Private Credit for Founders: Yields, Risks, and the Liquidity Reality

Family offices doubled their private credit holdings in one year. Now the asset class is having its first real stress test.

The UBS Global Family Office Report 2025 showed holdings jumped from 2% in 2023 to 4% in 2024, with plans to push toward 5%. That made private credit the fastest-growing allocation in their entire survey. The survey covered 317 family offices, each managing about $1.1 billion.

Then, in February and March 2026, the gates began to close.

What Just Happened

Blue Owl permanently ended quarterly redemptions from its non-traded BDC, OBDC II. The fund sold $600 million in loans — roughly 34% of its portfolio — and switched to periodic capital distributions. Investors can no longer request withdrawals on demand.

Blackstone's $82 billion BCRED fund saw record redemption requests of 7.9% in Q1 — roughly $3.8 billion, well above the standard 5% cap. The firm raised its tender offer to 7% and injected $400 million of its own capital (including $150 million from 25+ senior leaders) to meet 100% of requests.

Then on March 6, BlackRock's $26 billion HPS Corporate Lending Fund (HLEND) activated its redemption gate for the first time in the fund's history. Investors requested 9.3% of shares. The fund paid out $620 million — the 5% cap — and restricted the rest.

Three of the largest non-traded BDCs. Three different responses. One common thread: investors wanted out faster than the structures were designed to allow.

The catalysts were stacking for months. First Brands Group filed for Chapter 11 in September 2025 with billions in hidden debt. Tricolor executives were charged with fraud in December. Software companies — roughly 19-25% of private credit portfolios — face growing questions about AI disruption. And broader market anxiety from geopolitical conflict and weakening jobs data pushed sentiment further.

None of this means private credit is broken. The core mechanics — bank retreat from mid-market lending, attractive floating-rate yields, genuine illiquidity premium — remain intact. BCRED still reports 9.8% annualized returns since inception. HLEND's portfolio is 95%+ senior secured. The gates are functioning as designed.

But the timing matters. Anyone evaluating private credit right now needs to understand both the long-term thesis and the short-term reality.

What Private Credit Actually Is

Private credit refers to lending to companies outside banks. Rather than issuing public bonds or taking out a bank loan, a company borrows directly from a private lender. The lender might be a fund, a business development company (BDC), or a focused manager.

Think of it this way: investors become the bank. Money gets lent to companies. Interest comes back. At maturity, principal returns. Most loans have floating rates, so yields move with benchmarks like SOFR.

But private credit isn't one thing. The strategies range widely in both risk and return.

Direct lending is the heart of the market. These are loans to mid-sized companies, often backed by private equity firms. The loans sit at the top of the stack. If things go south, they get paid first and lose last. This is where most family offices put their money.

Mezzanine debt ranks below senior loans but above equity. Yields run higher (often 12-15%+), but the safety cushion is thinner. When trouble hits, mezzanine holders feel it sooner.

Distressed and special situations mean buying troubled debt cheaply or lending to companies in crisis. This takes workout skills and a strong stomach for swings.

Asset-based lending covers loans backed by hard things: equipment, stock, invoices, property, royalties. The risk shifts from cash flow to asset values.

Specialty finance includes niche areas like legal funding, music royalties, plane leasing, and healthcare bills. These often move differently from the wider markets but require deep knowledge to judge well.

Most big investors make senior direct lending a core focus. Then they add speciality plays for variety. The numbers in this piece are mostly from direct lending, unless noted otherwise.

The Middle Market Isn't One Market

A $15 million EBITDA company and a $150 million EBITDA company both count as "middle market." But the risks, returns, and competition look nothing alike.

Lord Abbett's research breaks the middle market into three segments that matter for risk assessment:

Lower middle market covers companies with $10-25 million in EBITDA. These are smaller firms, often with thinner management teams and less financial cushion. Loans here can offer higher yields, sometimes 50-75 basis points above larger deals. But there's more execution risk. These companies have fewer options when things go wrong. Leverage tends to run lower as a result, averaging 4.0x since 2013, compared with 4.6x in the upper market. The trade: better yields and stronger covenants, but companies that can break faster.

Core middle market targets firms with $25-100 million in EBITDA. This segment hits a balance for many investors. Companies are big enough to have real management depth and multiple revenue streams. But they're small enough that the giant funds haven't commoditised the space. Competition is moderate. Covenant protection still matters. Lord Abbett's Steve Kuppenheimer calls it "big enough to offer scale and reliability, but not so large that deals become commoditised."

