The Fragility of Semi-Liquid Private Credit Funds

We study fragility in semi-liquid private credit funds, which have expanded rapidly and now manage over $300 billion in assets. These funds perform liquidity transformation by holding far more illiquid loans than traditional loan mutual funds while allowing investors to redeem at NAV through quarterly repurchase offers, typically capped at 5% of shares outstanding. We show that cash buffers and contractual loan repayments are insufficient to fund repeated 5% quarterly redemptions; inflows decline precisely when outflows rise; and net outflows are met with sales of illiquid loans, external borrowing, and delayed payments through repurchases payable. As a result, strategic complementarity arises, because redemptions impose liquidation and leverage costs on the remaining investors. We show that loan liquidation, leverage increase, and NAV inflation play an important role in amplifying the current episodes of run-like redemptions. Overall, our evidence suggests that quarterly gates and redemption caps do not eliminate run-like fragility in semi-liquid private credit funds, raising cautions about expanding retail access to private credit markets.