenders who lead loan originations negotiate documentation directly, shape covenant frameworks, collect more attractive economics, and maintain influence during amendments and restructurings. In syndicated exposures, that influence is diluted. Equally important is the composition of the investor base, as the types of investors in a vehicle can shape manager behavior, particularly when markets become more volatile.

In benign markets, this difference is immaterial; in restructuring scenarios, it’s not. Liquidity cannot substitute for a seat at the table.

Why The Cycle May Persist

Concerns about a private credit “endgame” typically rest on two assumptions: capital formation will slow and defaults will rise. The structure of the market suggests that any adjustment may be gradual rather than disorderly.

• First, there is no automatic liquidation mechanism that exists across the private-credit-fund complex writ large. Most private credit capital resides in drawdown funds, gated open-end vehicles, or permanent capital structures. There are no daily mark-to-markets adjustments or margin calls. Forced price transparency is limited.
• Second, leverage remains moderate. Fund-level leverage near 1:1 does not create the same reflexive dynamics that characterize highly levered banking systems.
• Third, opportunistic capital is abundant. Secondary funds and capital solutions providers have grown meaningfully. There is a reasonable argument that the market currently faces a supply/demand imbalance (too much opportunistic capital relative to distressed asset supply), which can quietly absorb stress absent a broader crisis of confidence.
• Fourth, private credit transactions are typically negotiated among small lender groups. The “clubby” nature of these deals makes coordinated amendments easier than in broadly syndicated bond markets. Managers often prefer to preserve enterprise value and extend maturities rather than accelerate defaults.

None of this eliminates credit losses, but it does reduce the probability of cascading forced sales.

Software Exposure and Multiple Compression

Software exposure has become a focal point. Many sponsor-backed software companies were underwritten at elevated multiples. If a loss of confidence in the underwritten purchase price compresses valuation multiples (for example, because projected revenue or EBITDA growth fails to materialize), enterprise values may decline. The critical distinction is between valuation normalization and structural cash-flow impairment. If recurring revenue models remain durable and multiple compression reflects a re-rating rather than revenue deterioration, covenant resets, time, and capital infusions should be able to bridge the gap. Recovery values may decline, but outcomes remain manageable so long as the cash flow is able to support debt service costs.

If technological shifts permanently impair cash flows, the risk profile changes materially. Loans to software companies with contractual recurring revenue and high customer switching costs may carry a lower probability of default; however, in the event of a default, software businesses lack tangible assets to liquidate. Intellectual property often has limited realizable value in distress. As a result, recoveries in the software sector are likely to be lower than in sectors supported by hard assets.

At present, the more probable risk appears to be multiple re-rating rather than structural and permanent impairment of software cash flows, although that judgment must remain conditional. That assessment may evolve but for now tempers the immediacy of “endgame” narratives.

Non-Bank Lending and Systemic Context

The US economy is increasingly reliant on non-bank lending channels. A severe contraction in private credit would have macroeconomic implications; however, scale matters. Traditional banks remain significantly larger, with approximately $13 trillion in assets, albeit with much lower prospects for lending growth in the absence of regulatory reform. Within private credit, the aforementioned abundance of undrawn opportunistic capital can act as a bridge until financing conditions become more stable. Finally, official policy responses, including those that would likely be initiated by Federal Reserve facilities and the US government, remain viable tools in a genuine credit freeze. Ultimately, private credit is systemically relevant, but not dominant.

Conclusion – No Technical Flaw, No Structural Immunity

Evergreen private credit vehicles are not inherently flawed; their liquidity mechanisms are designed to prevent forced liquidation, their leverage is moderate, and their stable return profiles are explainable within acceptable accounting conventions. There is no innate reason to view consistent-return private credit strategies as structurally unsound. However, that wrapper does not change the underlying exposure. Smooth NAVs reflect valuation methodology. Diversified exposure may reduce single-name risk while limiting control in workouts. Levered credit beta differs meaningfully from concentrated direct lending with documentation control.

The private credit cycle may persist longer than skeptics anticipate, particularly given moderate leverage and abundant opportunistic capital. Still, cycles are usually extended by structure, not eliminated by it. The central question for allocators is not whether the liquid option looks attractive, but whether they understand precisely what exposure they are purchasing and how it is likely to behave when valuation assumptions are tested. When that moment arrives, documentation control, underwriting discipline, and alignment will matter more than quarterly liquidity.