Upper middle market refers to companies with EBITDA over $100 million. These are large firms, often backed by the biggest private equity houses. The deals compete directly with public bond markets. Pricing gets tighter. Lender protections weaken. PIK features appear more often because borrowers have leverage to demand flexibility. Most of the "bubble" concerns about private credit — and most of the current stress — concentrate here.

The practical lesson: knowing where a manager focuses matters as much as knowing what they do. A fund targeting lower middle market healthcare companies faces different risks than one lending to $200 million EBITDA software firms. Both call themselves "direct lenders."

For first-time allocators, core middle market exposure through a broad BDC or interval fund is the most common starting point. The segment offers the clearest risk-adjusted picture without the compressed spreads of the biggest deals.

Why the Long-Term Thesis Holds

Three structural forces support private credit beyond the current stress test.

Banks Aren't Coming Back

The rules that pushed banks out of mid-sized lending haven't eased up. A Federal Reserve study from May 2025 shows how banks now lend to private credit funds rather than compete with them. It pays better to fund the funds than to make the loans directly.

This isn't a cycle. The shift looks here to stay.

Base Rates Make Yields Work

When SOFR was near zero, private credit yields depended solely on the spread. Today, with SOFR around 4.3%, all-in yields on senior loans run 10-12%+ without taking wild risks.

Hamilton Lane data show the forward SOFR curve points to a 200-300 basis-point higher yield than in the decade before 2022. The 3-month term SOFR hit 431 bps as of March 2025, with forward targets between 3.6% and 4.1% over the next decade. Compare that to the pre-2022 decade, when LIBOR averaged below 1%.

Even with rate cuts, zero rates aren't coming back.

Lockup Premium Persists

Private credit earns 150-200+ basis points over similar public bonds. Morgan Stanley shows direct lending kept roughly 200 basis points of extra spread over new single-B bank loans through late 2025.

The Cliffwater Direct Lending Index (CDLI), the main benchmark for U.S. mid-market debt, returned 10.06% in the year through Q2 2025. Credit losses came in at 0.75% per year, well below the 1.01% long-term average.

Compare that to high-yield bonds, which have yielded around 5.5% with 1.49% annual losses over the past 20 years.

Where Private Credit Sits in the Risk Range

Private credit falls between investment-grade bonds and private equity. Knowing where helps with sizing.

Lower swings than public credit. The CDLI has shown less bounce than both high-yield bonds and bank loans over the past decade. Part of this comes from real safety features, such as covenants and sponsor backing. Part comes from quarterly pricing rather than daily marks. The calm isn't fake, but it's also not as smooth as the charts suggest.

Better returns for the risk taken. Morgan Stanley data shows direct lending beats high-yield bonds and bank loans on a risk-adjusted basis across many markets. During seven periods of rising rates since 2008, direct lending returned 11.6% per year on average, two points above its normal. Even in Q4 2024, with the Fed cutting rates, direct lending posted 10.5% returns, beating both high-yield and bank loans.

Credit risk is real. Default rates in direct lending now run about 1.45% (trailing year through mid-2025), versus 3.37% for broadly sold bank loans. The gap reflects better loan terms and sponsor involvement in private credit. But defaults do happen, and losses show up during downturns.

During the 2008 crisis, direct lenders marked assets down more than 16% by year-end. Actual losses peaked at 9.3% through Q1 2010. Painful, but less than the marks feared. The market has faced five distinct credit cycles: the 2008 crash, European banking stress, energy sector pain, COVID, and the 2022 rate shock. It held through each, though every cycle taught new lessons.

The J-Curve Issue

Private equity's J-curve, in which returns turn negative early before bouncing back, gets a lot of airtime. Private credit has a version too, but it's smaller and shorter.

The main drag comes from fees and slow deployment. Money gets pledged, called over 12-18 months, and fees run on the full pledge (not just what's invested) during ramp-up. Returns look thin until the full pot is working and throwing off income.

Closed-end private credit funds tend to show normal returns in years 2-3. That's much faster than PE's 4-6 year path. Income starts flowing right away on deployed cash, which softens the dip.

Evergreen and semi-liquid funds have mostly killed the old J-curve. Money goes in, lands in a ready portfolio, and income starts within the first quarter. The trade-off is buying into existing loans rather than building fresh.

For investors with real cash to put to work, the J-curve points toward either evergreen structures or spreading across vintage years when using closed funds.

Access Routes by Wealth Level

Access to private credit has opened up, but quality varies a lot.

Quick Reference: Access Routes Compared

Note: Yields are gross. Costs vary by manager. Actual returns depend on market conditions and manager skill.

