| Private credit has transformed from a niche institutional strategy into a $1.7 trillion asset class, increasingly accessible to individual investors through “evergreen” or semi-liquid fund structures. While these funds offer compelling yields compared to traditional bonds, they introduce a unique set of liquidity risks and are propelled by powerful financial incentives for the firms that sell them. This topic has been quite popular of late as news headlines have been filled with concerns over the private loan portfolios of many investment firms, and investors struggling immensely to liquidate their assets in them. The Reality of Liquidity Risk Unlike stocks or bonds traded on public exchanges, private credit involves direct loans to companies that do not have a secondary market. This creates several critical risks for investors: The Liquidity Mismatch: Many newer funds offer “periodic liquidity” (e.g., quarterly redemptions), but the underlying loans may not mature for five years or more. If too many investors try to exit at once, the fund may not have enough cash to meet the requests. “Gating” and Redemption Caps: To prevent a forced sale of assets at a loss, managers often “gate” funds, limiting withdrawals to a small percentage (typically 5%) of the fund’s total value per quarter. Valuation Uncertainty: Because these loans don’t trade publicly, their value is estimated by the manager or a third party. In a downturn, these “stale” prices may not reflect the actual decline in value, potentially leading to a “haircut” when an investor finally exits. Over my career, I’ve had experience with illiquid investments of various asset classes. While liquidity is the biggest issue, they can be laden with high internal fees like fund management fees, especially in the private equity and real estate space. While I think the right alternative investments such as these can be suitable for certain clients, I generally do not have these conversations with clients under $10 million in net investable assets. If the goal is to have a tranche of investments with a higher yield than investment grade corporate bonds, I have a way to accomplish that with full liquidity and more diversification in the public markets. These funds should only be used for assets that truly can be deployed and held for a long period of time with absolutely no concern or need for liquidity. Compensation: Why Big Firms Aggressively Sell Private Credit For major financial institutions like Morgan Stanley and Merrill, private credit is one of the most profitable products in their lineup due to its high-margin fee structure. Upfront Success Fees: Firms often act as “placement agents,” earning a one-time commission—typically 1.5% to 2.5%—for every dollar a client invests. Ongoing Management & Advisory Fees: Advisors often receive “trailing” commissions of approximately 0.85% annually for as long as the client holds the fund. This is significantly higher than the fees earned on low-cost ETFs or traditional mutual funds. Performance Participation: While the selling firm may not always keep the “carry” (performance fee), the overall revenue sharing with the fund manager is a major driver. Strategic Incentives: Private credit funds are “sticky.” Because of lock-up periods and limited redemptions, clients are less likely to move their assets to a competitor, ensuring a steady stream of fee revenue for the firm over many years. I started my career at a large brokerage firm and the hard and soft dollar arrangements that these institutions have in place create huge conflicts of interest between the firm, advisor, and client. It’s the biggest reason why I left and started my own firm: independence. I have no sales goals or incentives to hustle anything on anyone. A former mentor told me three key benefits in the brokerage world when it came to investments: what’s good for the advisor, what’s good for the firm, what’s good for the client – pick two out of three. What’s good for my client is what is good for me. And what’s good for my clients? Flexibility and liquidity with no shareholders to appease. Mike Lambrechts |
Understanding Markets Below the Surface
First and foremost, as a reminder to our existing and new clients, I personally write and publish these articles from time to time when I feel it is necessary to communicate my thoughts to you. These have generally come during times of market volatility but also have been delivered at all-time highs. While the monthly market commentary is delivered, I sometimes feel the need to expand upon that with additional thoughts. With that said, I hope you find these valuable.
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