Debunking 8 Myths About Private Credit and Semiliquid Funds

Semiliquid private credit funds have drawn healthy skepticism over the past several quarters on the heels of massive asset growth. Many shareholders have been pulling out of them recently and may not have fully understood what they had gotten into.

It’s easy to understand their confusion. Finding your way through the forest of available semiliquid private credit vehicles remains daunting, even though fund-level Securities and Exchange Commission filings leave some breadcrumbs—such as names, descriptions of the interest rates on their loans, and other notes—and managers usually release some aggregated statistics. Those are scraps, however, compared with what traditional mutual and exchange-traded funds report, making it hard for investors to evaluate how much risk they are taking or whether their portfolios are under stress. Not surprisingly, some misunderstandings and myths have arisen as private semiliquid funds’ assets have grown.

To help clear some of them up, here are eight things private credit managers rarely advertise about investment leverage, volatility, and withdrawal limits.

Myth 1: Risk in private credit funds is similar to that of corporate credit mutual funds.

Most private credit funds focused on direct lending consist of investments bought with both investor dollars and borrowed money, or financial leverage. For example, a nontraded business-development company that can borrow $1 for every dollar of investors’ money offers around 200% of the market exposure the investment would otherwise have. If you assume an unleveraged portfolio would produce an 8% yield, and add that amount of leverage, you get a 16% yield. While the underlying debt that yields 8% is at least as risky as any junk bond or syndicated bank loan, adding leverage to double its yield adds even more risk.

Of course, you won’t see a 16% yield. Borrowing has costs; we’ll pencil them in at 3.5% for this exercise, leaving roughly 12.5%. Most nontraded BDCs charge a combination of management, incentive, and operating fees. We’ll use a conservative, combined estimate of 3% of net assets (charging no fees on borrowed money), cutting your income to 9.5%. Cash drag, dilution from big inflows, or non-income-producing assets would trim away more. That leaves you a hypothetical expected income stream of 9%-10% from a portfolio taking enough risk to generate 16%.

This optimistic example doesn’t assume any credit losses, falling prices, or other market heartache, either. It also means the only way to deliver the level of returns for which people are clamoring—and still reap generous fees—is to use leverage.

Myth 2: Incentive fees encourage managers to perform better.

There are three main ways to rev up a semiliquid fund’s income stream: take on more credit market risk, investment leverage, or both. Most funds start with marketlike credit risk and lean more on leverage to make the economics work.

Managers don’t start collecting incentive fees until they produce a certain level of income, after which more income delivers more fees. In other words, incentive fees encourage more risk. A fund can generate lots of income and collect fat incentive fees, even if its underwriting standards are lax and many of its loans default. (Interval funds can’t charge incentive fees, yet typically have fees as high as vehicles that do.)

The largest nontraded BDCs engaged in direct lending typically use a 1.25% quarterly yield hurdle—5% annualized—and if the fund doesn’t top that, investors pay no incentive fees.

Most private loans currently pay annualized yields of between 8% and 12%—before adding leverage—so 5% is a charade. Most funds also levy “catch-up” fees that allow them to keep every penny of income from the 5% hurdle to 5.72%. The 0.72% catch-up is reverse engineered to approximate what a manager would have received by charging 12.5% of the income up to the hurdle, which is the percentage figure the fund will further collect on income when its yield rises beyond 5.72%.

Private credit funds take this fee model from other private asset sectors, including those like private equity that have tremendous potential upside. However, in corporate credit, where income is the core purpose, the typical incentive fee structure encourages managers to chase more yield and put investors’ principal at greater risk. Savvy underwriting and careful portfolio construction can mitigate those risks, but it’s tough to know when to stop when you get paid to keep going.

Myth 3: You can rely on your fund’s volatility as a useful statistic as you would with any mutual fund.

Benign credit markets, low short-term interest rates, and generous yields have given private credit a goldilocks profile in recent years. Most private loans also carry floating rates, which protects them from interest rate volatility. While most asset managers and their pricing services revisit their valuations at least once a month, private corporate loans rarely trade, which also gives managers a lot of leeway when adjusting their marks.

Firms can get into trouble for not adjusting an individual loan’s price if they know a borrower’s having problems. If there are no credit issues and no one is trading the loans, though, there’s little pressure to change their prices. That makes private debt an alluring target for leverage. Using borrowed money to invest in assets that usually carry little volatility can ratchet up income without causing much turbulence during normal times. That’s a magical mix for a strategy that relies on leverage to fulfill its high-income mission while still levying healthy fees.