Public BDCs: The Liquid Starting Point

Congress created business development companies in 1980 to funnel money to small and mid-sized firms. Public BDCs trade on stock exchanges. They offer daily liquidity and dividend yields in the 9-12% range.

The VanEck BDC Income ETF (BIZD) provides broad exposure to the largest public BDCs. Ares Capital, the largest at roughly $24 billion, has weathered several storms since 2004.

Public BDCs allow daily exit but with price swings — and right now those swings are pronounced. During March 2026, public BDC stocks have been trading at meaningful discounts to book value, with some names off 20-40% year-to-date. In previous stress episodes, such as COVID, good BDCs briefly traded at 30%+ discounts. Both credit health and market sentiment affect the price. Loans might be stable while shares drop 15%.

For many allocators, public BDCs work as a test drive or a liquid slice within a bigger private credit plan. They build familiarity with the asset class without a full lockup. And at today's discounts, some argue the risk-reward has actually improved for patient capital.

Non-Traded BDCs: The Stress Test in Real Time

Non-traded BDCs give access to top-tier loan books without daily price swings. Blackstone's BCRED ($82 billion including leverage) and BlackRock's HLEND are the biggest names.

Entry often starts at $2,500 to $25,000. Well within reach for wealthy investors.

These funds buy the same types of loans as public BDCs but price quarterly at net asset value rather than daily market sentiment. Applications go in monthly. Buyback programs (usually quarterly, capped at 5% of shares) offer some exit.

The March 2026 events showed exactly what "capped at 5%" means in practice. When HLEND received 9.3% in redemption requests, it paid out 5%, leaving the remaining 4.3% to investors. When BCRED hit 7.9%, Blackstone raised the cap and injected firm capital to meet 100% of requests — a show of confidence, but also a sign of how much pressure the model was absorbing. Blue Owl's OBDC II went further, ending the quarterly tender process entirely.

BCRED still reports strong fundamentals: 9.8% annualised return since 2021, a 95% senior-secured portfolio, and a 0.08% yearly loss rate over two decades in North America. The numbers suggest the underlying credit is performing. The stress is in the structure, not the loans.

This distinction matters. Non-traded BDCs are designed for investors who can tolerate quarterly liquidity with occasional delays. The current episode is the first major test of whether that design holds under real pressure. So far, the loans are performing. The investor psychology is not.

Interval Funds: The Focused Route

Interval funds open doors to private credit plays that don't fit the BDC mold. Cliffwater's Corporate Lending Fund (CCLFX), with over $30 billion in assets and roughly 4,000 loans, offers broad direct lending access at lower fees than most peers.

The interval setup means buying can happen at any time, but selling only in set windows (usually quarterly). Exit requests can face caps if too many pile up. This is a real limit that needs to be grasped before money goes in.

Funds like Cliffwater Enhanced Lending Fund (CELFX) tap into specialty areas like royalties, equipment leasing, and legal finance. These throw off returns that move on their own path from regular credit.

Interval funds tend to suit money that won't be needed for 3-5+ years and where manager focus matters more than big brand names.

Private Funds: The Full Pledge

Old-school private credit funds — closed-end vehicles from shops like KKR, Ares, HPS, and many others — offer the deepest access but ask the most in return. Entry often starts at $250,000 and can run $1 million+ for flagship funds.

Money pledges get called over 18-36 months, pay out as loans wind down, and return when the fund wraps (typically 5-7 years). The lockup is real. Secondary markets exist, but often mean selling at steep discounts.

The upsides: manager skin in the game through profit sharing, access to the full deal menu, including big loans and custom terms, and no forced limits on focus or leverage.

For founders with $20M+ building a serious alternatives book, private funds are a good fit. Below that level, the pledge size versus total wealth creates concentration risk that defeats the spreading benefit. The portfolio construction chapter of the Family Office Playbook covers how to size these commitments relative to overall wealth.

Major Players and What They Focus On

The private credit world has dozens of managers, but a handful dominate. Knowing their angles helps with picking.

Blue Owl Capital runs one of the largest direct lending platforms with over $150 billion under management. Their focus sits in upper-middle-market companies, primarily sponsor-backed. The public BDC (OBDC) trades on NYSE, while OBDC II was their non-traded vehicle — now in wind-down after the February 2026 redemption freeze. Blue Owl's challenges are instructive: OBDC trades at a significant discount to NAV, and the firm faces a shareholder lawsuit alleging it failed to disclose redemption pressure. Average borrower EBITDA runs $229 million in their portfolio — firmly in the upper market where stress is concentrating.

