The Liquidity Illusion: Why Investors Can't Get Out

A $14bn queue

In the second quarter of 2026, investors asked to withdraw $22bn from a group of 20 private credit funds; they received less than 40 per cent of it. The rest, more than $14bn, remains locked inside the funds, in a queue that grew through the first half of the year. It was the second consecutive quarter in which requests passed $20bn, and the median fund was asked to hand back 8.7 per cent of its assets, up from 7.1 per cent three months earlier.¹

The funds in question are what the industry calls semi-liquid, or evergreen, vehicles. Over the past decade, private markets firms have built them to bring wealthy individuals into assets that rarely or never trade, such as private loans and stakes in private companies, which until recently were sold mainly to institutional investors. Unlike a traditional private fund, which locks investors in for years, these vehicles let investors take money out every quarter. The catch is a limit written into their terms. Once withdrawal requests pass a threshold, usually 5 per cent of the fund's net value in a quarter, the manager can cap them.² This limit, known as a gate, was sold as a safety feature that would rarely be needed. This year, that safety feature has become the funds' defining characteristic.

The pressure that began in private credit has since spread to private equity, where the steps managers are now taking suggest it will not ease quickly. At the heart of it is a mismatch between what investors bought and what they expected. The assets inside these funds are illiquid by nature, yet investors were offered a regular way out, and now that many want to leave at once, that promise is being tested.

The exodus from private credit

The scale of the problem is clearest in the industry's flagship funds. Apollo Debt Solutions, a $15bn fund, received withdrawal requests worth roughly 17 per cent of its value in the second quarter, about $2.5bn, up from 11 per cent in the first, and met less than 30 per cent of them.³ Cliffwater's $31bn corporate lending fund also faced requests of 17 per cent, worth more than $5bn,² while the Ares Strategic Income Fund faced 14.4 per cent and honoured just over a third.⁴ In each case the fund capped redemptions at 5 per cent.

Investors are leaving for several reasons, the first being a run of credit stress. The collapses of the auto lender Tricolor and the car parts group First Brands raised doubts about how carefully loans across the wider credit market had been underwritten.⁵ The second is artificial intelligence. Private credit lent heavily to software companies, and investors now fear that advances in AI will disrupt those businesses.²

The third reason has an irony to it. During the boom, so much money flowed into private credit that lenders had to compete for the same borrowers, pushing down spreads, the extra interest a lender charges above the base rate, and with them the returns the funds could expect to earn.⁵ The same wealthy investors who built these funds were, in effect, the ones who drove spreads down, and the weaker returns that followed are now part of the reason they are leaving.

The worst hit has been Blue Owl's technology lending fund, OTIC, and its experience shows how much these funds depend on whoever sells them. OTIC was designed with UBS's clients in mind, and at least 60 per cent of its money came from them, most of whom were based in Asia. That is double what some executives say they would want from a single distributor, with one rival aiming for no more than 20 to 30 per cent from any one platform. When UBS advised clients who were over-allocated to private credit to sell down their positions, the advice was not aimed at Blue Owl, but its fund felt the effects more than most. Requests reached 15.4 per cent in the final quarter of 2025 and more than 40 per cent in the first quarter of 2026. The episode shows how power in this market has shifted from the managers to the banks and wealth platforms that decide where client money goes.⁵

Most of those leaving appear to be based outside the US. Ares said its requests came mainly from a small number of non-US institutions and family offices, a point Apollo and other managers have also made.⁴ That is the managers' own account, and one that suits them, since it presents their core US investor base as loyal.

Why it spread to private equity

For most of the first half of the year, private equity funds sold to wealthy individuals escaped this pressure, which is odd. Private credit funds have grown largely by lending to private equity-backed companies, so the two types of fund often hold the same businesses. If one of those companies goes bust, its lenders are paid before its shareholders, which means investors in a private equity fund should, in theory, be more exposed than investors in a credit fund. In other words, investors were leaving the safer of the two investments while staying in the riskier one, something industry insiders had been pointing out for months.⁶

That changed in June, when Partners Group capped withdrawals at Global Value SICAV, its European private equity fund, after requests reached 9.8 per cent, the first such move since the industry began courting wealthy individuals. Partners itself said the dynamics in private credit had extended to private equity, and its shares fell 16 per cent on the day.⁶ The pressure has grown since. At its flagship US fund, requests more than doubled, from about 6 per cent ($900mn) in the second quarter to 15 per cent ($2.2bn) in the third.⁷

Partners' problems stem largely from performance. As of January, its European fund had returned between 0.3 and 8.3 per cent a year over the previous four years, and the firm has faced tougher competition as larger US firms such as Blackstone and KKR have moved into the wealth market that Partners helped to create.⁶ Partners pioneered evergreen private equity funds, just as Blue Owl was one of the first firms to target retail investors in private credit. Both are now among the hardest hit. Being first meant building these products, but it has also meant being first to discover their limits, while larger rivals arrive with more scale behind them.

