Private Credit’s Reality Check: Liquidity Stress, Structural Failures, and the Advisor Education Crisis

Private Credit Isn’t the Problem, Structural Ignorance Is

Private credit has grown from a niche alternative to a central pillar of global capital markets. It has delivered strong returns, access to bespoke opportunities, and diversification away from traditional fixed income. That part of the story is real.

But now, as liquidity pressures emerge and semi-liquid vehicles face redemption stress, the headlines are asking the wrong question:

“Is private credit the next crisis?”

The better question is:   Who built the structures? Who sold them? Who understood them?

Because the truth is this:
The biggest risks weren’t hidden. They were obvious to anyone who understands structural finance.

Liquidity mismatch. Gating mechanics. Duration imbalance. Reliance on constant inflows. Over-optimistic valuations. Weak disclosure.

These are not exotic problems. They are textbook structural issues and yet they were widely ignored or, worse, covered over by sales narratives marketed to retail and even “advised” clients.

This is not fundamentally an asset-class failure.

It is a structure and education failure, exacerbated by advisors and distributors who did not understand the products they were selling.

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This Week’s Headlines Prove the Point: Liquidity Risk Is About Structure, Not Panic

Recent news highlights stress in evergreen and semi-liquid funds—vehicles that promise periodic liquidity while holding illiquid assets. When markets are calm, these structures look elegant. When redemptions rise, the mismatch is exposed.

• Gates are being triggered.
• Redemptions are being queued.
• Tender offers at discounts are emerging.
• NAV financing lines are being drawn.
• Bank exposure to nonbank credit providers is raising regulatory concern.

None of this should surprise anyone who has analyzed how these funds are built. The assets do not settle daily. The loans cannot be liquidated instantly. Yet products were packaged and sold as “monthly liquidity,” “income with stability,” or “bond alternatives.”

Let’s be clear:

The structure was always the real risk. The cycle just revealed it.

Evergreen Funds: When Promised Liquidity Collides with Reality

Evergreen funds (including interval funds, tender-offer funds, and non-traded REITs) were designed to democratize access to private markets. In theory, they bridge the gap between institutional drawdown funds and retail liquidity needs.

In practice?

• They imply liquidity that they cannot always deliver.
• They rely on manager discretion to impose gates.
• They often depend on constant net inflows to function smoothly.
• They value assets using lagged or model-based pricing, which can mask emerging stress.
• They can create first-mover advantage—investors who redeem early get out at a cleaner NAV than those stuck behind the gate.

When markets tighten, managers must choose between:

• Selling illiquid assets at discounts,
• Using credit facilities to cover withdrawals (adding leverage),
• Or gating to protect the remaining investors.

Gating is not inherently bad. It is often the correct decision.
But here is the problem: most investors were never told that this was the actual liquidity mechanism.

They believed they could exit at will.   Why?  Because that is how it was marketed to them.

And that brings us to the core issue…

The Real Contagion Risk: Interconnected Funding, Not Asset Class Collapse

Private credit itself is not imploding. Defaults are rising but in line with a normal credit cycle. Strong managers with disciplined underwriting are managing through it.

The bigger risk lies in how certain managers fund their liquidity promises.

Key pressure points include:

• Bank credit lines backing redemptions
• NAV loans to generate cash
• Cross-fund liquidity transfers
• Securitization structures using mark-to-model collateral

When multiple funds draw on similar lines or face simultaneous redemptions, funding stress can feed on itself.

Regulators are not worried because private credit is toxic.
They are worried because the plumbing is opaque and liquidity stress in one area can bleed through financial linkages.

This is a structural risk.
It was foreseeable.
And yet, many advisors never asked a single question about it.

ADVISOR FAILURE: The Most Underreported Risk in Private Markets

Here begins the expanded, core critical section (major focus):

Let’s be direct:
One of the most dangerous forces in modern investing is the gap between what is structurally true and what advisors think is true.

Most investors did not design these products. They relied on professionals. Unfortunately:

• Too many advisors sold private credit, MICs, and semi-liquid real estate funds as high-yield alternatives to bonds without any understanding of structural finance.
• Many never read the offering documents.
• Few understood gating mechanics or redemption waterfalls.
• Almost none could explain the capital stack or funding models.
• Many relied on wholesaler decks, back tested returns, and talking points rather than true due diligence.

This is not a competence issue; it is a systemic education issue.
Most advisor licensing frameworks never teach:

• Liquidity waterfalls
• Duration mismatch
• Leverage mechanics
• NAV financing risks
• Redemption queues
• Embedded borrowing costs
• Capital stack positioning
• How these structures behave when the cycle turns

Instead, advisors are trained to sell investment products, not analyze financial structures.

That is how we ended up with:

• Advisors pitching monthly liquidity on illiquid assets.
• Retail portfolios overloaded with MICs and non-traded REITs.
• “Income” strategies built on credit leverage without understanding the consequences.
• Clients thinking “secured by real estate” equals “safe.”

This wasn’t a black swan.
It was bad structure sold by unsophisticated intermediaries.

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ADVISOR FAILURE (continued): Product Sales ≠ Risk Management

The wealth management industry has a structural flaw:
Distribution often matters more than understanding.

Many advisors were rewarded for:

• Pushing “income products” with attractive yields,
• Gathering assets quickly,
• Following firm-approved product lists,
• Relying on wholesaler narratives.

