Private debt: liquidity stress, evergreen structures and where the real risks lie

Liquidity pressures are evident, but mostly confined to specific areas of private debt

We see the current volatility and the recent market concerns on a few private debt funds as something investors should keep an eye on, but don’t think we’re looking at a global private debt crisis at this stage. While contagion is a possible risk we’re monitoring very closely, for now the issues appear to be contained within Business Development Companies (BDCs) in the US. While investors might stay on high alert for some time, and rightly so, more fundamentally we don’t expect them to spread quickly across the whole private debt market. What matters more is how credit quality evolves in the current geopolitical environment and whether this ultimately impacts growth, inflation and interest rates.

What is private debt, and why does it matter now?

Private debt consists mainly of direct lending and loans which, unlike publicly traded debt, are typically customised financing solutions that address specific needs such as buyouts, refinancing or project finance.
Private debt is provided by non-bank lenders, which are typically institutional investors. It often offers more flexible loan covenants, maturity dates and interest rates than traditional bank loans. That flexibility allows borrowers to tailor financing more closely to their specific needs. Private debt lenders also tend to take a hands-on, relationship-based approach, providing access to industry expertise and guidance in addition to capital.

BDCs and ELTIFs: similar headlines, very different structures

Recent headlines around private debt markets have generated a lot of investor questions. So far, most of the challenges we have seen have been driven by concerns about liquidity, particularly within BDCs, rather than by a broad deterioration in the credit quality of the underlying debt.
But what is a BDC? A Business Development Company is a US fund structure that lends to smaller and midsized private businesses under 40 Act regulation, which means many are accessible to retail investors. By contrast, an ELTIF, or European Long‑Term Investment Fund, is an EU‑regulated vehicle designed to give retail and professional investors access to illiquid assets such as private credit, private equity or infrastructure.

Criteria	Business Development Company (BDC)	European Long Term Investment Fund (ELTIF)
Vehicle Structure	United States (US) regulated 40 Act vehicle	European Union (EU) regulated fund
Geography	Mainly US	Global, with European focus
Investors	Retail and Institutional	Retail and Institutional
Listed or Private	Publicly listed and private variants	Only private
Trading Frequency	Listed BDCs can trade up to daily, while private BDCs trade less frequently	Usually monthly subscriptions and quarterly redemptions, with less frequent variants possible
Leverage Limits	Up to two times debt to equity ratio	Up to 50% of the Net Asset Value (NAV)

Headlines can make BDCs and ELTIFs sound interchangeable when, in reality, they behave quite differently. Understanding the structure behind each vehicle is essential to assessing why some parts of the private debt market feel pressure sooner than others, and why not all of it reacts the same way to market stress.

Evergreen structures in private markets: what investors often overlook

The recent newsflow is a timely reminder of some often-forgotten features of evergreen structures. While they offer liquidity options, the underlying private assets are still illiquid. Whatever the vehicle structure, whether a BDC or an ELTIF, these are intended as long-term investments rather than short-term trading vehicles. Evergreen structures can make volatility more visible than in classic closed-ended vehicles, but that visibility should not prompt reactive trading. Occasional gating, or placing limits on redemptions, is a normal feature designed to protect existing investors and should not necessarily be seen as a negative.

A few things to remember:

Private market assets are illiquid, and so are evergreen funds.
Evergreen funds only offer a liquidity option.
Gating of a fund is not always a negative sign.
Gating is an important mechanism to protect existing investors.
Many evergreen funds are likely to be gated at some point in time.
These investments are not designed to be the only investment in a portfolio.
Evergreen funds are not suitable for clients who cannot bear the possibility of gating.
None of this diminishes the usefulness of private markets within a diversified portfolio.

We don’t see significant signs of systemic stress at this stage

The recent pressure has been driven more by investor behaviour, particularly the fear of being last in a redemption queue, than by credit defaults. Across the broader private debt market, defaults and delinquency rates have not risen sharply, and fundamentals remain resilient. However, we expect default rates to drift from artificially low levels back towards historical averages.

We will continue to monitor developments of flows and redemption requests in the private debt space. Should these continue to rise on a broader basis, funds that gate or queue withdrawals (e.g. at 5% of NAV per quarter) may see investor confidence erode further, independent from the underlying credit quality and fund performance. The liquidity mechanism of the structure itself could become a source of stress, though this is not the case currently.

The stress we are seeing is mostly concentrated in specific managers or sectors. Some of the recent pressure reflects the repricing of software related risk. Borrowers in that sector often have higher leverage and more growth-dependent business models, which makes them more sensitive to shocks. As a result, traded BDCs with higher software exposure were hit harder than those with less exposure, broadly in line with moves seen in publicly traded software companies.

It’s important to remember that short term stress does not always point to a wider crisis. Over the last twenty years, the private debt market has been fairly resilient to interest rate and economic cycles, including during the Eurozone crisis in 2011 and the pandemic in 2020. The only recorded down year for the US direct lending market was during the global financial crisis in 2008.

That said, we expect interest rate volatility to create, in turn, possible volatility in private debt market returns. That’s why strategy and manager selection will be key, as we expect performance differences between managers to rise. So, while it’s important to monitor volatility, we prefer to emphasise long-term investing and in-depth due diligence, rather than reacting to each headline.

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