You, as an investor, don’t like to be “stuck.” But that’s the word Peter Rudegeair and AnnaMaria Andriotis use in The Wall Street Journal to describe the investors of the Stone Ridge Alternative Lending Risk Premium Fund. They write:
Investors stuck in private-credit funds are wondering how long they will have to wait to get all of their money out.
One fund offers a cautionary tale: four years and counting.
The Stone Ridge Alternative Lending Risk Premium Fund, also known as LENDX, has limited the amount of money that investors can withdraw for 16 consecutive quarters, according to people familiar with the fund. One wealth manager estimates it could take six more years to get all his clients’ money out of the fund, which specializes in a niche corner of the private-credit world.
As more investors have rushed to exit from the fund, getting money out has gotten harder. In September 2022, LENDX investors received 85% of what they asked for in cash, according to an investor update reviewed by The Wall Street Journal. This month, they got 12%, the people said.
A similar dynamic has started playing out more recently across the private-credit industry because of souring loan performance over the past year and the fear of future defaults, especially among software companies vulnerable to being displaced by artificial intelligence. The exodus of wealthy investors has pressured funds, which typically allow up to 5% of their shares to be redeemed each quarter. That threshold is designed to prevent forced sales of illiquid assets.
Imagine you’re attempting to live Your Retirement Life, and you want to withdraw some money from your 401(k), but you find out that it’s “stuck” in a private equity or credit fund somewhere, and that you can’t take it out.
Among the major countries with defined contribution retirement savings systems measured by a group of researchers from Harvard and Yale working on a paper for the NBER, only the United States hasn’t (so far) made its system “overwhelmingly illiquid before age 55.”
The researchers measured the systems of the United States, the United Kingdom, Canada, Australia, Singapore, and Germany, focusing on employer-based defined contribution plans (for example, 401(k)s in the United States). In their conclusion, they explained:
The United States stands alone with respect to the high degree of liquidity in its DC system. Penalties for early withdrawals are relatively low, even at normal levels of income, and early withdrawals are slightly subsidized as income falls transitorily.
Action Line: Getting to your money is important. You don’t want your money to be “stuck” in your account, either because it’s trapped behind the illiquidity of a private equity or credit fund, or because penalties and regulations make it impossible to withdraw. Be sure you understand any investment you make in your 401(k), and all the rules for withdrawing your money. When you need help, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
Read the entire series here.
