Private Credit Solved an Asset-Liability Mismatch—Then Recreated It

Redemption gates are going up across parts of the developed market private credit landscape, as investors seek liquidity from vehicles that promised periodic access to capital. The recent redemption restrictions at several large private credit funds have brought a structural question back into focus.

It is worth stepping back and asking a more fundamental one: How did private credit—an asset class designed to solve an asset-liability mismatch—end up reintroducing one?

The Original Thesis Was Elegant

The intellectual foundation of private credit was sound—arguably one of the cleaner structural insights in modern finance.

Banks fund themselves with short-term deposits and overnight borrowing. They should not be originating long-dated, illiquid loans against that funding base. When they do, the consequences are well documented.

Private credit emerged as the solution: raise committed capital from institutional investors (pensions, endowments, insurance and sovereign wealth funds) that understood illiquidity, accepted it and were compensated for it through a meaningful premium over what they would get for similar credit-risk exposure in public markets.

For years, that model worked precisely as designed. Capital was patient. Returns were attractive. The alignment between asset duration and liability duration was genuine.

Then the Industry Scaled—and the Model Shifted

What changed was not the underlying credit, but the distribution.

As private credit grew from a niche institutional allocation into one of the most prominent segments of alternative assets, managers needed new pools of capital to sustain the industry’s growth trajectory. They found it in wealth management—including registered investment advisers, family offices and individual investors accessing private markets through semi-liquid vehicles such as interval funds, tender-offer funds and non-traded business development companies.

These structures were designed to balance competing objectives.

The underlying assets remained illiquid corporate loans with multi-year durations and limited secondary markets. But the investment vehicles offered periodic liquidity windows, NAV-based pricing and the appearance of accessibility.

The implicit contract of the vehicles was that investors could participate in private credit’s yield premium without fully bearing its illiquidity cost.

The Irony Should Not Be Lost

Parts of the developed market private credit industry have therefore reintroduced the very structural tension the asset class was originally designed to correct.

The mismatch has simply migrated. Instead of sitting on bank balance sheets funded by deposits, it now sits within fund structures supported by capital that expects periodic liquidity, even though the underlying assets cannot reliably provide it.

The incentives that drove this evolution were understandable. The wealth management channel offered enormous scale. Advisers and their clients were seeking yield in a low-rate environment and, later, diversification, as public markets grew more concentrated.

Managers responded rationally to that demand. But rational responses to incentives can still produce structural fragility.

The recent wave of redemption restrictions is not primarily a credit event. Most underlying loan portfolios continue to perform.

It is a liquidity architecture issue—and that distinction matters.

The Emerging Markets Contrast

What makes the current moment instructive is that an alternative model already exists.

Emerging markets private credit developed along a fundamentally different path. The investor base has remained overwhelmingly institutional—allocators commit capital for the life of the investment and do not expect interim liquidity.

That constraint, which may appear to limit growth, turns out to be a structural advantage.

When there is no periodic redemption mechanism, there is no gate risk. The alignment between asset duration and liability duration is not simulated—it is the initial investment premise.

The credit characteristics often differ as well. Emerging markets private credit tends to involve senior-secured, collateralized lending at lower leverage levels than comparable developed-market or middle-market transactions. Structures are frequently U.S. dollar-denominated, removing local currency volatility from the equation.

Because the lending market is less crowded, covenant protections for investors have also eroded less than they have across much of the developed market.

Perhaps most importantly, the return premium in emerging markets private credit reflects genuine illiquidity—because the structure does not attempt to give any of it back through liquidity features.

The Right Question Going Forward

When gates appear, the instinct is to focus on the immediate: which funds are affected, how much capital is involved and whether contagion might follow.

Those are reasonable questions.

But the more important conversation concerns what comes next for private credit as an asset class and whether the distribution model that drove its extraordinary growth is sustainable in its current form.

Private credit in emerging markets will not grow to the scale of the industry in developed markets, nor should it try. But it does offer something that the current moment has revealed to be scarce: a model in which illiquidity is explicit, acknowledged and priced from the outset rather than layered over with structural features designed to soften it.

As investors reassess private credit allocations, the more important question may not be which funds are gating, but which structures were never vulnerable to gates in the first place.

Robert Koenigsberger is the managing partner in and CIO of Gramercy Funds Management.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

More on this topic:

	Private Credit Grapples With Sustained Investor Skepticism
	Risk Factors Are Rising in Private Credit, Performance Harder to Predict
	How Has Private Credit Affected Valuations Across Debt Markets?

Tags: market risk, Private Credit