Private Credit Is Often Misunderstood. Here’s How to Evaluate It with a Clear Head. 

Steve Dean is the Chief Investment Officer at Compound. He has 30+ years of experience in markets and investments, and leads our investment team, developing our public and private portfolios. He previously worked in the economic research department of the Federal Reserve.

There’s a lot of negative backlash around private credit.

Jamie Dimon compared private credit bankruptcies to “cockroaches” — where there’s one, he said, there are always more. 

Private credit exists for a good reason. For borrowers, it fills a void left by traditional banks pulling back from the market. For investors, it can be a valuable option to capture yields often above traditional fixed income in a way that doesn't move in lockstep with traditional stocks and bonds.

When you understand the mechanics of private credit, you can recognize what’s panic du jour, and what’s a real cause for concern. Here’s how to evaluate whether private credit funds can work in your portfolio. 

Key Takeaways: 

• Investing in private credit funds can be a powerful diversification strategy. Private credit yields generally top those of traditional fixed income but track independently of public markets. 

• Some of the risk of private credit is behavioral, not fundamental. Quarterly liquidity windows can create a redemption spiral when headlines spook investors, even when the loans are performing well.

• Your liquidity choice determines your exposure to that risk. Quarterly-liquid funds offer potential accessibility, but can leave you vulnerable to gating dynamics; longer lockup structures can remove the possibility of reactive behavior. 

A Quick Primer on Private Credit 

Private credit involves lending money to companies that either:

• can't access the traditional bond or bank lending markets, or 
• choose not to. 

It’s usually seen in younger businesses with less-established balance sheets. 

As an investor, you can invest through a fund that makes those loans, and the interest the borrowers pay is your return.

Historically, much of direct lending came from banks. Since 2008, banks have gotten a lot more conservative about who they'll lend to, which means that when younger or smaller companies need financing, they can't just go and get it from a bank or the public bond market. Private credit funds have stepped in to fill that hole. 

Because those companies have fewer lenders to choose from, they pay higher interest rates. That's part of the reason why private credit has historically offered higher yields.

What makes private credit interesting at the portfolio level, beyond the yield, is that it may move differently than the traditional credit cycle as it's less correlated to the corporate bond market. (Your yield expectation for private credit depends on the strategy, but could be 8-10% for the broad funds.)

That's part of why private credit is grouped with other alternative investments — private equity, real assets, hedge funds — as a category investors turn to for diversification beyond their standard portfolio.

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The Hesitations Around Private Credit 

You know what they say about one bad apple? 

A handful of private credit challenges have made investors skittish about the asset class. 

In late 2025, several private-credit funds had exposure to high-profile borrower failures. More broadly, regulators and researchers have raised concerns that some lenders’ portfolios may be concentrated in particular sectors, which can magnify losses when those sectors weaken. 

While there have been underlying truths about potential private credit missteps, headlines have blown risks out of proportion. Those were isolated failures that the media amplified — as a result, investors all ran to get their money back. And when they tried to get their money back all at once, it looked like there was a broader solvency crisis. 

But it was really just headline-spurred herd behavior; the loan books themselves looked sound all the way through.

How Private Credit Can Benefit Your Portfolio (and If It’s Right For You) 

Private credit isn’t the same as private equity. You're not an owner who’s betting on a company's growth — you're a lender who’s getting paid for the risk you're taking on. While there’s less upside than equity, you’re less tied to the ups and downs of the traditional bond market.

But is private credit right for you? 

That depends on your feelings as an investor.  

You can decide by asking yourself a few questions: 

• How do you feel about not touching your money for a while? If a fund has periodic liquidity, let’s say too many investors want out at once: You might not be able to get your requested money back right away. If that scenario would stress you out, a longer-lockup structure might actually feel better.

• Are you looking for income, or growth? Private credit is lending, not ownership. You're getting a yield. If you’re looking for an ongoing income source rather than a payoff down the road, private credit could be a fit. 

• Do you know what's actually in the fund? Some private credit funds are concentrated in a handful of sectors (software and AI lending often among them); others are intentionally diversified. Before you commit, look into where a given fund's loans are concentrated, and consider what happens to your money if that sector hits a rough patch.

There’s no right answer to these questions. They help you diagnose whether investing in private credit aligns with your own timeline, temperament, and financial picture.

Two Approaches to Private Credit

Would you rather let your investment mature the way it was designed to, or keep the option of pulling out early?

Your answer should be tied to your genuine liquidity needs, which many investors overestimate. That answer can shape which structure makes sense for you.

There are two ways to approach liquidity trade-off in private credit:

Stay liquid — You can choose a quarterly-liquid evergreen/interval fund. It’s more accessible and more liquid, but if people start worrying about the fund and pulling their money, that can affect pricing and flexibility for the investors who stay. 

