Key Takeaways
- • Semi-liquid private credit funds, which grew from $10 billion in net assets in 2019 to $300 billion by end-2025, are facing run-like redemption pressure, according to a Wharton and Drexel University paper titled "The Fragility of Semi-Liquid Private Credit Funds."
- • Blue Owl Capital Corp II and Blue Owl Credit Income Corp. received redemption demands equal to nearly 22% and 40% of shares outstanding, respectively, far above the 5% quarterly cap.
- • In Q2 2026, repurchase outflows from semi-liquid BDCs reached $7.1 billion while issuance inflows fell to $3.8 billion, producing aggregate net outflows for the first time in the sector's history; $10.7 billion of requests were gated.
- • Semi-liquid BDCs hold average cash of only 5.5% of TNA and net investment income of about 2.5% of TNA per quarter, well short of 5% quarterly redemptions.
- • Software exposure, which makes up roughly a fifth of semi-liquid fund loans, is a central source of stress as AI agents threaten SaaS borrowers, raising the risk of a leverage-redemption doom loop.
Summary
A new paper, "The Fragility of Semi-Liquid Private Credit Funds," authored by Drexel University finance professor Chuck Fang and Wharton finance professors Itay Goldstein and Yao Zeng, finds that semi-liquid private credit funds are under significant stress. The global private credit industry has reached $3.5 trillion in assets under management, and semi-liquid funds are its fastest-growing segment. Software firms account for about a fifth of their loans, and the paper describes a "software crisis" as AI agents threaten SaaS companies and lead to sharp upward revisions in borrower default probabilities.
The business development companies (BDCs) operating these funds are "heavily exposed to software companies," the paper states, and are expected to mark down their illiquid loan values. Many semi-liquid BDCs, including some sponsored by large investment banks, have faced unusually large redemption requests. Blue Owl Capital Corp II and Blue Owl Credit Income Corp. received demands equal to nearly 22% and 40% of shares outstanding. Funds managed by Blackstone, BlackRock, and Apollo Global Management have also received repurchase requests exceeding the 5% cap. The authors analyzed regulatory filings from 52 semi-liquid BDCs between Q1 2024 and Q2 2026 and conclude the redemption pressure is industry-wide and has reached run-like proportions.
The paper identifies structural weaknesses. The 5% quarterly redemption cap does not help when funds cannot raise enough from new issuances or cash reserves to meet even capped redemptions. Semi-liquid BDCs hold cash equal to an average 5.5% of TNA, net investment income averages 2.5% of TNA per quarter, and income from maturing loans is under 0.5%. Because registered investment companies must distribute at least 90% of investment income, little is retained to cover redemptions. Loan sales are also constrained: about 80% of loans are unrated, and fewer than 20% are held by ten or more fund families, so forced sales would trigger fire-sale discounts.
The paper warns that stale or inflated NAVs compound the problem, allowing redeeming investors to exit above true economic value at the expense of remaining holders. When outflows rise, BDCs increase net debt issuance, with each percentage point of net outflows associated with 0.38 percentage points of added net debt. The authors describe a "leverage-redemption doom loop" in which weaker inflows, loan sales, and borrowing feed back into further redemptions. Zeng said the findings bear on retail access to private credit, and the paper states that retail investors need to understand the true costs and risks, particularly as the U.S. Department of Labor proposed a rule in March 2026 encouraging 401(k) plans to allocate to alternative assets, including semi-liquid private credit funds.
The business development companies (BDCs) operating these funds are "heavily exposed to software companies," the paper states, and are expected to mark down their illiquid loan values. Many semi-liquid BDCs, including some sponsored by large investment banks, have faced unusually large redemption requests. Blue Owl Capital Corp II and Blue Owl Credit Income Corp. received demands equal to nearly 22% and 40% of shares outstanding. Funds managed by Blackstone, BlackRock, and Apollo Global Management have also received repurchase requests exceeding the 5% cap. The authors analyzed regulatory filings from 52 semi-liquid BDCs between Q1 2024 and Q2 2026 and conclude the redemption pressure is industry-wide and has reached run-like proportions.
The paper identifies structural weaknesses. The 5% quarterly redemption cap does not help when funds cannot raise enough from new issuances or cash reserves to meet even capped redemptions. Semi-liquid BDCs hold cash equal to an average 5.5% of TNA, net investment income averages 2.5% of TNA per quarter, and income from maturing loans is under 0.5%. Because registered investment companies must distribute at least 90% of investment income, little is retained to cover redemptions. Loan sales are also constrained: about 80% of loans are unrated, and fewer than 20% are held by ten or more fund families, so forced sales would trigger fire-sale discounts.
The paper warns that stale or inflated NAVs compound the problem, allowing redeeming investors to exit above true economic value at the expense of remaining holders. When outflows rise, BDCs increase net debt issuance, with each percentage point of net outflows associated with 0.38 percentage points of added net debt. The authors describe a "leverage-redemption doom loop" in which weaker inflows, loan sales, and borrowing feed back into further redemptions. Zeng said the findings bear on retail access to private credit, and the paper states that retail investors need to understand the true costs and risks, particularly as the U.S. Department of Labor proposed a rule in March 2026 encouraging 401(k) plans to allocate to alternative assets, including semi-liquid private credit funds.
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