Golub Capital targets the core middle-market with over $85 billion in capital under management. Their public BDC (GBDC) has operated since 2010, focusing on sponsor-backed, first-lien loans. The firm emphasises what it calls "one-stop" lending: acting as the sole or lead lender rather than participating in club deals. This gives more control over terms but concentrates risk in individual names.

Ares Capital (ARCC) is the largest publicly traded BDC at roughly $24 billion. The portfolio spans middle-market and larger deals across diverse industries. Ares runs both traded and non-traded vehicles, giving investors options by liquidity preference. Their European fund (Ares Capital Europe VI) closed at €17.1 billion in 2025, one of the biggest private credit raises ever.

Main Street Capital (MAIN) stands apart as internally managed, meaning no external manager collects fees. The structure aligns costs better with shareholders. Main Street also takes equity stakes in many borrowers, which creates upside but different risk. Dividend composition varies more as a result, with some quarters showing meaningful capital gains rather than pure interest income.

Hercules Capital (HTGC) focuses specifically on technology and life sciences lending. This niche means higher growth borrowers, but also more volatile outcomes. The warrants and equity kickers they often receive can boost returns when portfolio companies succeed. Given the current AI disruption concerns around software borrowers, tech-focused lenders like Hercules deserve particularly careful scrutiny.

Cliffwater runs interval funds rather than BDCs, with the Corporate Lending Fund (CCLFX) being the largest at over $30 billion. Their approach aggregates loans from multiple originators rather than sourcing directly. Fees run lower than most peers. The Enhanced Lending Fund (CELFX) adds specialty finance exposure.

The lesson: manager focus matters. A technology-focused lender like Hercules behaves differently from a broad middle-market player like Ares. Know what angle fits the overall portfolio before picking.

Tax Considerations: What Actually Lands in Your Pocket

Private credit income is subject to tax treatment that varies by structure. The differences can shift after-tax returns by 2-3% per year. Worth understanding before money goes in.

BDC Dividends: Mostly Ordinary Income

BDCs must distribute at least 90% of taxable income to maintain their tax status. These payouts hit shareholders as dividends, but not the good kind.

Most BDC dividends count as non-qualified ordinary income, taxed at the investor's top marginal rate (up to 37% federal, plus state, plus the 3.8% net investment income tax for high earners). That's a meaningful bite compared to qualified dividends at 15-20%.

The reason: BDCs earn interest income, which passes through in the same character. Interest doesn't get qualified dividend treatment. Some BDCs with equity stakes in borrowers generate portions of capital gains or qualified dividends, but these tend to be small. Main Street Capital shows higher qualified portions than most because of its equity co-invest strategy, but even there, roughly 80% of distributions have historically been ordinary income.

Pending legislation could improve this. The One Big Beautiful Bill Act, passed by the House in May 2025, proposes a 23% deduction for "qualified BDC interest dividends." If enacted, this would cut effective rates for top-bracket taxpayers from 40.8% to roughly 32.3%. But the bill hasn't become law, and tax policy changes frequently. Plan for current rules, not hoped-for ones.

K-1 vs 1099: The Paperwork Split

The reporting structure depends on how the fund is organised.

BDCs and interval funds issue Form 1099-DIV. This is the simpler path. The form shows up by mid-February. Numbers plug into standard tax software. No special filings required.

Private funds structured as partnerships issue Schedule K-1. These arrive late, often in March or even April. The forms are complex, with multiple line items that can affect state filings, passive activity rules, and other obscure corners of the tax code. Many investors need CPA help to process them correctly.

Blue Owl notes that the 1099 structure is a key advantage of BDCs: "One of the most obvious tax differences between the BDC and private credit fund is that BDCs provide tax reporting from 1099s instead of K-1s. K-1s are often received late in the tax season and can be complex to read and understand."

For investors who value simplicity and file their own taxes, the 1099 structure of BDCs and interval funds has real value. For those with CPAs handling everything anyway, the K-1 complexity matters less.

UBTI: The IRA and 401(k) Trap

Putting private credit in tax-advantaged accounts seems smart: shelter high-taxed ordinary income. But there's a catch for certain structures.

Unrelated Business Taxable Income (UBTI) rules apply when retirement accounts invest in partnerships that use debt. If the fund borrows money, which most private credit funds do, part of the income becomes UBTI. When UBTI exceeds $1,000 in any year, the IRA owes taxes at trust rates (up to 37%) and must file Form 990-T.

BDCs are structured specifically to avoid UBTI. Because they're organised as corporations rather than partnerships, their dividends don't trigger these rules. This makes BDCs and interval funds (also organised as corporations) clean choices for IRAs.

