Private-credit fund locks exits for 4 years as redemption requests pile up

A private-credit fund focused on consumer and small-business debt has barred full investor exits for four straight years, with wealth advisers warning it could take many more before capital is returned.

The fund, which has not been named publicly, has consistently capped redemptions since at least mid-2022, leaving investors unable to withdraw their full stakes. The restrictions reflect a broader liquidity crunch spreading across the $1.8 trillion direct lending market, where redemption requests have overwhelmed quarterly repurchase caps at some of the industry's largest managers.

"Investors who entered these funds expecting quarterly liquidity are discovering that the contractual caps are binding in practice, not just in theory," said Hannah Park, a former credit analyst at Moody's who covers asset management. "When a fund's portfolio consists of illiquid consumer and small-business loans, meeting large-scale redemptions within a quarter is structurally impossible."

The fund's four-year lockup period far exceeds the typical experience in private credit. Morgan Stanley's North Haven Private Income Fund, a $7 billion vehicle, said it will fulfill roughly 43% of second-quarter withdrawal requests after investors sought to redeem 11.6% of units outstanding — more than double the fund's 5% quarterly repurchase cap. At Ares Private Credit Fund, managers capped redemptions after 14% of investors sought to exit.

The broader non-traded private credit category hit a milestone in the first quarter when money flowing out exceeded fresh capital coming in for the first time on record, according to industry data. Apollo Global, Blackstone and BlackRock are among the other managers that have placed restrictions on exits from their own vehicles, Reuters reported.

Why Liquidity Mismatch Matters

Private credit funds typically offer quarterly redemption windows capped at 5% of net asset value, a structure that works when only a small fraction of investors seek to exit. But when redemption requests surge past that threshold — as they have at Morgan Stanley, Ares and now this consumer-debt fund — managers face a choice between selling assets at distressed prices or locking investors in.

The fund's portfolio of consumer and small-business loans is inherently less liquid than the broadly syndicated loans or direct corporate loans held by larger peers. As of May 31, Morgan Stanley's North Haven fund held more than $2.2 billion in undrawn debt capacity and cash, with a debt-to-NAV ratio of 0.97x and a portfolio of more than $400 million in liquid loans — resources that smaller funds may lack.

Investors have grown wary of private credit funds this year amid concerns about loan quality and the potential for artificial intelligence to disrupt software businesses, a key area of exposure for many lenders. At Morgan Stanley's North Haven fund, software represented about 22.7% of total exposure across 301 individual borrowers and 45 industries.

The Outlook for Locked Investors

Wealth advisers now caution that investors in the consumer-debt fund may face additional years of restricted access. Unlike listed business development companies, which trade daily on exchanges, non-traded private credit funds offer no secondary market exit. Investors who need liquidity must either wait for quarterly windows or sell at steep discounts in private secondary markets, where bids can fall to 85 to 90 cents on the dollar.

The four-year restriction at this fund is among the longest in the industry. Most private credit funds that have capped redemptions since the recent wave began in late 2025 have done so for one to three quarters, not multiple years. The duration suggests underlying portfolio challenges that may take time to resolve, Park said.

"If a fund cannot generate sufficient cash from loan repayments, asset sales or new subscriptions to meet redemptions after four years, the path to full liquidity is unclear," she said. "The risk is that locked investors become permanent capital, regardless of their original expectations."

This article is for informational purposes only and does not constitute investment advice.