With the rise of semi-liquid vehicles, private credit is opening its doors to retail investors, but managing liquidity in an inherently illiquid asset class is becoming the industry’s defining challenge. Aysha Gilmore reports…
The push into retail is one of the most significant recent trends in private credit, driving a structural shift from closed-ended funds towards evergreen vehicles and fuelling rapid growth across the asset class.
In the US, evergreen fund assets in direct lending have surged in recent years, more than tripling from $63.6bn (£47.5bn) in 2022 to over $209bn in 2025, according to PitchBook data. The data shows that direct lending now represents the largest segment of the evergreen universe, with total assets under management reaching $500bn in 2025.
While evergreen structures are available to both institutional and retail investors, they are particularly attractive to the latter due to the flexibility and periodic liquidity they offer, enabling easier scaling down or exit of positions. For general partners, this model provides a continuous pool of capital and access to a vast, largely untapped retail channel.
Liquidity mismatch
However, moving away from closed-ended structures, which Graham Roche, director of private credit and debt solutions at investor service provider IQ-EQ, describes as the “natural bedfellow” for private credit, raises a fundamental challenge of how to structure these vehicles without creating a liquidity mismatch.
At its core, the issue lies in how managers structure and manage liquidity when applying semi-liquid vehicles to an inherently illiquid asset class. A tension which has been brought sharply into focus by recent developments in the US evergreen business development company (BDC) market focused on retail investors.
By now, most readers will be familiar with the turbulence that has unfolded in the US retail market. Several of the largest alternative asset managers, including Blue Owl, Blackstone and BlackRock, have faced rising redemption requests as retail investors grow increasingly cautious about the asset class, particularly its exposure to software and the potential implications of artificial intelligence.
One of the highest-profile examples has been Blue Owl’s decision to restrict investor redemptions from one its retail debt funds, changing its redemption structure so that investors can no longer request additional redemptions. In other words, “gating” one of its funds.
These events have put liquidity management within evergreen structures firmly in the spotlight.
“Recent events illustrate that liquidity mismatches tend to reveal themselves during periods of stress, which turn structural features into structural vulnerabilities,” remarked Felipe Berliner, co-founder and head of structuring at emerging markets manager Gemcorp.
As Roche puts it, liquidity provisions of evergreen funds are a “double-edged sword”. The funds’ structure broadens access to private credit and introduces managed liquidity features, but only functions smoothly when investor behaviour remains stable. If too many investors attempt to withdraw capital at once, the structure can come under strain.
At the same time, questions remain over whether managing liquidity within semi-liquid vehicles will ultimately erode the illiquidity premium that has long underpinned private credit returns.
Read more: Private credit weathers scrutiny as managers reject crisis narrative
Liquidity crisis or credit crisis?
The key challenge for liquidity management in evergreen vehicles such as BDCs is when a “liquidity crisis becomes a credit crisis”, as Antonello Aquino, EMEA head of private credit at Moody’s, explained, even if the underlying assets remain sound.
“You don’t want to be in a situation where you are a forced seller of assets, that is why we are monitoring the situation, at present, the number of non-accruals remain relatively low, which is broadly consistent with stable asset quality,” he said.
Importantly, Aquino stressed that this scenario has not yet materialised in the current environment. “Gating is an established feature of these funds. They invest in inherently illiquid assets, and redemption limits are designed to reflect that structure.”
In the case of BDCs, “this does not necessarily indicate that these funds are underperforming they are operating in line with their stated structural design,” he said. Gating, in other words, is not a failure of the BDC structure but a core component of its design, intended to protect investors and preserve value during periods of stress.
In practice, liquidity is managed in evergreen funds through a combination of tools, including redemption limits, cash buffers, portfolio construction and, in some cases, secondary market sales.
Retail = new risks
However, the growing presence of retail capital introduces a new layer of complexity. Alexandra Aspioti, VP, senior analyst at Moody’s, noted that the shift towards semi-liquid products is “changing” the investor mix, with private credit historically dominated by institutional investors who are better equipped to manage illiquidity and market volatility.
Understanding and managing the liquidity needs and behaviour of retail investors is therefore critical. In some regions, particularly in Asia, retail investors are known for borrowing to invest in these funds, using their holdings as collateral. In such cases, any disruption can trigger a need for immediate liquidity to meet obligations elsewhere.
“So, evergreen funds introduced a risk that was not present previously in private markets. How these products are marketed and how their liquidity features are managed is therefore critical,” she said. “The key question here really is how these products were ultimately positioned to investors and how liquidity features were communicated.”
