The Liquidity Mirage

Private credit funds — specifically non-traded business development companies (BDCs) and interval funds — have been in the news. In the first quarter of 2026, investors across the non-traded BDC universe submitted redemption requests totaling approximately $14 billion. Sponsors honored $7.4 billion — with some funds, including Blackstone's BCRED, voluntarily exceeding the standard 5% cap to meet demand — leaving approximately $6.5 billion unfulfilled. Of that amount, more than $4.6 billion was formally trapped behind triggered pro-rata gates; the remainder reflects the above-cap fulfillment at funds like BCRED that honored requests in full despite exceeding the standard limit. It was the first quarter in which pro-rata gating occurred across the non-traded BDC product type on an industry-wide basis.

What makes this episode particularly interesting is what is not driving it. Actual loan defaults across the non-traded BDC universe have remained relatively limited. This is not a traditional credit quality crisis. The redemption wave has been driven largely by investor concern about a specific portfolio concentration: BDC portfolios carry meaningful exposure to loans made to software companies — particularly software-as-a-service (SaaS) businesses — secured against annual recurring revenue, or ARR. The concern is that rapid advances in artificial intelligence may erode the revenue base of many of these software companies, weakening the very collateral underpinning the loans. Sentiment moved faster than the credit cycle, and the gates followed.

We believe this episode raises an important and timely question about how allocators evaluate semi-liquid investments. The traditional manager selection process — team, track record, strategy, risk management, fees, and market environment — remains necessary. It is not, however, sufficient. Liquidity diligence needs to be an explicit part of the process as well, and the events of early 2026 illustrate why.

How the Gate Works

Most non-traded BDCs and interval funds offer quarterly redemption windows capped at 5% of net asset value (NAV) — or 20% annually. When redemption requests fall below that threshold, investors receive what they ask for. When requests exceed 5%, the fund fulfills them on a pro-rata basis, meaning every investor receives the same fraction of their request regardless of size.

There is an important legal distinction worth understanding here. In a true interval fund — registered under the Investment Company Act and required under Rule 23c-3 to make periodic repurchase offers — the liquidity provision is a formal regulatory obligation. The fund must offer to repurchase shares at the stated interval. In virtually every other semi-liquid structure, including non-traded BDCs and tender offer funds, the repurchase program is board-discretionary. The 5% quarterly offer is a stated policy, not a legal mandate. The board can modify, suspend, or limit it. Note that investors in these structures are relying on a conditional promise, not a contractual one — a distinction that is easy to overlook at the time of investment and difficult to overlook when the gate goes up.

The Game Theory of the Gate

Once investors and advisors begin to believe that a gate is likely, the rational response is to over-request. If you believe the fund will only honor 50% of redemption requests this quarter, the logical move is to request twice what you actually want. Submit $1,000,000 when your goal is to redeem $500,000. If the gate holds at 50%, you receive your target. If it does not gate at all, you receive more than planned — an outcome that carries no downside.

That said, while this is a rational individual decision, it is destabilizing at the fund level — a classic Prisoner's Dilemma. The more investors suspect a gate, the more they over-request; the more they over-request, the more certain the gate becomes.

The Goldman Sachs data point from Q1 2026 illustrates how broad the industry-wide pressure had become. Goldman Sachs Private Credit Corp (GSCRED), a $15.7 billion non-traded BDC, reported requests of exactly 4.999% of outstanding shares — one basis point below the 5% cap. Its April 6, 2026 shareholder letter, filed with the SEC, noted it was the only non-traded BDC in its peer group to clear without triggering pro-rata fulfillment, meaning gates were effectively universal across the peer group that quarter. Whether investors were rotating to more favorable asset classes, responding to credit concerns, or strategically inflating requests to compensate for expected pro-rata cuts — possibly some combination of all three — the structural incentive to over-request is unambiguous: there is a meaningful cost to asking for less.

The Fear of Being Left Holding the Bag

Once investors become convinced that a gate is not temporary but prolonged, behavior shifts from seeking liquidity to avoiding being the last one out. The concern is not merely illiquidity — it is adverse selection. Managers under sustained redemption pressure may need to sell assets to meet outflows, and there is a reasonable concern that the most liquid and widely-held positions are also the easiest to monetize first. If that occurs, investors who remain longest could find themselves holding a residual portfolio that is less liquid, less desirable, and lower in quality — one where go-forward returns may be lower and the risk of loss higher. Whether or not this plays out in any given fund, the concern itself can be sufficient to accelerate redemption requests further.

An Interesting Comparison: Private Credit vs. Private Equity

It is worth noting that, of all the semi-liquid private market structures available, credit funds are arguably the best positioned to manage periodic redemption requests — and yet they are the ones generating headlines.

Credit funds invest in loans — instruments with contractual maturity dates, defined repayment schedules, and regular interest payments. As loans mature, principal is returned. As interest accrues, cash flow is generated. A well-managed credit fund therefore has a natural mechanism for funding redemptions over time without necessarily selling assets. A private credit BDC collecting quarterly interest payments on a diversified loan book is structurally better equipped to serve periodic liquidity windows than a fund investing in equity.

Private equity vehicles present the opposite profile. Equity stakes have no contractual maturity, pay little or no meaningful income, and can only be monetized when a buyer emerges — whether through an IPO, an acquisition, or a secondary sale at an uncertain price. There is no amortization schedule and no coupon. Exit timing depends entirely on market conditions. It is also worth noting that equity sits below debt in the capital structure, meaning equity holders absorb losses first in any deterioration scenario.

This makes the current environment genuinely interesting. Private credit — structurally better suited to handle redemptions due to contractual cash flows — is the one in the news. Private equity interval funds and semi-liquid vehicles, whose underlying assets are far less compatible with periodic liquidity promises, are largely absent from the conversation. As the industry continues to package private equity into semi-liquid wrappers, we believe allocators should be asking the redemption pressure questions now, before that stress test arrives.

