Key Takeaways
- • An early 2025 survey cited by McDermott Will & Schulte found about one-third of family offices intended to increase private credit allocations in 2025 and 2026, the highest among alternative asset classes.
- • The firm characterizes "private credit" as an umbrella spanning direct lending, mezzanine, asset-backed/specialty finance, opportunistic/special situations, distressed, NAV lending, and litigation finance, each available in open-ended, closed-ended, or hybrid fund formats.
- • Hybrid funds carry the greatest risk of overestimating liquidity, as exits can take considerable time depending on terms.
- • Slow-pay redemption mechanics can leave redeeming investors exposed to performance risk, continued fees, and possible follow-on capital calls on sequestered positions.
- • The firm recommends family offices negotiate caps on slow-pay duration, clear disclosure of follow-on obligations, cross-collateralization safeguards, and valuation oversight for illiquid credit.
Summary
McDermott Will & Schulte's analysis, published March 11, 2026, notes that a third of family offices surveyed in early 2025 intended to raise private credit allocations during 2025 and 2026, the highest intent among alternative asset classes. The firm cautions that "private credit" covers a wide range of strategies and structures, and that experience with hedge funds or private equity may only partly prepare investors to evaluate a private credit fund's terms, making significant legal review necessary.
The article outlines three fund structures. Open-ended (evergreen) funds permit periodic subscriptions and redemptions, typically with NAV-based fees, gates and lock-ups, and should hold shorter-duration or refinanceable assets. Closed-ended funds feature commitments, capital calls and fixed investment and harvesting periods, with no redemption rights, and typically target illiquid originations. Hybrid funds combine elements of both, offering flexibility that sponsors can use to pivot in volatile credit markets, but the firm warns investors may over-estimate their liquidity.
On leverage, the firm identifies subscription lines, asset-level debt and NAV facilities as common sources, urging investors to understand usage and covenants. Where sponsors run multiple products, cross-collateralization can cause risk to migrate between vehicles, and investors should seek details of the sponsor's safeguards. For illiquid instruments without screen prices, the article recommends clear valuation policies with notice requirements, independent oversight, performance compensation tied to realized gains, and quarterly valuation memos for material non-performers.
Conflicts of interest arise from affiliate origination, syndication and co-invest allocation, and the firm advises scrutiny of allocation policies, affiliate fee transparency and cross-trade rules. On liquidity, the article highlights slow-pay mechanics, under which a redeeming investor's pro-rata portfolio slice is segregated until realization while fees and follow-on capital calls may continue. The firm suggests negotiating limits on slow-pay duration, clarity on funding obligations and enhanced reporting on distribution timing.
The article outlines three fund structures. Open-ended (evergreen) funds permit periodic subscriptions and redemptions, typically with NAV-based fees, gates and lock-ups, and should hold shorter-duration or refinanceable assets. Closed-ended funds feature commitments, capital calls and fixed investment and harvesting periods, with no redemption rights, and typically target illiquid originations. Hybrid funds combine elements of both, offering flexibility that sponsors can use to pivot in volatile credit markets, but the firm warns investors may over-estimate their liquidity.
On leverage, the firm identifies subscription lines, asset-level debt and NAV facilities as common sources, urging investors to understand usage and covenants. Where sponsors run multiple products, cross-collateralization can cause risk to migrate between vehicles, and investors should seek details of the sponsor's safeguards. For illiquid instruments without screen prices, the article recommends clear valuation policies with notice requirements, independent oversight, performance compensation tied to realized gains, and quarterly valuation memos for material non-performers.
Conflicts of interest arise from affiliate origination, syndication and co-invest allocation, and the firm advises scrutiny of allocation policies, affiliate fee transparency and cross-trade rules. On liquidity, the article highlights slow-pay mechanics, under which a redeeming investor's pro-rata portfolio slice is segregated until realization while fees and follow-on capital calls may continue. The firm suggests negotiating limits on slow-pay duration, clarity on funding obligations and enhanced reporting on distribution timing.
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