ETFs Enter the Scene Amid Growing Liquidity Challenges in Private Credit—A Fresh Strategy for Managing Returns and Exits

Private Credit Faces a Liquidity Crisis

The private credit sector is experiencing a significant liquidity crunch, as redemption requests from investors in retail-oriented funds have reached record levels. This surge is fueled by heightened concerns over headline risks and the lack of transparency in asset valuations, prompting investors to urgently seek more liquid investment options.

Recent events have intensified these worries. Notable bankruptcies, such as the collapse of First Brands Group and Tricolor Holdings in September 2025, have exposed hidden vulnerabilities and raised questions about lenders' exposure. Additionally, BlackRock's TCP Capital Corp. recently wrote down a loan to Infinite Commerce Holdings, further unsettling investors. These incidents have led mass-affluent investors—who previously drove the sector's expansion—to scrutinize the "semi-liquid" nature of private credit funds and demand withdrawals.

The repercussions are already evident on Wall Street. Leading asset managers are adopting defensive measures; for example, Blue Owl suspended quarterly redemptions for one of its funds, highlighting the acute liquidity risks. While this gating approach helps stabilize the fund, it also signals caution to the broader market. As a result, shares of alternative asset managers have come under pressure, reflecting concerns about the valuations of the companies they finance.

Fund managers now face a difficult choice: either relax the standard 5% quarterly withdrawal limit to satisfy investors—potentially undermining portfolio value—or maintain restrictions and risk losing clients. If managers are forced to sell assets to meet redemption demands, a flood of loans could hit the market. The industry is undergoing a critical stress test, with liquidity concerns dominating the current narrative.

Public Credit ETFs Take Center Stage

As private credit funds struggle with liquidity, public credit ETFs have emerged as the preferred solution for investors seeking safety and transparency. These exchange-traded funds provide daily liquidity and clear pricing, addressing the main pain points of traditional private credit products.

Private credit ETFs are designed to offer retail investors easy access, with yields typically ranging from six to ten percent. They combine public debt and private credit assets in a single, tradable fund, allowing investors to participate in the multi-trillion-dollar credit market without high minimums or accreditation requirements.

Strategy Spotlight: Absolute Momentum Long-only

• Entry Criteria: Buy SPY when the 252-day rate of change is positive and the price closes above the 200-day simple moving average (SMA).
• Exit Criteria: Sell when the price falls below the 200-day SMA, after 20 trading days, or when a take-profit (+8%) or stop-loss (−4%) is triggered.

Backtest Summary

• Strategy Return: 2.77%
• Annualized Return: 1.4%
• Maximum Drawdown: 2.65%
• Win Rate: 0.51%
• Total Trades: 195
• Winning Trades: 1
• Losing Trades: 0
• Average Hold Days: 0.1
• Max Consecutive Losses: 0
• Profit Loss Ratio: 0
• Average Win Return: 2.77%
• Average Loss Return: 0%
• Max Single Return: 2.77%
• Max Single Loss Return: 0%

Despite their promise of liquidity, these ETFs still hold illiquid private credit assets, creating a structural mismatch. Regulatory measures, such as Rule 22e-4, limit illiquid investments to 15% of an ETF's net assets, requiring managers to use liquidity support agreements or securitized products like CLOs. In practice, this often results in daily or weekly redemption limits to manage stress periods. The market is closely monitoring whether this framework can withstand ongoing pressure.

BDCs: Another Liquid Alternative

Publicly traded Business Development Companies (BDCs), such as BIZD, offer a similar liquid, income-generating option. These companies are listed on exchanges, trade daily, and must distribute most of their earnings. For investors, BDCs provide a transparent and familiar route to private credit-like yields, competing directly with private credit ETFs. The rise of these ETFs represents a new approach to accessing the asset class that BDCs have long served.

Ultimately, public credit ETFs have become the preferred vehicle for investors looking to exit private funds while maintaining exposure to high-yield credit. Their growth will indicate whether the shift away from illiquidity is a lasting trend or a temporary reaction.

Valuation and Risk: Transparency vs. Opacity

The central issue in the credit market is the contrast between transparency and opacity. Private credit relies on loans that are difficult to value and lacks real-time pricing, relying on third-party assessments and limited disclosure. This makes the sector vulnerable, especially when investor confidence wanes. During periods of stress, the absence of rigorous public reporting can mislead retail investors about the true worth of their holdings, as recent redemption waves have demonstrated.

In contrast, public credit vehicles like ETFs and BDCs operate with strict disclosure requirements and real-time pricing, offering greater transparency. This is a significant advantage when liquidity and trust are paramount. For investors moving from private funds, the switch is not just about yield—it’s about regaining control over their capital and exit timing.

However, the risk landscape is more complex. Surprisingly, default rates in private credit are now similar to those in public markets, suggesting the risk premium is narrowing and the asset class is maturing. Competition has led private lenders to improve underwriting standards, reducing the gap between private and public credit risk.

When faced with market stress, investors are likely to favor public vehicles. The combination of daily liquidity, transparent pricing, and a proven ability to handle redemptions offers a safer option. While private credit ETFs attempt to bridge the gap, their structure—holding illiquid assets within a liquid wrapper—retains some of the opacity they aim to resolve. In a liquidity crunch, clarity and transparency are likely to win out, making ETFs and BDCs the preferred choice.

Key Catalysts: The Liquidity Challenge Ahead

The shift toward public credit is now being tested by several immediate catalysts. The expiration of redemption caps for private funds is a primary stress point.

This week, the results of tender offers from non-traded BDCs will be closely watched. At one fund, requests for repurchase reached 11.2% of outstanding shares at year-end, far above the typical 5% quarterly limit. How managers respond—whether through pro-rata reductions, special distributions, or other liquidity measures—will reveal the true strain on capital. Historically, fulfilling such requests can take up to a year. If asset sales are required to meet redemptions, it could trigger broader price declines in the private credit market, confirming liquidity concerns.

Meanwhile, the resilience of institutional capital is under scrutiny. While retail-focused funds are under pressure, Goldman Sachs predicts institutional fundraising will continue into next year. This points to a divided market: if institutional demand remains strong, it suggests private credit has a stable foundation. If institutional flows weaken, it could signal a deeper loss of confidence in the asset class.

For public credit ETFs and BDCs, performance is measured against passive junk bond ETFs, which yield 6.7% to 6.9%. If public credit ETFs consistently outperform this benchmark while maintaining liquidity, their growth will persist. Otherwise, their popularity may quickly diminish.

In summary, the coming weeks will serve as a critical test of liquidity. The outcomes of tender offers, the strength of institutional capital, and yield comparisons to public bonds will determine whether the market’s move toward public credit is a lasting shift or a temporary response to stress.