Know Who Is in the Fund with You

In our view, this is the most underappreciated dimension of semi-liquid fund diligence — and often the variable most likely to determine your actual experience as an investor.

Fund size matters. A 5% quarterly cap sounds like meaningful liquidity until you consider that 5% of NAV is only as large as the fund itself. For a $300 million fund, 5% of NAV is $15 million per quarter. For a fund with several billion in assets, that same 5% represents far more capacity. We encourage evaluating the redemption bucket as a dollar amount relative to the size of your investment, not simply as a percentage.

Investor concentration matters just as much. Blue Owl's Q1 2026 earnings call surfaced a notable data point: approximately 1% of OCIC shareholders represented the majority of total redemption requests.¹ In a fund where ownership is concentrated among a small number of large platforms or institutions, a single investor's reallocation decision can consume the entire quarter's available liquidity for everyone else. Consider the arithmetic: at 5% per quarter — or 20% of NAV annually — a single investor holding 8% of a fund's NAV who submits a full redemption request will consume about one and a half quarters of the fund's redemption capacity on their own, before any pro-rata dilution from other concurrent requests.

That said, a fund with a broadly diversified investor base — many investors, no single holder commanding a disproportionate share, and large investors subject to restricted redemption provisions — presents a meaningfully different risk profile. When no single investor can exhaust the quarterly bucket alone, the structure functions much closer to its stated intent.

It is also worth knowing your own ownership percentage of the fund. If you represent a meaningful share of the fund's NAV, your redemption request will itself consume a significant portion of the available quarterly liquidity — which affects both how quickly you can exit and how you think about sizing your request.

A Note on Currently Gated Funds

If a fund is currently gated, we believe any new investment should be viewed as genuinely long-term — and potentially very long-term. There is no reliable way to forecast when redemption pressure will abate, as it depends on future inflows, portfolio cash generation, and asset sales.

It is also worth asking why you would allocate new capital to a gated fund at all. Fresh capital deployed into a gated fund primarily solves the manager's liquidity problem — new subscriptions provide cash that can be used to meet existing redemption obligations. It does not solve yours. In effect, you are lending your liquidity to a structure that has already demonstrated it cannot fully meet current demand.

Adding Liquidity Diligence to the Manager Selection Process

As noted above, the traditional manager selection process — team, track record, strategy, risk management, fees, and market environment — remains the foundation of evaluating any manager. For semi-liquid structures, we believe liquidity diligence needs to be added to that process as an equally important dimension, not an afterthought. The questions below are a starting point.

• Is the fund currently gated?
  If so, treat any new investment as genuinely long-term and indeterminate in duration. There is no reliable forecast for when redemption pressure will abate. Fresh capital into a gated fund solves the manager's liquidity problem, not yours.
• What is the fund's current NAV, and what does 5% of it equal in dollars?
  Absolute redemption capacity matters. $10M per quarter is not the same as $500M per quarter, even if both represent 5% of NAV. Evaluate the redemption bucket as a dollar amount relative to the size of your investment.
• What is the investor composition — by number of investors and by size?
  Is the base broadly diversified, or are a handful of platforms or institutions holding a disproportionate share? At 20% of NAV per year, a single investor holding 8% can consume about one and a half quarters of redemption capacity on their own.
• Are large investors subject to restricted redemption provisions?
  Some fund structures allow managers to defer or limit redemptions for holders above a certain size — a meaningful structural protection for smaller co-investors who would otherwise compete for the same quarterly window.
• What are the fund's other sources of liquidity beyond new subscriptions?
  Does the fund maintain a subscription credit facility? What is the pace of principal repayments from the underlying portfolio? A fund generating meaningful internal cash flow is structurally more resilient than one dependent on new investor capital to fund redemptions.
• What is the fund's historical redemption pattern?
  Has the fund previously approached or exceeded the 5% quarterly cap? Is it currently in net inflow or net outflow? Trends in redemption activity are as informative as point-in-time data.
• Under what conditions would the manager sell assets to meet redemptions — and which assets first?
  The order of asset liquidation matters for remaining investors. We recommend understanding this policy before it becomes relevant.
• Has the fund ever gated, and how did the manager communicate it?
  How a manager communicates during a gate period is a meaningful indicator of how they prioritize investor relationships under pressure.

Semi-liquid does not mean liquid. As noted earlier, true interval funds carry a contractual repurchase obligation — but even then, liquidity is capped at 5% per quarter and rationed pro-rata when demand exceeds supply. For non-traded BDCs and tender offer funds, the repurchase program is board-discretionary and can be modified or suspended at times that may not align with your needs. In either case, the structure is designed to slow down exits, and the events of early 2026 are a reminder of what that looks like in practice.

We are strong believers in semi-liquid structures and allocate up to 50% of client portfolios to them. The reasons are straightforward: they provide true economic diversification, access to markets and strategies that simply are not available in public markets, and the potential for higher returns or income with less volatility than publicly traded alternatives. Some of the most prominent and successful investment managers in the world now offer their products in structures that a high-net-worth investor can own — that is a remarkable development for portfolio construction, and one we take full advantage of on behalf of our clients.

That said, these products require a higher level of diligence than traditional investments. Understanding the liquidity mechanics — how the gate works, who else is in the fund, the size of the redemption bucket in dollar terms, and what happens to the portfolio under sustained outflow pressure — is as important as evaluating the manager, the strategy, and the market environment. The goal of this article is not to discourage investment in these structures. It is to encourage the diligence they deserve.

As always, our team is happy to discuss how these considerations apply to your specific portfolio. Please reach out with any questions.