Private credit has recently attracted significant media attention following a series of high-profile failures. Concerns have centred on opaque valuations, hidden defaults, conflicts of interest, and a fundamental mismatch between the illiquid nature of private loans and the liquidity expectations of retail investors. Advances in AI have added further uncertainty, particularly around loans to software companies. Despite the headlines, the core issue is structural, not a broad deterioration in credit quality.
What Triggered the Headlines
The current scrutiny traces back to a sequence of events beginning in late 2025:
- September 2025: Tricolor and First Brands, both largely bank-funded, entered insolvency, drawing mainstream media attention to private credit for the first time.
- November 2025: Blue Owl attempted to merge a private fund into its publicly traded equivalent at a 20% discount, raising questions about whether private fund valuations accurately reflect market prices and whether similar mispricing exists across the industry.
- Early 2026: AI-driven concerns about software company viability intensified, prompting questions about the soundness of private credit loans to that sector, given the opacity of fund valuations.
- Retail panic: Redemption surges at Blue Owl’s OBDC II, OBDC, and OTIC triggered gates and halted redemptions, exposing the structural flaw in semi-liquid vehicles.
The Real Problem: Structural Mismatch in Semi-Liquid Funds
The root cause of recent instability is not credit deterioration, but rather a structural mismatch built into semi-liquid (evergreen or non-traded BDC) vehicles. Fund managers marketed these products to retail and wealth investors with promises of “democratisation” and “liquidity” (typically quarterly redemptions). But the underlying assets, long-dated, non-traded secured loans, are inherently illiquid.
Evergreen fund contracts typically cap redemptions at 5% per quarter, prorated if breached. When redemption requests exceed this threshold, driven by sentiment, not credit quality, managers may be forced to sell performing assets at inopportune times. Early exiters effectively transfer value away from remaining investors, leaving them with a diminished portfolio.
This is a structural flaw, not a market failure. Artificial liquidity created artificial expectations. When those expectations could not be met, the instability became self-reinforcing.
Why Closed-End Funds Are the Better Structure
Traditional closed-end funds are simply a better fit for private credit. They feature fixed capital commitments, multi-year lockups (typically 10–12 years), and no ongoing redemption requests. Capital is called gradually, deployed into illiquid loans, and returned through organic realizations over time. There is no structural mismatch, no forced selling, and no gating risk.
Key advantages:
- Full illiquidity premium: Higher yields earned through disciplined, hold-to-maturity deployment.
- True alignment: Asset and liability durations are matched; managers focus on long-term origination rather than managing redemptions.
- No retail-driven runs: Capital cannot be withdrawn on demand, eliminating sentiment-driven outflows.
- Proven returns: Approximately 9–10% annualised over 5–20 year periods, per the Cliffwater Direct Lending Index.
Credit Quality Remains Sound
Despite the noise, underlying credit performance remains resilient. In core direct lending, non-accruals and defaults have remained low. Blue Owl’s flagship OBDC reported non-accruals of approximately 2.3% of cost (1.1% at fair value, late 2025), with assets sold near par at 99.7–99.8%, validating internal valuations. Industry-wide, while some headline default metrics have risen modestly in stressed cohorts, seasoned portfolios report lower fully loaded rates trending down in recent quarters (S&P Global). Recoveries in secured positions remain strong. Isolated cases of fraud, such as Tricolor and First Brands, are idiosyncratic and do not signal systemic weakness.
The chart below illustrates the performance of the Cliffwater Direct Lending Index, reinforcing that patient capital in private credit continues to deliver.
Source: BlackRock; Cliffwater Direct Lending Index
Conclusion
The media narrative around private credit risks conflates structural flaws in a minority of semi-liquid retail products with the broader, well-functioning asset class. Closed-end and buy-and-hold structures remain the gold standard for long-term patient capital. They deliver the full benefits of private credit: higher yields, covenant protections, and strong recoveries, without the liquidity mismatch that has created instability elsewhere.
Investors who understand they are being paid to wait will continue to benefit. The current volatility is a structural warning, not a credit crisis.
About Bond Capital
Bond Capital is an award-winning private credit fund. As a direct lender, Bond Capital provides advice and money across the entire risk curve. Bond Capital secured structured credit financing enables business owners to maintain control ownership in exchange for yield and capital preservation. Across multiple cycles and for over 20 years, Bond Capital has advanced secured investment quality credit to lower middle market companies throughout North America.
