Private credit is coming for your 401(k) (along with private equity), and in my series Private Equity Is the Next Big Thing Coming for YOU, I work to make sure that you are ready for its arrival.
Another question is: Is private credit ready for you? In a recent study performed by Chuck Fang (Drexel University), Itay Goldstein (UPenn), and Yao Zeng (UPenn), the authors found that private credit funds were not necessarily liquid enough for retirement investors. They concluded:
In this paper, we study semi-liquid private credit funds, which occupy an important middle ground between closed-end and open-end funds. They do not offer daily liquidity, but they still promise investors periodic liquidity at NAV while holding highly illiquid assets. Using novel regulatory filing-based data on semi-liquid BDCs, we show that this design can generate fragility even when redemptions are infrequent and quantity-limited. Cash buffers, retained investment income, and maturing loans are not sufficient to make 5% quarterly redemptions costless. Inflows decline when outflows rise, making new capital least reliable when liquidity is most needed. When funds face net outflows, they sell loans, including illiquid loans, increase borrowing, and delay payments through repurchases payable. These responses transmit redemption pressure to private credit asset mar kets and weaken funds’ future balance-sheet capacity. They also create strategic complementarity among investors, as redemptions by some investors impose liquidation, leverage, and dilution costs on those who remain. The central lesson of this paper is that redemption gates and quarterly caps do not eliminate the fundamental trade-offs associated with liquidity transformation. They cap immediate withdrawals, but the costs of meeting those withdrawals may reappear through asset liquidation, leverage, delayed payments, and dilution borne by remaining investors.
Our findings are informative for the future design of retail access to private markets. Recent proposals to include private credit and other private assets in retirement plans often emphasize the benefits of diversification and expanded access, but they also require mechanisms that provide at least some liquidity to investors. Our evidence suggests that the design of this liquidity is critical. Caps, gates, and periodic repurchase windows can limit immediate withdrawals, but they do not by themselves remove the underlying costs of transforming illiquid private assets into liquid investor claims. As private credit becomes more accessible to retail investors and retirement savers, fund liquidity terms, leverage, valuation practices, and delayed-payment mechanisms should be evaluated jointly. Expanding access to private markets is not only a question of who can invest, but also of how liquidity is promised, priced, and ultimately provided in stress.
Action Line: If you can’t turn an investment back into money you can use, how much is it really worth? And for the funds, when you tell investors one thing, and it turns out not to be exactly the truth, that’s not a great place to be. When you want to talk about your retirement, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
