Liquidity in private credit: separating promise from practice

Liquidity has become a central focus for advisers as interest in private credit continues to grow globally. While many funds promote regular redemption or withdrawal options, understanding the mechanisms that support these features is essential for setting realistic client expectations and managing liquidity risk.

Liquidity is now one of the most closely examined aspects of private market investing – and for good reason. As clients seek additional sources of income and diversification beyond traditional fixed income, questions around access to capital and liquidity risk have rightly moved to the forefront. In its September 2025 Private Credit in Australia report, regulator ASIC warned that:

For advisers and clients, the priority is not only to understand what level of liquidity a fund offers, but also how that liquidity is generated, what supports it, and under what conditions it may become constrained.

Liquidity in private credit – the basics

At its core, liquidity in private credit is derived from the natural life cycle of loans. Capital is returned to investors when loans reach maturity, amortise through scheduled principal payments, or are refinanced by another lender. In bullet loan structures, where interest is capitalised, liquidity is typically only available at the end of the loan term rather than progressively.

These fundamental aspects form the backbone of private credit investing – and they are inherently time-based. Liquidity is delivered according to the structure of the underlying loans, not at the moment investors request it. This distinction is important when advising clients who may assume regular liquidity behaves similarly to liquidity in listed markets.

Headline liquidity versus practical liquidity

In response to investor demand, a number of private credit funds now promote daily liquidity otherwise known as “Evergreen Funds”, or other short term liquidity options. While compelling on the surface, it’s vital to assess and interrogate how these promises align with the underlying liquidity profile of the assets.

Private credit assets are typically held for a term and are generally not designed to be sold quickly. If a fund experiences sustained redemption pressure from investors – particularly during periods of market stress – loan repayments alone may not be sufficient to meet those demands. Many funds therefore rely on tools such as redemption gates, withdrawal limits or deferrals to manage liquidity mismatches. These safeguards are not inherently negative; they exist to protect investors and preserve portfolio quality and ongoing performance. Advisers can assist clients to understand how these tools operate, when they may be applied, and what they mean for access to capital in deteriorating market conditions.

On the other hand, managers with deep experience in institutional funding and capital markets issuance may be able to generate liquidity through ongoing wholesale funding channels. Performing loans can sometimes be transferred between wholesale funding facilities or issued into ‘term funding’ arrangements in the debt capital markets, provided they meet institutional eligibility requirements and are not in arrears.

This form of liquidity is not reliant on amortisation, underlying security asset sales or new investor inflows. Instead, it is underpinned by strong and consistent access to complementary forms of domestic and global institutional capital, supported by a track record of programatic rated bond issuance. This capability allows those managers to structure funds with alternative liquidity options that are aligned with the realities of their operating model.

Importantly, this does not imply constant or unlimited liquidity – but rather liquidity that is realistic, deliverable and supported by multiple established mechanisms instead of a single source.

Why pricing and discounts matter

Advisers may also look to discuss the cost of liquidity with clients. In public fixed income markets, liquidity is often available at short notice, but selling during periods of volatility may require accepting a discount that erodes capital.

In private markets, well-designed liquidity arrangements can allow redemptions to be met on a dollar-for-dollar basis, avoiding the need to sell assets at unfavourable prices. Whether this is achievable depends entirely on the quality and performance of the underlying loan assets in combination with the strength and structure of the liquidity framework underpinning the fund.

Durable liquidity in private credit is ultimately a function of multiple factors: loan structures, funding arrangements, operating scale and the alignment with institutional capital. Understanding how these elements interact is critical to assessing whether a liquidity statement is reliable.

Helping clients navigate liquidity in private credit

For advisers, the aim is not necessarily to steer clients away from private credit simply because it operates differently from public markets. In fact, the ‘Illiquidity Premium’ is a well acknowledged benefit of investing in Private Credit. Value lies in understanding how liquidity is generated, when it may be constrained, and what tradeoffs are involved. Equipped with this insight, advisers can guide clients toward private credit strategies that align with their time horizons, income needs and risk appetite.

By focusing on the underlying mechanisms that support genuine liquidity – not just the headline redemption terms – advisers can support more informed decision making and help clients build realistic expectations around access to capital in both stable and stressed environments.