Private credit evergreen vehicles launched aggressively by a few large asset managers to gain new territory in private wealth have backfired. Even though evergreen’s embattled state is not a microcosm of troubles in the overall private credit asset class, the media is fueling investor anxiety by conflating the two and questioning the health of private credit as a whole.  Only time will tell how private credit’s overindulgence in sponsored lending will play out when an economic downturn pushes up defaults and nonaccruals or a financial market fallout hits a wall of maturity or triggers a pullback from leverage providers.

But for now, it’s important to recognize the tail (evergreen private credit is ~15% of the overall sector) wagging the dog situation.  Therefore, we must isolate evergreen private credit’s present-day loss of investor confidence to understand some large asset managers’ wrongdoing, if you will, and how a do-over might give evergreen private credit a second chance to participate in an asset class that its original beneficiaries and benefactors i.e. institutional investors are tapping into beyond the sponsored/direct lending boom.

Wrongdoing

Faced with a fundraising drought in institutional land, many large alternative strategy managers made a beeline for greener pastures in the retail world where assets held are estimated at $37 trillion, including $10.5 trillion at direct investor platforms, $6 trillion at wirehouses, and $3.5 trillion at independent RIAs (Source: Cerulli Associates). They launched private credit “evergreen funds” that include 1940 Act closed-end interval funds for the retail masses (who already have access to publicly traded liquid BDCs) and non-traded BDCs for accredited investors. The pitch: life is passing by and it’s time the masses got an opportunity to invest in “private credit”, the nirvana for institutional investors in a low-yielding environment post GFC. In pushing a product originally designed for institutional investors, many richly commissioned advisors harped more on higher yields, lower minimums and simpler tax reporting but failed to emphasize enough, private credit’s raison d’être- the “illiquidity premium”, in other words, a return premium for giving up liquidity/locking up one’s investment for a length of time.

Overlooking the liquidity mismatch, i.e. liquid structure housing illiquid underlying assets, the managers, on the contrary, volunteered partial quarterly liquidity (~5%) even in non-traded BDCs that technically allowed them full discretion in considering redemption requests. To gain favor with wealth advisors this was presented on par with interval funds that are obligated to offer a quarterly redemption of 5% of NAV. Their spiel worked (bolstered further by the executive order allowing private credit in 40(k)s) and assets in private credit evergreen funds ballooned 3x over 2022-2025, mainly in non-traded BDCs (Source: Morningstar and Pitchbook). Yet again, the unsuspecting retail investors and their advisors overlooked the deal origination challenges these private credit managers faced in deploying their institutional dry powder in sponsored lending, before endowing them with a further largesse.

Now the chickens are coming home to roost with a spate of redemption requests from impulsive HNW (led by Asian) investors mainly in non-traded BDCs who are quick to pull the trigger on scary headlines (e.g. AI-induced SaaSocalypse, threat of contagion from a few fraud instances in public BDCs), a movie we have seen before in the collapse of many funds of hedge funds (FOHFs) backed by wealth channels during the GFC.

Instead of exercising their discretion to either cap/gate the redemption requests, some non-traded BDCs have honored all incoming requests to alleviate investor anxiety about the quality of the portfolio and not alienate them during future fundraising, just like some FOHFs adopted back in the day. And those who choose to gate at stated 5% NAV levels stick out as less honorable/investor-friendly (in comparison) when it is reported that the manager redeemed only 50% of redemption requests.

Do-Over

If evergreen funds wish to restore retail investors’ faith they must first and foremost educate investors that lenders charge a premium for lending against corporate cash flows (as in sponsored lending) or income producing assets (as in asset-based lending) when lenders contractually commit to a longer loan tenure. Viewed from another lens, private credit monetizes asymmetry in borrower’s information unknown to the general marketplace. If investors pull money out prematurely, evergreen funds need to sell their underlying loans at a discount that hurts the remaining investors in the fund. Therefore, illiquidity of the underlying loans and in turn of the fund cannot be compromised.

