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Evaluating Trade-Offs in Semi-Liquid Credit

As access to private markets expands, investors should refocus on what drives outcomes.
Evaluating Trade-Offs in Semi-Liquid Credit
Evaluating Trade-Offs in Semi-Liquid Credit
Headshot of Jason Mandinach
Headshot of Christian Clayton
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Semi‑liquid credit funds that hold hard-to-trade private debt, while allowing periodic, limited withdrawals, have moved from the fringes of wealth portfolios into the mainstream. Interval funds, non-traded business development companies (BDCs), non-traded real estate investment trusts (REITs), tender‑offer funds, and operating companies have expanded access to markets once reserved for institutions.

But as capital has poured in and products have proliferated, a key question has been obscured: Are investors being paid for the risks they are taking? In our view, the answer depends far less on the fund structure and far more on the investment strategy, flexibility, and discipline embedded within it.

Below are several considerations we believe investors should weigh when evaluating semi‑liquid credit strategies.

Liquidity and transparency have a value

Liquidity – the ability to buy or sell an asset quickly at prices reflecting fundamental values – has historically been scarcer in private credit, which traditionally offered higher returns to compensate investors. Today, that trade‑off is less compelling. Yields in public fixed income, with daily liquidity and pricing, are far higher than they were a decade ago. That raises the bar for locking up capital or sacrificing transparency into portfolio holdings.

Importantly, a fund’s or investment vehicle’s structure doesn’t change the liquidity of the underlying assets. It simply sets the rules for how and when investors can request redemptions. Portfolio transparency also varies widely across managers and strategies, which can make performance harder to explain and risks harder to monitor.

Takeaway: If a strategy limits liquidity or transparency, clients should expect clear compensation for those constraints.

Strategy matters more than structure

Recent stress in parts of private credit isn’t an indictment of semi‑liquid structures. Rather, it reflects late‑cycle behavior: crowded trades, higher leverage, and weaker underwriting – particularly in corporate direct lending, a subset of private credit.

Strategies that flourished during a decade of low interest rates and abundant liquidity may struggle today. Greater economic and geopolitical uncertainty favors active security selection and comparing relative value across markets.

Takeaway: The fund structure doesn’t mitigate risk. Careful underwriting, portfolio construction, and diversification do.

Flexibility is essential

Many semi‑liquid strategies target a narrow slice of the credit market. That can work in stable periods, but it limits a manager’s ability to adapt as conditions change. More resilient approaches tend to be multi‑sector and flexible – able to shift between public and private credit, adjust risk, and step away from crowded areas where compensation has declined. This flexibility is particularly important today given full valuations across most risk assets and elevated uncertainty and volatility across markets.

Flexibility is about building portfolios that can play both offense and defense across cycles. For advisers, diversified solutions can simplify portfolio construction and reduce operational complexity.

Takeaway: Flexible mandates are often easier to manage – and stick with – through different market environments.

Liquidity starts with portfolio management

Semi‑liquid funds don’t generate liquidity automatically. Managers must plan for it. That means holding liquidity buffers, monitoring cash flows, and designing portfolios that can meet redemption requests during periods of stress. When done well, liquidity management can become an advantage, allowing managers to invest when others are forced to sell.

Takeaway: Liquidity potential depends on disciplined portfolio design, not just fund terms.

Smooth reported performance can hide risk

Finally, investors should be cautious about equating smooth historical returns with safety. In semi‑liquid credit, risk tends to surface through valuation adjustments, redemption pressure, or weaker recoveries – not daily price moves.

Takeaway: Less volatility on paper can reflect less-frequent price adjustments rather than less risk.

Bottom line

Semi‑liquid credit isn’t inherently good or bad. It’s a tool that can enable market access. But in today’s environment, investors should prioritize outcomes over access. That means demanding clear compensation for illiquidity while considering flexible, disciplined strategies.

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