Private funds structured as partnerships create UBTI issues. Some use "blocker" structures to solve this, but investors need to confirm before putting retirement money in.

The practical takeaway: for IRA or 401(k) money, BDCs and interval funds are the cleaner path. For taxable accounts, the structure matters less — but the tax drag on ordinary income is worth running the numbers on before committing.

Location Strategy

Given the tax picture, where does private credit fit within an overall structure?

Tax-advantaged accounts (IRAs, 401(k)s) are a common home for BDCs and interval funds. The high ordinary income gets sheltered. No UBTI concerns with corporate structures. Just confirm that any fund uses the right setup before investing.

Taxable accounts work fine too, especially for investors who don't have retirement space available or want the quarterly income for spending. The tax drag is real but tolerable if the gross returns justify it.

Private funds with K-1s often end up in taxable accounts due to the complexity of UBTI. Investors with large taxable pools and CPA support can handle the reporting without much friction.

One more consideration: state taxes vary. California, New York, and other high-tax states can add 10%+ to the federal bite. Founders who've relocated to Texas, Florida, or other no-income-tax states keep more of their private credit returns. This doesn't change the investment thesis, but it affects how much actually stays after the government takes its share. The tax frameworks guide for global founders covers the broader jurisdictional picture.

Regulatory Landscape

Private credit's growth has drawn attention from regulators. The March 2026 redemption wave will likely accelerate that scrutiny.

SEC Oversight of BDCs

BDCs operate under the Investment Company Act of 1940, with SEC registration and reporting requirements. Public BDCs file quarterly reports (10-Q) and annual reports (10-K). Shareholders get full visibility into holdings, leverage, and performance.

Non-traded BDCs face the same SEC registration, but with less frequent pricing and trading. Recent years have seen the SEC push for clearer fee disclosure and better valuation practices. The current redemption pressures will almost certainly prompt further attention to how liquidity terms are marketed to retail investors.

Federal Reserve Attention

The Fed has been studying the links between private credit and the banking system. A May 2025 paper from the Boston Fed warned that banks' growing exposure to private credit funds creates "underappreciated" risks. Large banks' loan commitments to private equity and private credit funds have surged to about $300 billion, up from $10 billion in 2013.

But the Fed's own 2025 stress tests found that private credit exposures don't pose systemic risk to banks. Even under severe recession scenarios with full drawdowns on credit lines, banks stayed above minimum capital requirements. The loss rate on loans to private credit funds came in at roughly 7% in the stress case — painful but manageable.

What Could Change

More data requirements seem likely. Private credit funds don't face the same disclosure rules as banks. Regulators want better visibility into leverage, valuations, and interconnections.

Valuation standards may tighten. When loans don't trade, someone has to decide what they're worth. Different funds use different methods. Pressure for more consistency could affect reported returns.

The current redemption events may also prompt a rethink of how "semi-liquid" products are marketed. Senator Elizabeth Warren has already called for federal stress tests on private credit exposures. Whether that leads to legislation is unclear, but the direction of regulatory travel is toward more transparency, not less.

None of this should change the fundamental investment thesis for individual allocators. But founders should expect the space to professionalise further over the next few years.

Private Credit Secondaries: An Emerging Exit Option

Locked funds create a classic problem: what happens when circumstances change, and you need the money?

The private credit secondaries market has grown to answer this. Volume roughly doubled from $6 billion in 2023 to $11 billion in 2024, per Evercore. Projections point toward $18 billion+ in 2025.

How It Works

Secondaries come in two flavours:

LP-led transactions involve a limited partner selling their stake in a private credit fund to another buyer. The selling LP gets cash. The buying LP steps into their position, receiving remaining distributions and bearing remaining risk. Pricing has improved as the market has matured. Jefferies data shows credit secondaries priced at 92% of NAV on average in H1 2025, up from 91% at the end of 2024.

GP-led transactions involve the fund manager creating a new vehicle to continue holding certain assets. Existing LPs can cash out or roll into the new structure. This has become the majority of deal volume as managers seek ways to hold good loans longer while offering liquidity to investors who need it.

Why This Matters Now

For investors worried about lockup, the secondary market changes the math. A seven-year fund isn't really seven years if there's a functioning exit path at year three or four.

That said, the discounts are real. BlackRock notes that credit secondaries trade at meaningful discounts to NAV, though smaller than equity secondaries. Selling early still means leaving money on the table.

