Private credit generates cash continuously through interest and principal payments, but the fund holding those loans may not be liquid on demand. Advisors need to manage both realities at once.

Two kinds of liquidity

The distinction that resolves most client confusion is between natural and structural liquidity.

Natural liquidity comes from the loans. A direct-lending portfolio of five- to seven-year loans generates interest each quarter and returns principal as borrowers repay or refinance. The portfolio is self-liquidating over time.

Structural liquidity is what the vehicle offers its shareholders, and it is engineered separately. A quarterly repurchase offer capped at 5% of net asset value is a policy decision layered on top of an asset pool that cannot be sold quickly at full value.

The two can diverge sharply. A fund can collect interest on schedule from performing borrowers yet still be unable to meet redemption requests in full because the requests arrive faster than the loans mature. That is not a contradiction. It is the structure working as intended.

How proration works

Structure	Repurchase obligation	Typical cadence and cap	What can go wrong
Interval fund	Mandatory under SEC Rule 23c-3	Quarterly, commonly up to 5% of shares	Requests above the cap are prorated; the balance generally must be resubmitted
Tender offer fund	Discretionary, board approved	Typically, quarterly at NAV	An offer can be reduced or skipped entirely
Non-traded / evergreen BDC	Discretionary, board approved	Quarterly or annual, per the fund program	The program is an intention, not a guarantee, and can be modified or suspended
Drawdown private credit fund	None	Cash returns as loans repay	Early exit requires a secondary sale, usually at a discount to NAV

The worked example matters more than the table. Suppose a client holds $500,000 in a non-traded BDC with a 5% quarterly cap and requests a full redemption in a quarter when shareholders collectively tender 10% of shares. The fund repurchases 5%, so each request is filled at roughly half. The client receives about $250,000, and the unfilled balance does not carry forward automatically at most funds: it must be resubmitted at the next window, where it competes with that quarter's new requests.

This is why, in 2026, redemption requests fed on themselves. Investors who were partially filled resubmitted for more than they needed, driving requests higher and deepening proration.

Why gates exist

A gate transfers risk from investors who stay to those who leave. Without one, meeting heavy redemptions would require quickly selling illiquid loans, which means selling them at a discount, and the loss would fall on remaining shareholders. Cambridge Associates puts it directly: "Gating can protect investors by preventing fire sales or the selective liquidation of high-quality assets that would disadvantage remaining investors."⁷

The full explanation includes the other half. Gates bind hardest exactly when clients most want out, because that is when everyone wants out at once. Advisors who describe gates as purely protective tell half the story, and the client will discover the other half at the worst possible time.

Fitch's assessment of eight rated perpetual non-traded BDCs provides useful context on capacity. Average leverage stood at 0.85x as of March 31, 2026, below that of typical non-perpetual peers, and would rise to 1.39x under Fitch's most severe stress case, with no inflows and no portfolio repayments for a full year. Fitch concluded that "current liquidity and asset coverage cushions should support rated issuers' ability to manage elevated tenders over the next year without material pressure on credit profiles," while expecting requests to remain above 5% throughout the year.¹³

Liquidity is real. It is also rationed by design, and most heavily when demand is highest.

Net asset value and why it is struck, not quoted

Definition: net asset value (NAV)

A fund's assets minus its liabilities, divided by shares outstanding. In a semi-liquid credit fund, NAV is the price at which investors subscribe and redeem. Because private loans are appraised rather than continuously traded, NAV is set on a monthly or quarterly schedule using valuation models and third-party input. It moves more smoothly than a market price, which is a measurement property rather than evidence of lower risk.

NAV quality is not an accounting footnote in these vehicles. Every subscription and repurchase occurs at NAV, so an inaccurate mark transfers value among entering, exiting, and remaining shareholders. Chapter 7 covers the regulatory framework that governs how that mark is set.

Budgeting liquidity at the portfolio level

The general four-step liquidity budget is set out in Chapter 6 of the equity volume and applies unchanged here. Read The Complete Guide to Private Equity for RIAs. Three additions are specific to credit:

1. Count the distributions as planned cash flow. Private credit's quarterly income is a genuine liquidity source, and for a distribution-phase client, it can reduce the need to redeem at all. Model it.

2. Stress income, not just principal. Distributions can be cut. Several BDCs reduced dividends in 2026. A client whose spending plan assumes a fixed distribution rate has unhedged exposure.

3. Size so that a fully gated year is survivable. Assume no repurchases are made for four consecutive quarters. If the client's plan still works, the sizing is defensible.

Matching client to structure

Client profile	Better-matched structure	Why
Needs current income and can hold through gated quarters	Evergreen BDC or interval fund	Income arrives quarterly; periodic liquidity is available but not guaranteed
Long horizon, no near-term cash needs, can manage capital calls	Drawdown private credit fund	No repurchase caps to manage; capital returns as loans repay
Needs access to the money within one to three years	Neither; keep in liquid credit	No private credit structure is a reliable source of near-term liquidity
Wants exposure in a taxable account	Evaluate account location first (Chapter 12)	Income is predominantly ordinary and distributed annually by requirement

Many portfolios reasonably use more than one structure. The error to avoid is a mismatch: a drawdown commitment set against near-term cash needs, or an evergreen position sized as though its quarterly window were a guarantee.

Key takeaway

No client should ever be in a position where their spending depends on a repurchase window being met in full. Size the allocation so that a gate is an inconvenience rather than an emergency, and state this in writing before the subscription.

Sources

Cambridge Associates, "A New Era of Dispersion in Direct Lending Favors Disciplined Managers," April 2026. https://www.cambridgeassociates.com/insight/a-new-era-of-dispersion-in-direct-lending-favors-disciplined-managers/
Fitch Ratings, analysis of perpetually non-traded BDC liquidity and leverage, 2026. https://www.fitchratings.com/

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