Johnathan Rickman | Blue Vault
Are your clients asking you about private credit? Many of them probably read the same headlines as you and might be expressing concerns about their allocations, both present and future.
Market reactions to recent news events1 and the implications of AI are prompting worries among investors that another financial crisis may be looming, and many of them are backing away from investments involving private credit and lending. Indeed, redemptions are on the rise2 in the credit space.
According to the U.S. Department of the Treasury, a run on credit investments in one country—especially when consumer credit is involved—can impact banks’ resiliency3. After watching what happened with fund-of-fund hedge funds during the 2008 financial crisis4, why does the investment community appear to be repeating the same mistakes?
The answer is simple: many investors and advisors still don’t fully understand how alternative investments work or how credit-focused strategies are designed to weather market swings.
If your clients come to you with questions about investing in private credit, we hope the following can help you educate your clients on this hot-button topic and bring clarity to your conversations about the allocation decisions you make.
Alts and Liquidity
Investments in private credit, real estate, and equity—asset classes outside traditional stocks, bonds, and cash—work to diversify retail investor portfolios and generate potentially higher returns. But these investment options come with risk and are largely illiquid, meaning they aren’t easily converted into cash without incurring a significant loss.
Most “alternative investments” are designed as long-term investments and aren’t intended to be used as a transactional bank account. While “alts” can potentially generate income for investors, they are rarely allocated for that purpose alone. Offerings with limited liquidity like nontraded BDCs and interval funds balance portfolios by differentiating income and preserving investor capital.
Liquidity Perspectives
Liquidity looks different to investment managers, wealth advisors, and investor clients:
- Liquidity for investment managers involves meeting an offering’s stated objective while mitigating risk. Liquidity management can include redemption gating and other efforts to contain operational expenses.
- Liquidity for wealth advisors is all about balancing client needs, securing enough income to address immediate life expenses and market opportunities, while also balancing long-term investments.
- Liquidity for investors involves cash or assets that can be converted into cash.
Interval Funds 101
While most alternative investment vehicles have limited liquidity, newer structures like interval funds periodically offer as a feature to buy back a percentage of outstanding shares at net asset value that ranges from 5% to 25%, with the vast majority at 5% (with a few exceptions at 7.5% or 10%).
Not only do interval funds continually raise capital and reinvest returns in evergreen fashion, but they also offer low investment minimums, 1099 tax forms, and trading on close-end fund platforms, making them popular with investors. Interval funds have grown into a more than $150.7 billion industry5.
While they sometimes invest in private equity and private real estate, most interval funds consist of actively managed portfolios of private credit securities and distressed debt. And like nontraded BDCs and nontraded REITs, interval funds do not trade on an exchange.
Private vs. Public Credit
In the wake of Dodd-Frank6 and other regulatory reforms, it became more difficult for entrepreneurs and small businesses to secure bank loans. Higher interest rates also exacerbated the phenomenon. To fill the gap, BDCs stepped in as private lenders, and interval fund sponsors developed portfolios of various credit instruments and investments.
Some of these credit investments include:
- Senior secured loans: loans secured by a company’s assets
- Mezzanine debt: a hybrid form of financing below senior debt but above equity
- Structured credit: pools of debt obligations with similar collateral or risk profiles
- Specialty finance: a form of financing that caters to businesses’ specific needs
- Unitranche loans: loans backed by a company’s credit profile
- Asset-based lending: loans secured by a company’s assets
- Distressed debt: securities of governments or companies in financial trouble
Asset managers employ different strategies when developing alternative investments, with the idea that the strategy not only supports the investment’s value, but that the investment can also help balance other allocations in an investor’s portfolio, depending on their goals.
Diligence and Allocation Advocacy
Talking to Sponsors
While markets and investor sentiment always change, analyzing an investment’s performance and approach to liquidity is ever important. This analysis should also include performing qualitative and quantitative due diligence that goes beyond the numbers. And assessing the sponsor’s transparency, track record, and approachability remains crucial. Ask sponsors:
- How do you manage liquidity in your offering?
- How does the offering’s strategy work to manage market risk?
- How do you believe the offering can complement my client’s other investments?
Talking to Clients
So, what do you say to clients when redemption queues start lining up around the corner?
To begin with, it’s important to explain how credit-focused investments like interval funds are actively managed and designed to manage market fluctuations around the strategic portfolio the investment employs.
When private credit markets experience turmoil, interval funds’ liquidity opportunities may not satisfy every investor. Since repurchasing is done on a pro rata basis, there is no guarantee that an investor can redeem the desired number of shares during a given redemption period. But this is all by design to protect the investor.
For instance, if such an offering were to liquidate a large amount of its debt-related assets to satisfy investor demands—something that is not easy for sponsors to do and that must be done strategically—it could dramatically lower the value of the fund’s portfolio, leading to potentially negative impacts on the investor’s portfolio. That could potentially include lower returns and/or loss of capital.
Here are some other things you could say to clients about your allocation decisions:
- Reinforce the long-term investment rationale for alternative investments.
- Pass along some of the information that sponsors have provided to you.
- Remind them of the strategy that you employ in crafting portfolios around a mix of solutions, asset classes, structures, capitalizations, and strategies. If you manage portfolio risk by allocating to alts at a level far lower than to other solutions, say at 5%-10%, then let them know.
Regulations put in place in the wake of the 2008 financial crisis have spurred new product innovations and approaches to risk management in the private credit space. But clearly there’s more work to be done to educate investors. Bookmark Blue Vault’s website to stay up to date on the latest industry news, product developments, and performance data on alternative investments.
References
1 Fallout from First Brands bankruptcy ripples through credit markets – InvestmentNews, October 10, 2025
2, 5 Interval Fund Fundraising Grows as Redemptions Rise – Blue Vault, February 17, 2026
4 The 2008 Financial Crisis Explained – Investopedia, November 25, 2025
6 Dodd-Frank Act: What It Does, Major Components, and Criticisms – Investopedia, February 1, 2025