The secondary market also creates buying opportunities. Purchasing existing fund stakes at 90-92 cents on the dollar effectively boosts yields. Some family offices have started allocating specifically to secondary strategies for this reason — and with current redemption pressures, secondary pricing may become more attractive for buyers in the coming quarters.

Jean-Baptiste Wautier, whose family office invests from London, told Crain Currency that liquidity management has become central: "Maintaining healthy liquidity is key to avoid either being stuck in a liquidity trap or unable to seize opportunities when they present themselves."

For investors considering locked private credit funds, knowing the secondary market exists provides insurance. It's not a free exit, but it's an exit.

Where Geography Matters

Private credit hasn't grown the same way in every place. Location shapes both chance and risk.

The U.S. market runs deepest and longest. About 60%+ of global private credit sits in North American mid-market lending. The legal tools work well: bankruptcy law, foreclosure steps, and lien rights. Manager skill runs thickest here. For a first stake, U.S.-focused plays give the most data and history to study.

Europe is growing fast. The market there came later but is rising quickly. Ares Capital Europe VI closed at €17.1 billion in 2025, one of the biggest private credit funds ever. European loans often price 25-50 basis points wider than U.S. deals, partly due to the mixed rules across countries. The chance is real, but picking managers matters even more given the legal patchwork.

Asia is early but tricky. Direct lending in Asia is younger, with different legal setups for lender rights and less standard paperwork. Most investors with Asia stakes get it through global managers with local teams rather than pure Asia funds.

For a first stake, U.S. direct lending gives the clearest risk-reward picture. Spreading across regions makes sense once holdings get big enough that manager focus becomes a real issue.

How Family Offices Actually Allocate

The UBS data shows family offices at an average of 4% in private credit, but that hides big swings. Offices with deep alternatives programs often run 10-15%, while others hold nothing.

The Goldman Sachs 2025 Family Office Survey found that the share of family offices with zero private credit exposure fell to 26%, down from 36% in 2023. The asset class has moved from niche to mainstream.

Mary D'Souza, CIO of a single-family office who's executed over $13 billion in transactions, told Prestel & Partner: "We see the most compelling opportunities in lower middle market credit with teams that have a private equity style and operational expertise." Her office keeps roughly 40% in private markets, with private credit as a core piece.

Ali Bayler, managing director at New Republic Partners, which serves multiple family offices, explained to Crain Currency: "A lot of large families that we work with are thinking beyond the short-term noise and looking for how they invest, both in public and private markets and areas where they have high conviction over a longer market cycle."

Clear patterns show up across experienced allocators:

Core in senior direct lending. This makes up 60-80% of total private credit for most family offices. Either through non-traded BDCs, interval funds (Cliffwater), or mixed private funds.

Vintage spreading in private funds. Rather than putting everything in one fund, experienced investors spread across 3-4 fund years. This smooths the deployment path and cuts timing risk. Each year brings fresh stakes as older funds pay out.

Specialty plays for different return streams. Asset-based lending, royalty funds, and other niche areas offer returns that behave differently from regular credit. The stakes run smaller (1-3% each), but the mixing helps.

Liquidity matched to real needs. Offices with ongoing cash needs keep more in public BDCs and liquid options. Those with multi-decade views and little near-term need can lean heavier on locked funds.

A common starting pattern for a $20M portfolio: 5% in a non-traded BDC or interval fund, growing toward 10% over 3-4 years as comfort builds. At $50M+, spreading across 2-3 managers and adding private fund stakes becomes more practical. For a broader context on how private credit fits alongside other alternatives, the 60/40 portfolio analysis covers how family offices are rebuilding their allocation models.

What Can Go Wrong: Lessons from Real Failures

The private credit boom has pulled in money faster than good deals can absorb it. The current stress test is providing real-time lessons alongside the historical ones.

March 2026 Liquidity Test

The Blue Owl, Blackstone, and BlackRock events aren't credit failures. The underlying loans are largely performing. What they reveal is a structural mismatch: retail investors expected more liquidity than the products were designed to deliver, and when sentiment turned, everyone wanted out at once.

The distinction matters. In 2008, mark-to-market losses reflected genuine credit deterioration. In March 2026, the stress is in the wrapper, not the contents. BCRED's portfolio companies have an average EBITDA growth of 10% and improving interest coverage. The issue is that investors saw headlines about fund gates and fraud cases and reached for the exit.

That said, "structural stress, not credit stress" is cold comfort when your money is gated. The lesson: semi-liquid means semi-liquid. Plan for the possibility that the exit won't be available when wanted.