They were not rewarded for:

• Questioning the liquidity structure,
• Stress-testing cash flow waterfalls,
• Challenging valuation assumptions,
• Asking what happens when funding lines are pulled,
• Saying “no” to a product that “everyone else is selling.”

This is how crowded trades are born.

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The Divide: True Fiduciary Advisors vs. Product Distributors

Not all advisors are the same.

There is a small but elite group of fiduciary-level advisors who:

• Understand capital structure and liquidity dynamics.
• Analyze term sheets, not just marketing decks.
• Know the difference between headline yield and risk-adjusted return.
• Educate clients on structure before return.
• Size illiquid positions appropriately and stress-test outcomes.
• Build portfolios designed to survive dislocation, not just back tests.

These advisors add massive value.

But they are the minority.

The majority of the market is served by:

• Advisors trained more in sales than structure.
• Advisors who view private credit as a “bond replacement” because it’s how it was pitched.
• Advisors who never asked how redemption gates actually work.
• Advisors who believed “monthly liquidity” meant actual liquidity.
• Advisors who equated distribution yield with safety.

This is not an attack, it’s a diagnosis.

If the industry wants better outcomes, it must start with raising the structural literacy of advisors.

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Case Study: Mortgage Investment Corporations (MICs)  

The Perfect Example of Structural Ignorance

The Canadian Mortgage Investment Corporation (MIC) trade is the clearest real-world example of everything broken about product-driven advice.

MICs were marketed as:

• High yield,
• “Secured by real estate,”
• Conservative,
• Monthly income,
• Tax-efficient.

But structurally, many MICs were:

• Concentrated in construction and bridge loans (highest risk segment).
• Operating with illiquid underlying assets.
• Offering redemptions without true liquidity.
• Managed by firms relying on continuous inflows to meet cash needs.
• Light on standardized disclosure and stress-testing.
• Sold under exempt market rules to investors who did not understand the risk.

This was never a “safe yield play.”
It was a leveraged, illiquid, cyclically sensitive real estate credit trade disguised as a fixed-income substitute.

And advisors piled into it.

Why?

• High commissions.
• Attractive yield optics.
• Simple marketing language.
• Everyone else was doing it.

The result was predictable:

• As rates rose and housing activity slowed, MICs faced rising impairments.
• Liquidity shrank.
• Redemptions were delayed, gated, or suspended.
• Investors were “surprised,” but they shouldn’t have been.

The problem wasn’t the cycle.
The problem was the structure and the way it was sold.

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The Lesson: Structure Matters More Than Yield, Narrative, or Popularity

Private credit is not broken.
But poorly structured private credit sold by poorly trained advisors is dangerous.

A well-designed private credit strategy:

✅ Uses closed-end or drawdown structures with no forced liquidity mismatch
✅ Has strong underwriting and disciplined capital allocation
✅ Manages leverage and funding lines responsibly
✅ Is transparent about valuation and risk
✅ Sizes liquidity sleeves realistically
✅ Aligns the investor’s liquidity expectations with the asset’s reality
✅ Is overseen by fiduciary-level advisors who understand structures deeply

A poorly designed/sold private credit product:

❌ Promises more liquidity than the assets can provide
❌ Depends on new inflows to fund old redemptions
❌ Uses gates as a last-minute surprise
❌ Masks cyclicality with “secured” language
❌ Overweights transitional or construction assets without stress testing
❌ Is adopted because “everyone else is doing it”
❌ Is sold by advisors who cannot explain what happens in a downturn

Contagion vs. Selection: The Market Will Separate the Adults from the Amateurs

We are not headed for a private credit collapse.
We are headed for a sorting.

Strong managers with strong structures will retain capital and seize opportunities.
Weak managers and weak structures will face prolonged stress, forced sales, or restructuring.

Some gates will stay open. Some will close.
Some funds will admit their limits. Others will pretend.

This is not systemic contagion across the asset class.
It is consequence for poor design and poor understanding.

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Why I Am Comfortable with My Own Exposures

Because I focus on:

• Structural integrity over yield.
• Alignment between liquidity and asset duration.
• Sponsors with institutional underwriting standards.
• Realistic stress scenarios.
• Managers with disciplined capital management.
• Position sizes that do not depend on perfect market conditions.
• Structures that are built to withstand redemptions, not just generate distributions.

In short:
I knew what I owned before the cycle turned.

That is the difference between advice and distribution.

The First Step to Better Outcomes: Choose Better Advisors

If investors want better results in private credit or any complex asset class the starting point isn’t picking the right product.

It’s picking the right advisor.

An advisor who:

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✅ Understands structure, not just yield
✅ Asks how liquidity actually works
✅ Reads the legal documents
✅ Knows the capital stack and funding sources
✅ Sizes positions correctly
✅ Plans for stress, not just upside
✅ Educates the client on risk, not just return
✅ Has the courage to say “no” to popular but flawed products

Because products don’t cause damage.
Distribution without understanding causes damage.

There is no substitute for sophistication.

Final Thought: The Industry Doesn’t Need More Yield, It Needs More Understanding

Private credit will remain a core part of modern portfolios.
The asset class has real value.
But the era of selling it like a bond alternative with a marketing deck must end.

The next evolution of this industry will be defined by:

• Structural transparency,
• Advisor education,
• True fiduciary behavior,
• And investors who finally demand more than a sales pitch.

Private credit isn’t the problem.
Misunderstanding private credit is.

And the fastest way to fix that?

Start with better advisors.

Because recognizing obvious risks isn’t genius …it’s competence.

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