Chloe Ladwig/PitchBook News
Every day, it seems, there is news of another business development company facing soaring redemption requests.
The same goes for interval funds—similar but structurally distinct investment vehicles that are also largely backed by retail investors and extend private credit loans to small and midsize businesses.
Some argue that mounting concerns about credit quality have eroded investor confidence in these retail-focused vehicles, prompting a flight to safety. This has largely been triggered by spiking fears about the impact that AI could have on the business models of software companies, major borrowers from BDCs.
Others say that a wave of negative headlines has unnerved skittish retail investors and triggered a run on these private credit funds.
Whatever the catalyst, this episode has brought greater scrutiny to the redemption gate that limits how much capital investors can withdraw during a set period—commonly up to 5% of the net asset value at the prior quarter.
There is nothing special about this number. The first perpetually non-traded BDC adopted the 5% threshold, and others followed suit, according to Fitch Ratings credit analyst Chelsea Richardson. Over time, the figure came to be viewed as a “Goldilocks solution.”
Recent events have tested the assumptions that underpin this number. It has led to the emergence of two groups of fund managers: those sticking rigidly to the 5% limit and those disregarding it to meet rising redemption requests.
These diverging strategies have stirred a debate about how managers should react when they face a spike in redemption requests, and which approach might be rewarded or punished by investors.
BlackRock-owned HPS Investment Partners decided to draw a hard line on its 5% gate, capping withdrawals.
In an investor letter, HPS defended its liquidity framework, saying that “without [the 5% limit], there would be a structural mismatch between investor capital and the expected duration of the private credit loans” in which the fund invests.
On the other side of the debate is Blackstone, which in early March fulfilled a total of $3.9 billion in quarterly redemption requests in its $82 billion private-credit fund, BCRED—approximately 7.9% of the fund’s shares.
The firm even committed around $400 million of its own capital, including the personal wealth of its executives, to a feeder fund in order to fulfill the requests and shore up investor confidence.
The argument for lifting the limit
Some applauded fund managers who fully honored redemption requests, viewing it as a move that helps protect a brand’s reputation.
Last month, when Blue Owl Capital sold $1.4 billion of loans from a BDC to accelerate the return of capital well beyond the 5% limit, analysts at investment bank Piper Jaffray said the asset sale, which was done at close to par pricing, was a sign of confidence in Blue Owl’s ability to meet its redemption obligations going forward.
A former senior risk manager, who oversaw systemic credit and mortgage risk at major banks and a federal regulator, agrees.
“Are you willing to put your neck on the line to defend your franchise and value your reputation, or are you going to hold people to the agreements that they may have naively signed?” he said, adding that lifting the gate also sends a message to investors that the fund is backed by sufficient liquidity.
Those efforts at brand protection matter now as the patience of some retail investors appears to be waning.
A decline in payouts and returns from some semi-liquid vehicles, alongside concerns over growing payment-in-kind (PIK) loans, nonaccruals and software lending, has frightened some who had invested in private credit for the higher yields.
In Q3 2025, about 40% of BDCs tracked by Morningstar reported a quarter-over-quarter decline in net investment income, averaging about 5%, as easing interest rates suppressed yields on the corporate loans they invested in. BCRED, for example, cut its monthly dividend by roughly 9% in October.
Meanwhile, payment-in-kind income, which doesn’t generate any cash payments, also inched higher across the sector. Its share of total investment income rose to 8% for the first nine months of last year, up from 7% in 2024. PIK, as it is known, allows borrowers to defer interest payments and can be a sign that they are struggling to pay.
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And just last week, a BlackRock BDC marked the value of a $25 million loan down to zero. Only three months ago, the fund manager had valued the loan at par. The wipeout at the BlackRock TCP Capital Corp. was another thing that has made investors worried about the health of credit portfolios; if a manager can apply such a radical change to a private credit loan’s value in such a short period, similar write-downs may follow.
One high-net-worth investor likened being in these funds to being stuck in a cab in traffic, the former risk manager said. The fee meter is clocking up, but you are going nowhere.
Moreover, current marketing practices may have given the misleading impression of the illiquidity embedded in these vehicles, said Sonali Basak, chief investment strategist at iCapital, which connects individual investors with private funds.
While an advocate for maintaining redemption limits, Basak argued that the industry has not always been clear about the tradeoffs.
“We think ‘semi-liquid’ is not the best way to tell the story,” she said. “When people hear ‘semi-liquid,’ all they hear is ‘liquid,’ and these are not liquid funds.”
She also suggests fund managers and financial advisers do more to better align investors’ liquidity expectations.
In addition to driving home the true meaning of illiquidity, she believes that investors should be educated on how to assess a fund’s financial health, including how to look for PIK loans. Third-party audits, more frequent communication and daily NAV updates would also go a long way, she added.
The argument against lifting the limit
Others say adhering to the gating mechanism is not a sign of a liquidity shortage, but a way of preserving stability. The 5% limit allows managers to fulfill redemption requests in an orderly manner without being forced into rapid-fire sales of private credit loans, which are hard to liquidate quickly without steep discounts.
Gating the equity can prevent a run on the fund and therefore protect the value of assets held by remaining investors, they said.
“The gates are essential because private market strategies are by their nature long-term buy and hold,” said William Cox, the chief rating officer at KBRA. “Retail investors should know that going in.”
“If you do not want to be part of the investor community in a particular strategy, or invest in a private market investment vehicle anymore, then it may take time to get your money out,” he added. “That’s the reality of the investment thesis.”
Meanwhile, lifting the gate may work as a one-timer, but not something that can be done repeatedly without causing pressure on the portfolio.
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Some BDCs may be compelled to fund tenders by taking on more leverage or selling liquid assets, such as broadly syndicated loans, which certain BDCs may hold alongside illiquid private credit loans, according to Fitch’s Richardson. Funding redemptions by selling illiquid private credit investments is much harder.
“Cash from portfolio repayments, any new inflows, as well as borrowing capacity under credit facilities will be the primary sources of liquidity,” Richardson wrote in an email to PitchBook.
Referring to HPS’ recent move to cap withdrawals at 5%, Richardson noted that other managers will likely take a similar approach in the coming quarters if redemptions exceed that level.
Managers facing redemption requests well above the 5% threshold have an even stronger incentive to cap repurchases rather than honoring them in full. Under the Investment Company Act of 1940, which regulates BDCs, crossing this limit can trigger a mandatory minimum offer period that requires the fund to extend the window and potentially invite further redemptions, though they do have the flexibility to increase the tender limit to 7% without tripping the wire.
Ultimately, the fundamental tension will always be meeting investors’ desire for liquidity in an inherently illiquid asset class.
While this may temper the pace of fundraising in the retail channel, it is more likely a bump in the road rather than a long-term trend, proponents of private credit predict.
An earlier version of this story said that HPS is owned by Blackstone. It is, in fact, owned by BlackRock.
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