Private credit funds have grown in popularity over the past few years. Marketed as a way to earn steady income, reduce volatility, and diversify beyond traditional stocks and bonds, these strategies found a receptive audience during a period of rising interest rates and strong demand for yield.
But last year offered a meaningful test of how these products behave when conditions shift.1
According to recent disclosures and reporting, several large private credit funds received redemption requests above their quarterly limits at the end of last year. In most cases, about 5% of fund assets were requested for withdrawal in a single quarter. This is a relatively high figure.
For investors who may not be familiar with these products, private credit funds, particularly business development companies (BDCs), typically lend to midsize companies with below-investment-grade credit ratings. The income they generate, and distribute to investors, comes largely from interest payments on those loans. When short-term interest rates rose sharply in 2022 and 2023, yields followed. Many private-credit strategies were distributing income north of 10%, making them especially attractive to income-focused investors.
But that relationship works both ways.
As interest rates stabilized and began to ease, loan yields tend to fall in lockstep. The result: several large private-credit funds have already reduced dividends, which has created a stir amongst investors (and also helps explain high distribution rates).
The numbers tell the story. Total returns from five of the largest private credit funds aimed at individual investors averaged about 11.4% in 2023, fell to roughly 8.8% in 2024, and declined further to around 6.2% in the first nine months of 2025. Those returns are still positive, but they are meaningfully lower than many investors had come to expect based on recent history.
But here’s the big issue. When investors see falling yields and attempt to shift their income strategy or move their money elsewhere, many realize for the first time that they cannot access all of their money. Many private credit funds are “semi-liquid,” meaning investors can request redemptions quarterly, but at a capped rate—often at 5% of fund assets per quarter, or 2% per month.
During periods of calm, redemption limits may not be much of an issue for long-term investors. But during periods of uncertainty and/or falling yields, they suddenly matter a great deal.
Limited liquidity and income variability can easily clash with the expectation of stability. For institutions with long-dated liabilities and stable capital, these limits are well understood and planned for. But limits don’t always align with the financial realities of individuals, who may need access to cash for healthcare expenses, tuition, or unexpected life events.
We saw a similar dynamic play out several years ago in private real estate, when redemption requests surged and funds were forced to restrict withdrawals. The lesson then, and now, is that liquidity constraints are not necessarily a flaw in these products. They are a feature. They allow managers to avoid forced asset sales and protect long-term investors. But they also require investors to plan carefully for near-term cash needs elsewhere.
None of this means private credit is “bad” or unsuitable in all cases. But it does mean the trade-offs are very important for investors to acknowledge and understand, and they become highly relevant precisely when conditions are less favorable.
Bottom Line for Investors
At this moment, the recent uptick in private credit redemptions does not constitute a crisis. But it does serve as an important reminder.
Private markets can play a role in diversified portfolios, but they demand a clear understanding of how returns are generated, how income can change, and when capital can realistically be accessed. Liquidity constraints become most important when markets turn choppy.
As efforts continue to broaden access to private investments, education matters more than ever. Investors should ask not only what a strategy offers when conditions are ideal, but how it behaves when expectations shift.
1 Wall Street Journal. January 21, 2026, https://advisor.zacksim.com/e/376582/-bc1e8cbc-mod-livecoverage-web/5v31n8/1448452501/h/yiEtBIn2YzHEb4yy6d38GViOVcfZY_n9dzfHx-EajoE
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