Equally important for them is to exercise their discretion in structures like non-traded BDCs to allow only as much liquidity as afforded by the income that the portfolio can generate. It would be quite justified for them to borrow a page from the hedge fund playbook to impose hard (1-3 year) locks or soft locks (liquidity with some penalty) to discourage panic selling along with fund or investor level gates. As for interval funds, investors should be educated on the potential dilution of illiquidity premiums when illiquid assets are either sold prematurely as explained above or mixed with liquid stocks to meet the 5% mandatory liquidity per quarter.

Allowing frequent liquidity also warrants more frequent valuations for determining sale and purchase prices, a seemingly difficult exercise for hard-to-trade/hard-to-price (Level 3 assets) private loans that do not have a public market and often lack good proxies. Periodic valuations involve many minds and datapoints to form best estimates predicated on logical and consistent assumptions that would only get more difficult in a more uncertain economic and credit environment. If frequent marks came easy, institutional investors would not have to live with lagged information.

Now if evergreen funds were to adjust valuations for more frequent marks on assets concurrently held by institutional investors, it would lead to yet another debate on whose interest is being served-the retail or institutional investors’? Or further still, is it to serve the fund manager’s interests with management and performance fee calculations based on NAV? Evergreen funds should therefore educate the masses and their advisors on the practical challenges of valuing private loans and that too, frequently rather than promise them daily NAVs (likely to be more mark-to-myth/guesstimates) in their bid to appear transparent and support frequent liquidity. If daily NAVs become a widespread practice among evergreens, it could also create undue  pressure on everyone, to take market-to-market losses on similar assets even if they planned to hold loans until maturity to be fully paid back eventually.

Leverage providers to evergreen private credit funds can exercise their prerogative to perform their own valuations to price or decide their leverage that evergreen fund investors should be made aware of as a heads up to any potential lender markdowns (with reasons) as we have seen recently.

If anything, this wave of evergreen fund redemptions proves yet again that brand names are not synonymous with safety/comfort and best practices. In fact, it affords the next crop of evergreen funds including other private credit asset managers who wish to launch evergreen funds, the opportunity to buy discounted assets/LP interests. Credit secondaries could prove attractive again if business/economic pressures weigh on poorly underwritten sponsored loans of yesteryears (in the wake of a capital glut discussed above) or rising interest rates induce evergreen funds to deleverage in the near future.

On a look through basis evergreen private credit, especially interval funds have invested heavily in equity sleeves of nontraded BDCs and private credit CLOs comprising of sponsored loans, besides making direct sponsored loans. Not only does this pose over concentration in direct lending, but it also adds to overall leverage and create valuation dependency on the underlying. This overconcentration is due to evergreen funds’ urgency to deploy quickly the large assets raised in a short period of time.

Therefore, the next iteration of evergreen funds should be capital-disciplined in matching regular investor inflows to deal flow (origination is key) such that they can tap into a diversified set of opportunities like physical asset-based lending, infrastructure debt, capital solutions, junior debt, Asia non-sponsored lending etc., all opportunities that institutional investors are viewing favorably with prospects of rising base rates and widening credit spreads. Moreover, direct lending is quite long in the tooth with rising interest rates curtailing PE deal activity.

IF the purpose for asset managers in inventing evergreen funds is really to tap into a new investor base on the promise of equal opportunity for the retail masses as enjoyed by their institutional brethren, it is necessary to regain investor confidence with education and enforced practices around illiquidity, valuation, leverage, capital discipline and by providing diversified exposures within private credit that institutional investors are tapping into beyond the sponsored/direct lending boom. A do-over would be key to developing a go-to-market strategy for the next generation of evergreen private credit managers.

Kamal Suppal

Chief Investment Auditor

March 17, 2026

The above content is intended for accredited/qualified/sophisticated audiences as in institutional investors or family offices. Readers are advised that any theme or idea discussed above is not an offer to buy or sell any investment.