Software/AI Risk Factor

Roughly 19-25% of private credit portfolios are exposed to software and technology borrowers. This sector now faces specific pressure from AI disruption. UBS has modelled scenarios where default rates in AI-exposed software loans could hit 13%, versus 4% for high yield broadly. Roughly $25 billion in speculative-rated software loans are trading below 80 cents on the dollar.

This doesn't mean every software loan is impaired. But managers with heavy technology concentration — like Blue Owl's OTIC fund, which saw 15% redemption requests — face pointed questions about how AI reshapes their borrowers' competitive positions.

For allocators evaluating managers, technology exposure is no longer a routine question about sector allocation. It's a specific risk factor that deserves its own due diligence.

J. Crew Trapdoor

In 2016, J. Crew's private equity owners found a clever hole in their loan papers. They moved 72% of the company's brands, worth $250 million, to a new shell company in the Cayman Islands.

The trick, mapped out by Yale Law Journal, used a clause meant for overseas tax planning. By moving the brands outside the loan's reach, the company could borrow against them fresh while the old lenders lost their grip on the firm's most prized assets.

The phrase "getting J. Crewed" entered the private credit lawyer's toolkit. Revlon, Neiman Marcus, and others pulled the same play later.

Noetica data shows that by Q3 2025, 45% of private credit deals had "J. Crew blocker" clauses, up from just 15% at the start of 2023. The lesson: loan terms matter, and borrower lawyers keep getting craftier.

First Brands: When Homework Fails

The First Brands Group crash in September 2025 teaches a different lesson. This Ohio auto parts firm filed for Chapter 11, with debts over $10 billion and billions more in off-the-books financing that investors had badly missed.

Court papers showed the company had $2.3 billion in invoice-selling deals and over $8 billion in debt through linked firms. Probers found invoices that had been doctored — one showed $179.84, later changed to $9,271.25, fifty times higher.

The alleged fraud touched big names. UBS O'Connor had 30% of one fund tied up. Jefferies held over $700 million through related firms. As one lender told Fortune: "You're not paid to do due diligence in this market." That mindset kills returns.

Cambridge Associates, in their November 2025 review, said both First Brands and the related Tricolor bust "failed due to fraud specific to them rather than wider market problems." But the losses were real, no matter the cause.

Warning Signs Worth Watching

Chasing yield. When managers can't find enough good deals at target returns, they face a choice: give money back or lower the bar. Many choose door two. If a fund claims 12%+ returns in a market where quality loans yield 10%, ask hard questions about where the extra comes from.

Weak loan terms. Covenants have gotten softer in recent years. Terms matter most in downturns. Without them, problems surface too late to fix.

Managers who've never seen hard times. The huge growth of private credit since 2015 means many managers have only worked in calm markets. When defaults rise, workout skills shape what comes back.

PIK and non-accrual numbers. PIK (payment-in-kind) lets troubled borrowers skip cash interest by adding to what they owe. PIK use has risen from 6.5% of deals in Q4 2021 to roughly 11% in late 2025. "Bad PIK" (changed mid-deal to help struggling firms) now makes up over half of all PIK per Lincoln data.

Non-accrual rates (loans that stopped paying interest) offer another signal. The industry sits at around 1.8% now. Managers well above this need a closer look.

Old loan risk. Many managers hold loans made when rates were near zero. Those borrowers didn't plan for 5%+ base rates. Interest coverage ratios have dropped from 3x in 2020 to roughly 1.8x in 2025 across the market. Newer loans written at today's rates should perform better than older books.

One family office investor told Crain Currency: "I don't know if it's next year or if it's in 2027, but [a dislocation] will come." He added that "people have gotten too aggressive going into private credit."

Manager Vetting Framework

Before putting money with any private credit manager, these areas deserve scrutiny:

Track record through bad times. Has the manager run through a real credit crunch? What were the actual losses (not marks) during stress? How does their non-accrual rate stack up to benchmarks like the CDLI?

Loan standards. What's their typical loan-to-value? Interest coverage floors? Covenant setup? How have these shifted as the market has got more crowded?

Book makeup. What share is senior versus junior debt? Backed by PE firms or not? Industry mix — and specifically, how much software and technology exposure? Average borrower size? Biggest single loan?

Cost structure. Management fees range from 1.5% to 2% on pledged or net assets. Profit share adds 1-1.5%. Total cost often tops 3%. Know what's being paid and whether the manager earns on gross or net returns.

Skin in the game. Does the manager put real money in alongside clients? What's the team's own stake in the fund? Blackstone's $400 million injection into BCRED during the March 2026 stress is an example of what meaningful alignment looks like. How much staff turnover?

