Why Semi-liquid Structures are No Free Lunch

“History Doesn't Repeat Itself, but It Often Rhymes” – Mark Twain

If you’ve seen the 1946 classic It’s a Wonderful Life, you’ve seen one of the most familiar examples of what happens when liquidity is promised against assets that cannot easily be turned into cash: a bank run, with crowds demanding money from an institution that does not have it on hand. This asset–liability mismatch - short-term liquidity promises funding long-term, illiquid investments - is a risk as old as banking itself.

While bank runs are the classic example, modern finance has repeatedly seen this same tension surface in other forms - across hedge funds, levered trading strategies, real estate vehicles, and reinsurance or credit structures. From Long-Term Capital Management in 1998, to Lehman Brothers in 2008, and most recently Silicon Valley Bank’s collapse in 2023, the pattern has been consistent: liquidity mismatches can appear manageable in calm markets, then become decisive when conditions tighten. Today, we believe a modern version of that risk may be emerging in private credit - particularly within so-called semi-liquid fund structures -and it has begun to attract headlines.

In this spotlight, we explain why, at Baker Street Advisors, we have been reluctant to recommend semi-liquid fund structures for holding private credit or direct lending assets, despite the operational conveniences they can offer. Our caution is driven less by the underlying asset class (though we do have concerns about certain segments of the market) and more by the structural risks created by liquidity promises layered on top of inherently illiquid investments.

Key Takeaway: We recommend accessing private credit through traditional closed-end drawdown funds that embrace illiquidity rather than mask it. Semi-liquid credit funds promise periodic liquidity on top of illiquid loans - an asset-liability mismatch that can end in gates, prorations, or forced selling when markets stress.

The Allure of Semi-Liquid Private Credit

Semi-liquid investment funds are vehicles that package illiquid assets - such as private loans - into a structure that offers periodic redemption windows. They’ve surged in popularity as a gateway to private credit, particularly for retail and high-net-worth investors seeking higher yields with some degree of liquidity. According to PitchBook, as of September 2025, U.S. evergreen funds managed approximately $500 billion in assets, with direct lending and private credit representing more than half that total. This demand has been matched by rapid product growth: the number of U.S. registered evergreen funds increased from 149 in 2019 to more than 505 in 2025¹.

Conclusion: Lessons from the Past, Caution for the Present

Borrowing short and lending long has always carried risk - this is simply a modern flavor of this dynamic. Whether it’s George Bailey pleading with depositors in a black-and-white film that their money is in “Joe’s house and the Kennedy house” (not sitting in the vault), or a fund manager balancing quarterly redemption requests against multi-year loans, the underlying principle is the same. The core vulnerability is an asset–liability mismatch that no amount of structuring or marketing can fully eliminate. If too many investors head for the exits at once, managers may be forced to sell assets into stressed markets or impose redemption gates - an outcome we’ve already seen in other “illiquid but redeemable” vehicles.

None of this means semi-liquid private credit funds are “bad” or destined to fail. With strong management and realistic expectations, they can play a role in portfolios that otherwise may not be able access private, floating-rate loans that may improve returns and diversification. The key is to treat them for what they are: long-term, illiquid investments, not ETF-like products you can trade in and out of freely.

For investors, our takeaway is simple: these structures come with restricted exits, added risk, and the real possibility that liquidity disappears precisely when you want it most. From our perspective, clients are better served by accessing these strategies through structures that are less vulnerable to liquidity mismatches and that avoid the added risks and distractions of managers having to simultaneously manage portfolios and investor flows.

Sources

¹ Q4 2025 US Evergreen Fund Landscape - Pitchbook

^‍2 Non-Traded Perpetuals Take Control of the BDC Market, But Deployment Issues Continue

^‍3 The Cliffwater BDC Index (CWBDC) measures the performance of lending-oriented, exchange
traded Business Development Companies, subject to certain eligibility criteria regarding portfolio composition, market capitalization, and dividend history. The CWBDC is a capitalization-weighted index that is calculated on a daily basis using publicly available closing share prices and reported dividend payouts.

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