Partners’ most striking response has been to split the fund, which holds net assets of €6.6bn, in two. Roughly 75 per cent of existing clients' money would move into a "distributing" fund of older, weaker deals, with the remainder going into a "compounding" fund of newer investments.⁸ The aim is to stop the older assets, which make up the bulk of the fund, from dragging down returns and deterring new investors. The move reflects a wider problem: the industry has struggled to sell older investments, many bought at high valuations when interest rates were low, on which firms now risk failing to make a good return.⁷

How managers are responding

The standard response has been to use the gate. Most firms have limited how much cash they return in any quarter, arguing that this protects investors who stay, since the alternative would be selling illiquid assets quickly and at poor prices.

Partners has since gone further. It has halved the quarterly limit at the fund from 5 per cent to 2.5 per cent, with effect from 30th October, as part of the restructuring. The smaller compounding fund is expected to return to 5 per cent by early next year, while the larger fund of older assets would likely keep the lower limit into 2027, and the board can apply it for up to two years. The decision followed an apparent change of course. When Barclays analysts first said the limits would be cut to 2.5 per cent, Partners called their note factually incorrect, before an investor letter dated 9th October confirmed the cut.⁸ For a product whose appeal rests on investors trusting its terms, such a reversal matters.

Not every firm has followed. Blackstone has avoided changing the terms on redemptions even when faced with a rush of clients wanting to leave, instead meeting withdrawals as originally set out in the hope that pressure eases. Starwood Capital, by contrast, has significantly limited withdrawals from one of its flagship funds for years.⁸

Property offers the clearest warning of how long a gate can last. In May 2024, Starwood's $10bn property fund, SREIT, cut how much investors could withdraw by more than 80 per cent, from as much as 2 per cent of net assets a month to 0.33 per cent. It had already drawn more than $1.3bn of its $1.55bn credit facility and sold $2.8bn of property to pay redemptions, and said it would hold off on further sales while it waited for the Federal Reserve to cut rates and the property market to recover.⁹ Investors who expected a temporary gate have instead found themselves waiting.

The case that it is under control

Managers argue the situation is under control. John Zito, co-president of Apollo Asset Management, said in June that the funds were performing as designed, pointing out that there had been no run of the kind that brought down Silicon Valley Bank in 2023 and that no financial institution had failed. The funds are also still generating positive returns, with Apollo's returning 6.2 per cent over the past year, and some analysts expect redemptions to peak soon.³ In that narrow sense, the gates have done their job: no manager has been forced into a fire sale that would hurt the investors who stayed.

The figures also put the problem in proportion. Business development companies, the retail-focused vehicles at the centre of the private credit exodus, managed portfolios worth about $570bn at the end of last year, compared with nearly $1.8tn in closed-end funds sold to institutional investors, whose money is locked up for years.⁴ Trouble in the retail funds is therefore unlikely to threaten the wider private credit market.

That argument holds on stability but not on liquidity. A fund that pays out only a third of what investors ask for each quarter is not liquid in any sense most of those investors would recognise. Liquidity means being able to get money back when it is wanted, and the gate works precisely because it prevents that. The structure may be sound, but it is sound because it keeps investors in, not because it delivers what they were sold.

Outlook: a queue that feeds itself

In private credit, the worst of the pressure may now have passed. In private equity it has not, and the strongest reason to doubt that it will is that a gate tends to provoke the behaviour it is meant to contain. Once investors can see a queue forming, the rational move is to join it early, even if nothing about the underlying loans or companies has changed. Partners Group effectively acknowledged this, describing its third-quarter requests as typical of evergreen funds in the quarters after a liquidity limit has been exceeded.⁷ Financial advisers have also said that Blue Owl's decision to permanently gate and wind down one of its older funds prompted some smaller investors to redeem from its other funds.¹ As in a bank run, investors appear to reason that if others want out, they may know something, and that being late is worse than being wrong.

Through the first half of the year, new money was also drying up. Apollo did attract $300mn of new commitments in the second quarter, limiting its net outflows to $400mn,³ but it is the exception rather than the rule. As outflows rise and inflows fall away, funds lean more heavily on the gate, which lengthens the queue further and gives the next investor another reason to join it.

Public markets appear to share these doubts. By early July, Blue Owl’s shares had fallen more than 40 per cent this year, taking them below their $10 listing price. The firm built much of its growth on wealthy individuals, raising more than $72bn from them since its launch and earning more than $570mn in management and performance fees last year from three of its non-traded credit funds. Yet its two main semi-liquid funds took in less than $40mn of new money in June, against an average of more than $640mn a month last year.¹ Shareholders appear to be questioning whether that source of growth, and the fees that came with it, can last.

What ties all of this together is the mismatch that has sat inside these products from the start. Private loans and private companies are illiquid assets, and no fund structure changes that. Semi-liquid funds offered wealthy investors access to them alongside the expectation of a regular way out, and for as long as more money was coming in than going out, that expectation held. Now that the flows have reversed, it has become clear that the liquidity was largely an illusion, one that only worked while few people tried to use it. The gates are not a sign that the products have broken. They are a sign of what the products always were.

This article reflects the position as of 31st October 2026. Partners Group's restructuring of its European fund remains subject to a shareholder vote.