Private Credit: When Liquidity Risk Is Mistaken for Credit Risk
Updated: Oct 2
The main issues in the US private credit market today are not the fundamentals of their underlying investments: it is the ๐บ๐ถ๐๐ฎ๐น๐ถ๐ด๐ป๐บ๐ฒ๐ป๐ ๐ฏ๐ฒ๐๐๐ฒ๐ฒ๐ป ๐ถ๐ป๐๐ฒ๐๐๐ผ๐ฟ ๐ฒ๐ ๐ฝ๐ฒ๐ฐ๐๐ฎ๐๐ถ๐ผ๐ป๐, ๐ฎ๐๐๐ฒ๐ ๐ฑ๐๐ฟ๐ฎ๐๐ถ๐ผ๐ป, ๐ฎ๐ป๐ฑ ๐น๐ถ๐พ๐๐ถ๐ฑ๐ถ๐๐ ๐๐ฒ๐ฟ๐บ๐.
Private credit assets are inherently longer-dated without a ready liquid market, with structures designed to support more secured outcomes in times of distress. Yet an increasing number of semi-liquid vehicles now offer periodic liquidity, creating investor expectations that may not be supported by underlying assets, as these cannot be readily liquidated during periods of stress.
In benign environments, this mismatch is easy to overlook. Larger fund managers have often use uncorrelated liquidity pools to manage investor liquidity .
๐๐ป ๐บ๐ผ๐ฟ๐ฒ ๐ฐ๐ต๐ฎ๐น๐น๐ฒ๐ป๐ด๐ถ๐ป๐ด ๐บ๐ฎ๐ฟ๐ธ๐ฒ๐๐ ๐น๐ถ๐ธ๐ฒ ๐ป๐ผ๐, ๐ถ๐ ๐ฐ๐ฎ๐ป ๐ด๐ถ๐๐ฒ ๐๐ต๐ฒ ๐ถ๐บ๐ฝ๐ฟ๐ฒ๐๐๐ถ๐ผ๐ป ๐๐ต๐ฎ๐ ๐ฐ๐ฟ๐ฒ๐ฑ๐ถ๐ ๐ฟ๐ถ๐๐ธ๐ ๐ต๐ฎ๐๐ฒ ๐๐๐ฑ๐ฑ๐ฒ๐ป๐น๐ ๐ฒ๐๐ฐ๐ฎ๐น๐ฎ๐๐ฒ๐ฑ ๐๐ต๐ฒ๐ป ๐ช๐ฃ๐๐๐ง๐ก๐ฎ๐๐ฃ๐ ๐๐ง๐๐๐๐ฉ ๐ฆ๐ช๐๐ก๐๐ฉ๐ฎ ๐ง๐๐ข๐๐๐ฃ๐จ ๐ช๐ฃ๐๐๐๐ฃ๐๐๐.
For investors of private credit, this is a timely reminder that ๐ฝ๐ฎ๐ฐ๐ถ๐ป๐ด, ๐ฑ๐ถ๐๐ฒ๐ฟ๐๐ถ๐ณ๐ถ๐ฐ๐ฎ๐๐ถ๐ผ๐ป ๐ฎ๐ป๐ฑ ๐ฎ ๐ฐ๐น๐ฒ๐ฎ๐ฟ ๐ฎ๐๐๐ฒ๐๐๐บ๐ฒ๐ป๐ ๐ผ๐ณ ๐น๐ถ๐พ๐๐ถ๐ฑ๐ถ๐๐ ๐ป๐ฒ๐ฒ๐ฑ๐ are essential.
๐๐ฉ๐ฆ ๐ช๐ฏ๐ง๐ฐ๐ณ๐ฎ๐ข๐ต๐ช๐ฐ๐ฏ ๐ฑ๐ณ๐ฐ๐ท๐ช๐ฅ๐ฆ๐ฅ ๐ช๐ฏ ๐ต๐ฉ๐ช๐ด ๐ฑ๐ฐ๐ด๐ต ๐ช๐ด ๐ง๐ฐ๐ณ ๐ช๐ฏ๐ง๐ฐ๐ณ๐ฎ๐ข๐ต๐ช๐ฐ๐ฏ๐ข๐ญ ๐ฑ๐ถ๐ณ๐ฑ๐ฐ๐ด๐ฆ๐ด ๐ฐ๐ฏ๐ญ๐บ ๐ข๐ฏ๐ฅ ๐ด๐ฉ๐ฐ๐ถ๐ญ๐ฅ ๐ฏ๐ฐ๐ต ๐ฃ๐ฆ ๐ค๐ฐ๐ฏ๐ด๐ต๐ณ๐ถ๐ฆ๐ฅ ๐ข๐ด ๐ง๐ช๐ฏ๐ข๐ฏ๐ค๐ช๐ข๐ญ, ๐ช๐ฏ๐ท๐ฆ๐ด๐ต๐ฎ๐ฆ๐ฏ๐ต, ๐ฐ๐ณ ๐ฑ๐ณ๐ฐ๐ง๐ฆ๐ด๐ด๐ช๐ฐ๐ฏ๐ข๐ญ ๐ข๐ฅ๐ท๐ช๐ค๐ฆ. ๐๐ญ๐ธ๐ข๐บ๐ด ๐ค๐ฐ๐ฏ๐ฅ๐ถ๐ค๐ต ๐บ๐ฐ๐ถ๐ณ ๐ฐ๐ธ๐ฏ ๐ณ๐ฆ๐ด๐ฆ๐ข๐ณ๐ค๐ฉ ๐ข๐ฏ๐ฅ ๐ค๐ฐ๐ฏ๐ด๐ถ๐ญ๐ต ๐ธ๐ช๐ต๐ฉ ๐ข ๐ฒ๐ถ๐ข๐ญ๐ช๐ง๐ช๐ฆ๐ฅ ๐ง๐ช๐ฏ๐ข๐ฏ๐ค๐ช๐ข๐ญ ๐ข๐ฅ๐ท๐ช๐ด๐ฐ๐ณ ๐ฃ๐ฆ๐ง๐ฐ๐ณ๐ฆ ๐ฎ๐ข๐ฌ๐ช๐ฏ๐จ ๐ข๐ฏ๐บ ๐ช๐ฏ๐ท๐ฆ๐ด๐ต๐ฎ๐ฆ๐ฏ๐ต ๐ฅ๐ฆ๐ค๐ช๐ด๐ช๐ฐ๐ฏ๐ด. ๐๐ข๐ด๐ต ๐ฑ๐ฆ๐ณ๐ง๐ฐ๐ณ๐ฎ๐ข๐ฏ๐ค๐ฆ ๐ช๐ด ๐ฏ๐ฐ๐ต ๐ช๐ฏ๐ฅ๐ช๐ค๐ข๐ต๐ช๐ท๐ฆ ๐ฐ๐ง ๐ง๐ถ๐ต๐ถ๐ณ๐ฆ ๐ณ๐ฆ๐ด๐ถ๐ญ๐ต๐ด.
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