Marking approach. Who prices the loans? In-house teams or outside firms? How often? What's the history between marks and actual results?

Exit rules. For semi-liquid funds, know the buyback setup. Can they cap exits? Under what terms? What happened during the March 2026 events — did they honour requests, raise caps, or gate? The answer tells you what "semi-liquid" actually means for that manager.

Leverage. Fund-level borrowing boosts returns but also losses. Most direct lending funds use 0.5-1.5x leverage. Know where a given manager sits and how borrowing changed through past cycles.

Matching Liquidity to Structure

The lockup premium exists because giving up quick access is uncomfortable. Matching the time horizon to the structure prevents forced selling at the wrong time. The March 2026 events make this section more important than any other in this guide.

Evergreen and semi-liquid funds (non-traded BDCs, interval funds) give quarterly exits under normal times. But gates exist for a reason. During March 2026, multiple funds activated those gates simultaneously. The lesson isn't that gates are bad — they protect remaining investors from fire sales. The lesson is that the money going into these structures needs to be genuinely patient, not "probably patient."

Closed funds lock money for 5-7+ years with thin secondary markets. Early exits often mean 5-15% haircuts; in stress, much more. Only truly patient money belongs here.

Public BDCs allow daily exit but with price swings. Selling can happen any time, but the price might not match the true value. During March 2026, the gap between price and value widened significantly.

A useful benchmark from experienced allocators: keep 50%+ of private credit in structures with quarterly or better liquidity. Save truly locked money for cases where the return premium clearly compensates for the constraint.

Fitting It Into a Portfolio

Private credit works best as a complement to, not a swap for, existing bond holdings. The investment philosophy guide covers the broader framework for building a resilient portfolio during uncertain periods.

The link between stocks and high-yield bonds runs lower (around 0.52 for quality direct lending versus 0.82 for high yield, per Cliffwater data). Duration is short to zero given floating rates. The income beats investment-grade bonds by a wide margin.

In a normal portfolio, private credit can replace part of high-yield and bank loan holdings while adding to total return and maybe cutting swings. The trade: losing the option to rebalance fast.

For founders with large equity stakes or business exposure, private credit offers income without adding stock-market correlation. The cash yield can fund life or other investments while maintaining a wealth-protection lens.

One note: if wealth came from a levered business that could hurt during credit downturns, adding heavy private credit creates linked risk. The business and credit books might both strain at once.

How Experienced Allocators Approach Entry

The current stress test makes the approach question more nuanced than it was six months ago. The underlying credit quality remains strong — defaults are below historical averages, recovery rates are healthy, and the structural tailwinds (bank retreat, floating rates) haven't changed. But the liquidity dynamics have shifted.

Starting small remains standard practice. Most family offices entering private credit begin with 2-3% of total wealth in a single diversified fund — a non-traded BDC or interval fund from a manager with multi-cycle history. Living with the quarterly liquidity and income for a year builds conviction before scaling.

Target allocations vary by wealth level. Among family offices in the $10-50M range, 5-10% is a common target. At $50M+, spreading across 2-3 managers with different angles and loan books becomes more practical.

Public BDC discounts create a timing consideration. With public BDCs trading at meaningful discounts to book value, some allocators are now starting there rather than in non-traded vehicles. The daily liquidity removes the gate risk entirely, and the discount means buying the same underlying loans at 80-90 cents on the dollar. The trade-off: more day-to-day price volatility.

The current environment rewards patience. iCapital and other platforms estimate that the redemption pressures may take 3-5 quarters to normalise. Allocators who wait for the dust to settle may find better entry points as funds stabilise, and any forced selling creates opportunities in the secondary market.

Questions worth asking before any commitment:

• What's the manager's actual loss rate through real cycles?
• How does the fund's non-accrual rate compare to industry averages?
• What share of the book was made in the 2020-2021 zero-rate years?
• What happened to this fund's liquidity during March 2026?
• What share of the portfolio is in software or AI-vulnerable sectors?
• What happens to the money if it's needed in 6 months? 2 years? 5 years?
• What are total costs, including management, profit share, and admin fees?
• Does the manager have real personal money in the fund?

The yields are real. The structural tailwinds are real. And as of March 2026, so is the proof that "semi-liquid" means exactly what it says — liquid some of the time, under some conditions, at the manager's discretion. One investor who spoke to Crain Currency put it well: "I don't know if it's next year or if it's in 2027, but [a dislocation] will come." It came. The allocators who sized correctly and matched their liquidity to their actual time horizon are uncomfortable but fine. Those who treated quarterly liquidity as guaranteed got an education they'll remember.