Most other loans and bonds in the broader fixed-income universe are priced daily with the help of market inputs, and their price movements can be an important indicator of investors’ collective perception of embedded risks. That indicator is sometimes imperfect, especially in fixed income, but provides an external frame of reference for how risky loans might be. For private loans with prices that rarely move in sync with their underlying risks, though, volatility-driven measures can be almost meaningless.

Myth 4: Stability is the same as safety.

As I’ve mentioned, you really can’t get more yield without taking more risk, and private credit loves leverage. But despite private credit’s low-volatility history, sharp price adjustment from a market squall can eventually feel more like a hurricane to a leveraged investor. A leverage factor of 1:1 debt/equity means that you have a 200% market exposure, or twice as much as if you simply invested your money with no leverage. If the market takes a 7% loss, you feel a 14% kick in the teeth.

Lacking measures that can help highlight that risk ahead of time is a real hazard. Models based on modern portfolio theory are built on price volatility, including data points such as

and the ; the more tenuously an investment’s volatility is tied to its fundamental risks, the less useful those metrics are. That’s especially problematic because they’re a critical input for the methodologies of most portfolio construction tools that generate asset-allocation efficient frontiers, for example. If a fund has yet to endure the kind of trouble that triggers price turbulence, models that reward investments for high returns and low volatility invariably suggest that investors overweight them in a portfolio.

Myth 5: Infrequently pricing your holdings isn’t a problem because prices eventually catch up.

Infrequently updated private credit prices have the potential to produce uneven results for investors. If a portfolio is priced higher than it should be given its underlying risks at the time an investor tenders their shares for repurchase, they’ll effectively be getting more than the shares are worth. Conversely, an investor buying shares at the same time will be overpaying.

Meanwhile, if a lot of investors sell when prices are frothy, forcing the fund to mark its loans down to prices that better reflect the portfolio’s risks, it can bite fund shareholders who stick around.

Myth 6: Private credit funds don’t pose risks to the market because they use so much less leverage than banks.

Breathtaking leverage in the banking sector was a foundational problem during the global financial crisis. Today’s iteration of private credit eventually grew from the ashes by lending to borrowers that regulatory reform pushed the banks to leave behind. When the financial press reports that problems in private credit could sow the seeds of the next crisis, incredulous private credit managers often argue that leverage in their portfolios is a fraction of what banks carried back then—and they’re not wrong.

It’s a false equivalence, though, in part because they don’t need to generate crisis-level damage for trouble to soar. Plenty of other investors and investment vehicles hold private credit too, and their risks are even harder to uncover. It wouldn’t take another full-blown global financial crisis to inflict a world of hurt. Big losses in a single fund or other pools of private debt don’t have to be catastrophic to foster big problems elsewhere. If the values of their private holdings tumble, large investors with other obligations might be forced to sell more liquid holdings to meet them. That could stir volatility in sectors far away from private credit. Similar chain reactions have happened before.

Myth 7: There’s nothing to worry about as long as a private credit fund can meet its redemption requests.

Investors’ redemption requests have often exceeded their funds’ quarterly redemption caps over the past year. Many private credit managers have assured shareholders that their funds can handle that pressure because they have plenty of liquidity to meet ongoing requests. They often cite the number of quarters’ worth of maximum redemptions they can handle if investors keep asking for their cash back.

In addition to cash, though, most managers include more easily traded holdings like syndicated bank loans or bonds in their liquidity definition. They also include money their funds can still borrow in the bond market or from other creditors in order to pay back investors. Using borrowed money to meet redemptions instead of selling assets increases leverage, which could make funds a lot riskier.

Myth 8: OK, this one’s not really a myth, but it is a hidden risk.

In addition to their loan portfolios, all the largest private credit funds also have so-called unfunded commitments to lend borrowers money at some point in the future. The funds pick up extra income from fees borrowers pay for a contractual agreement, akin to a line of credit, that funds will lend them money should they need it.

At the end of 2025, unfunded commitments of the five largest nontraded BDCs averaged the equivalent of around 27% of their total net assets. A key risk, however, is that economic pressure or a credit crunch could push numerous borrowers to tap a significant chunk of their open credit lines, and the knock-on effects could be messy. Funds with little cash on hand to lend and few assets to easily sell could wind up borrowing money that they would need to turn around and lend to their own borrowers. That would drive up a fund’s leverage when conditions are getting tough for their borrowers and further increase portfolio risk.