Across the industry, concerns have been raised about the potential for “irrational behaviour” among retail investors, particularly in response to negative headlines. While these products offer some liquidity, they are not liquid in the same way as public market instruments.
Education and communication are therefore central to managing liquidity pressures. Ensuring investors understand the limitations of semi-liquid structures could help prevent a wave of redemptions during periods of market uncertainty.
Yet the responsibility does not lie solely with end investors, points out Caroline Baker, executive vice president, fund solutions, Americas at Vistra Funds, who highlighted the role of intermediaries in shaping investor behaviour.
“It is not just the retail investors, it is the industry that is selling the product, while fund managers can do their piece, they also have a big distribution network and it is about educating that network,” she said.
Evolving structures
While some argue that the recent tensions in BDCs do not point to a structural flaw, it is likely that as both US and European managers expand further into the retail channel, new structures and approaches to liquidity management are likely to emerge.
Aspioti pointed out that many of the BDCs currently in focus are relatively concentrated in direct lending. As fund structures evolve, greater diversification, into areas such as asset-based finance (ABF), may become more prominent as a way to manage liquidity more effectively.
Direct lending has been a major beneficiary of the evergreen boom, overtaking real estate as the largest segment of the market. The strategy grew by 55.4 per cent in 2023, 66.1 per cent in 2024, and a further 27.7 per cent in the first nine months of 2025, according to PitchBook data.
“It will be worth monitoring whether investors increasingly favour vehicles that benefit from greater diversification, particularly into areas such as asset based finance,” Aspioti said. “BDCs have a narrower focus on mid-market lending. The newer type of funds might be investing in broader set or opportunities; it will be interesting to see from that point of view.”
Structurally, private credit portfolios in the US typically have average lives of around four years, with many loans featuring bullet repayments at maturity. Some also incorporate payment-in-kind (PIK) elements, allowing borrowers to defer interest payments.
Berliner pointed to shorter-duration assets and geographic region to help mitigate liquidity pressures.
“Shorter contractual maturities create natural liquidity,” he said. “Capital is returned through amortisation and repayment rather than secondary sales or refinancing. That is vital for vehicles offering periodic redemption windows.
“To be viable in all conditions, private credit evergreen funds need to meet three criteria: shorter-duration assets, diverse economic drivers and natural liquidity. This is where emerging markets private credit could be more a better fit than its US or European counterparts.”
Emerging markets strategies, he noted, tend to have shorter weighted average lives, around 2.5 years compared with four years in US direct lending, offering a potentially better alignment with semi-liquid structures.
Meanwhile, Simon Tang, head of US LP sales at Carta, suggested that the current environment will drive further product innovation of evergreen funds. “There will be new iterations and versions, there will be fine tuning, whether it is the liquidity mechanisms, the structure itself, or perhaps the investment strategy of the BDCs,” he said.
“A few weeks ago, managers met liquidity demands by selling off investments to the secondary market; the merging of two different strategies and mechanisms could ultimately provide a new type of product for investors.”
Further growth
Despite recent headwinds in US BDCs, most market participants do not expect the growth of evergreen vehicles for both retail and institutional investors to stall, either in the US or Europe.
Although Europe lags behind the US, the shift toward evergreen structures is also expected to grow significantly over the coming years, with 39 per cent of global institutional investors seeking them as a way to access private credit, according to a recent survey by Nuveen.
“As the industry evolves, it is very open to different types of structures, so I don’t think it will impede the growth; there are all types of variation of these open-ended funds,” said Mathew Cestar, president at Arini. “In an industry of this size and scale, it is going through this natural maturation process, and I think it will demonstrate which managers are doing their credit work.”
While Aquino added: “I don’t think it will stop the journey, which has long departed, but I think they [GPs] clearly need to communicate extensively that this is not a liquid product.”
However, others have cautioned that the focus on liquidity risks may be overshadowing a more fundamental issue of underlying credit performance. Overall, it is expected that non-accruals and reliance on PIK structures may increase, which could signal mounting pressure within portfolios.
While stating that he thinks the advantages of “well managed” evergreen funds to all investor types are “abundant”, Berliner remarked: “Investors need to be aware that they only function effectively when liquidity expectations are realistic, underlying assets are matched to the structure and concentration risks are properly understood.”
Ultimately, the success of semi-liquid private credit will depend on whether managers can effectively manage liquidity without undermining the very illiquidity premium that defines the asset class, whether that be through structure, communication or innovation.
This article was first published in Alternative Credit Investor’s magazine published on 1 April.