Lock up — You can choose a longer lockup structure (generally 5–7 years). This removes the risk of reactive investor behavior. That way, your investment matures the way the investment firm wants it to. 

The investment team at Compound actively evaluates private credit funds on many dimensions, from the team and process to the types of loans they focus on and the liquidity framework in place. While we know that a longer lockup is a structural strategy that can let an investment mature as advertised, we also see the benefit of potentially more frequent liquidity windows when those provisions are well managed.

“The Redemption Run”: What Happens When Investors Pull Out of Private Credit Early

When investors request to get their money back from funds — which they can do during quarterly liquidity windows — that's called a redemption. As an investor, you should know how your fund actually meets that request: The mechanics behind the scenes shape what you get back and when. 

Funds can pull a few different levers:

1. Use fund inflows
2. Draw on a line of credit
3. Maintain an allocation to liquid public securities that can be easily sold
4. Sell their most liquid private loan assets on the secondary market (often the highest-quality loans)

Quarterly liquidity windows let investors redeem up to a cap, usually 5% of fund assets. When redemption requests exceed 5%, funds scale the redemption amounts pro-rata so investors get back only a fraction of what they requested.

That partial redemption can create a challenging cycle where people think "I didn't get out the door all the way,” so “next time, I'm going to ask for even more." 

If everyone inflates their request because they’re expecting to be gated, redemption demand balloons past the client’s actual liquidity needs.

This behavioral loop means no one really knows what the true liquidity need is, because so many investors are playing the same game.

Another way to look at it: Imagine that you asked me for $100, and I only gave you $50. Then, the next day, you ask me for the other $50 you needed, but I only give you $25.

Next time you ask me for money (and want $100), you’re probably going to ask me for $200, expecting that I’ll only give you a portion of what you want.  

That’s how a redemption spiral starts — a $100 need turns into an inflated $200 request. 

It's important to understand a redemption run is generally the result of human behavior, not a result of deteriorating credit quality. But the spiral has real consequences for investors who stay in: as more of the fund's liquid assets get sold off to meet inflated redemption requests, what's left is often the less liquid, harder-to-sell part of the portfolio — which can affect pricing and flexibility for everyone still in the fund. 

A lot of people who added private credit to their portfolio don't end up sticking with it for the long run. And the long run is exactly where it works best — for the fund, and for your own returns.

Due Diligence Questions for Evaluating Private Credit Liquidity

When Compound’s investment team evaluates the liquidity of private credit funds, these are the questions we ask: 

What percentage of the fund’s portfolio is in public or liquid securities? 

• What is the public piece? 
• How liquid is it? 
• How safe is it? 

Some funds are pushing 20% in public securities as a liquidity buffer. That 20% drag on yield is the cost of the liquidity feature.

What are the terms of the fund's line of credit? 

If the fund is drawing on a credit line to meet redemptions, it's adding leverage. It is important to understand the specifics of that facility.

Has the fund had to sell loans to meet redemptions, and, if so, what was the impact on portfolio quality? 

If they've sold, what did they sell, and what does the remaining book look like? 

For example, look at Blue Owl. They sold loans at 99.7% of book value — which is a near-perfect execution. But did they sell their best loans first, potentially leaving a subtly weaker portfolio behind?

How diverse is the borrower base across industries? 

Some of the headlines that spooked private credit investors highlighted concentration of loans to the software sector. While many private credit funds showed this concentration, still more were diversified across industries. The software-concentration concern is fund-specific, not a broad indictment of the asset class. 

It’s more common now for funds to be proactive about answering these questions. If they aren’t, that’s worth some scrutiny. 

To get a clear view of your portfolio, try out our Dashboard. It’s the first step in identifying where alternatives could fit. 

FAQs

Is private credit in trouble right now?
Not necessarily. Headlines often conflate isolated and structural issues with credit quality problems, but they're different things. With due diligence, investors can identify well-managed funds to invest in.

What does it mean when a private credit fund "gates" redemptions?
Gating happens when redemption requests exceed the fund's quarterly cap (usually 5% of assets), causing the fund to return a fraction of what investors requested. This mechanism exists to protect investors from fire sales, but it can trigger a behavioral spiral where investors inflate future requests, creating redemption pressure that has nothing to do with the fund's actual credit performance.

How do I know if a private credit fund has potential liquidity issues?
Ask the right questions. How liquid is the portfolio? What are the terms of the fund's credit line? Has the fund had to sell loans, and what's left in the book? What's the inflow/outflow mismatch? How diversified is the borrower base? Well-managed funds will answer these proactively.