Troviq Private Markets: Private debt headlines misread market reality

1 mei 2026

Recent headlines surrounding private debt — particularly the gating of redemptions in certain high-profile evergreen or so-called ‘semi-liquid’ funds — have created the impression of a sector facing systemic stress. But do signs like fund-level liquidity pressure, falling dividends on BDCs, and governance disputes really point towards weakening credit fundamentals?

By Jason Proctor

 
A closer look at how the asset class operates shows a simple truth: fund flows and portfolio liquidity are not the same as underlying credit health. Private credit is, by design, an illiquid asset class. These are negotiated, long-dated loans intended to be held to maturity, not instruments traded daily in public markets. The valuation of these loans reflects borrower fundamentals and is typically updated quarterly, not in real time. This means that redemption activity – typically from ‘retail’ investors, who are more sensitive to short term changes in sentiment – does not transmit automatically into changes in NAV. When investors seek to withdraw capital from evergreen vehicles, the fund manager must generate liquidity, but that does not imply anything about the performance of the underlying borrowers.

The recent attention on certain US private credit funds illustrates this disconnect. Redemption requests exceeded the quarterly limits that some products allow, usually around 5% of NAV per quarter. These caps are not an accident; they are an intentional feature that protects both exiting and remaining investors. They ensure that managers are not forced into selling illiquid loans at unfavourable prices simply to raise cash. Where funds have chosen – or been forced – to sell assets, the most telling datapoint is that institutional buyers have been willing to purchase large portfolios of loans at or near par. In one well-publicised case, roughly $ 1.4 billion of senior secured loans were reported to have been sold at 99.7 cents on the dollar. That is not the behaviour of a market discovering hidden credit stress. It is evidence that the loans themselves remain solid and that the headlines relating to private debt funds were driven by sentiment and governance issues, not by a broad-based deterioration in borrower fundamentals.

The headlines relating to private debt funds were driven by sentiment and governance issues, not by a broad-based deterioration in borrower fundamentals.

The liquidity tension instead arises from the structure of certain evergreen products. Over the past several years, the industry has seen strong growth in ‘semiliquid’ funds – vehicles that market themselves as offering easy entry and quarterly liquidity, often up to 20% per year. While attractive to wealth investors, these terms do not always match the natural liquidity of the underlying private loans. Even in a stable credit environment, a portfolio of multi-year loans may not generate 20% annual liquidity. When a surge in redemption requests hits a vehicle with generous liquidity terms, gating is not a sign of credit distress but reflective of a structural mismatch and should therefore be anticipated by investors.

None of this means that private credit portfolios are free of risk. Default rates have normalised following unusually benign conditions in the post-pandemic period. Some borrowers will underperform, especially in sectors where technological disruption is accelerating. SaaS and software names, for instance, have attracted attention because of uncertainty around AI-driven business model shifts. Yet most direct lending exposure to these companies sits in senior secured positions with conservative loan-to-value ratios and significant equity cushions. What should be of primary concern to investors in the asset class is not the individual performance of borrowers or a subset of borrowers; rather, investors should be allocating to the asset class with the expectation of some defaults and building portfolios that can absorb them.

This is where diversification becomes critical. The word is often used casually by investors, but in private credit the mechanics truly matter. If the upside on a loan is capped (being repaid at par plus interest), there is little justification for allowing any single borrower to represent a meaningful share of a portfolio. As an example, a single 5% position in a loan is likely to generate the same return as a hundred 0.05% positions in good times, but could materially damage performance in the event of a default. Portfolios with exposure across hundreds or thousands of borrowers, sectors, and geographies dilute idiosyncratic risk to the level where any single credit event becomes negligible. The recent headlines have, in several cases, referenced funds where a handful of concentrated loans represented several percentage points of NAV.

Private debt remains an attractive source of income and long-term returns, provided that portfolios are constructed with discipline and with realistic expectations around liquidity.

Diversification also mitigates thematic or sector specific risks. While technologyrelated borrowers may experience mixed outcomes as AI reshapes competitive dynamics, the variability of those outcomes is exactly why diversified exposure matters. Some software businesses will benefit from new productivity gains, others may face margin pressure, but senior lenders holding first-lien positions with meaningful equity buffers are structurally protected. Concentration, not sector exposure per se, is the bigger issue.

Taken together, the current environment is better characterised by sentimentdriven fund flows in a relatively small number of high-profile fund structures, rather than by fundamental credit deterioration. Default rates remain manageable and consistent with long-term levels, borrower financials in the midmarket are broadly stable, and loan valuations are grounded in fundamentals rather than in mark-to-market volatility. Liquidity caps in evergreen funds are doing exactly what they were designed to do: preserve portfolio integrity for the long-term investor. And while the narrative surrounding private debt has been dominated by a small number of cases, these should not be extrapolated to be representative of the market as a whole.

For investors, the message is straightforward. Private debt remains an attractive source of income and long-term returns, provided that portfolios are constructed with discipline and with realistic expectations around liquidity. Credit events will occur, as they always do, but they should not surprise investors, and they should not meaningfully impair well-diversified portfolios.

Beyond diversification, fund-level leverage should be the next focus of investors. Understanding how leveraged a fund is, and to what extent that varies over time, could be a key determinant of future outcomes.
 

Read the article in Financial Investigator magazine