Private credit gating a ‘wake-up call’ for advisors 

At least five major private credit managers have limited investor withdrawals from semi-liquid funds since the beginning of 2025. Moves by Apollo Global Management, Blackstone, Blue Owl Capital, BlackRock and Morgan Stanley have underscored the liquidity strains built into the fast-growing asset class. 

Advisors say announcements from firms like these  present an opportunity to teach clients about alternative investments, and their liquidity needs. 

Zachary Schenk, an associate portfolio manager with Bowes Wealth Management in Toronto, part of Raymond James Ltd., has received questions from new clients, for example, on why the team has an allowance of up to 10% to alternatives in its investment policy statement. 

The question led to a valuable conversation about how the firm uses alternatives and why, and how all alternatives are not the same. 

“I pulled up a few slide decks I had showing that alternatives can be a positive story, as most people by now have only heard negative stories,” he said. 

His team has also won new clients who were invested too heavily in alternatives. One had a 40% allocation to alts, with half of that in private credit. 

“Three of their funds are gated,” Schenk said, including “both of their private credit funds.” The portfolio had delivered poor returns despite a relatively strong broader market.

“The client did not fully understand what they held or the liquidity limitations attached to those investments,” Schenk said, adding one venture fund had a 10% redemption penalty for the life of the fund, further limiting flexibility. 

“The first step is education, helping the client understand what is liquid, what is not, where the redemption constraints are and how those holdings fit or do not fit their goals and cash-flow needs,” he said. 

“From there, our approach is to reduce risk as much as we can over time. That means no further additions to illiquid holdings, using whatever liquidity is available to rebalance and gradually working toward a more appropriate mix as redemption opportunities arise.” 

Too much exposure to illiquid assets can’t be fixed overnight, Schenk said. “What you can do is put a plan in place to improve liquidity, reduce concentration and better align the portfolio with the client’s needs.” 

Know your product

Gating announcements serve as a reminder for advisors to know their product, said Adam Bighill, an advisor at Pejovic Bighill Private Wealth in Winnipeg, part of Wellington-Altus. 

“I think this is a wake-up call for every advisor who has exposure to private credit” said Bighill. He warns that increasing access for retail investors to private credit will create more moments where investors all try to “hit the exit” at the same time.  

The issues are generally “coming from a mismatch of expectations and outsizing of a position, and you know, a promised pipe dream that in reality is hard to meet.”  

Historically, the sales pitch for private credit has been that it offers equity-like returns with bond-like volatility. That “doesn’t match the structural description of what private credit really is,” Bighill said. 

Po Leung, an advisor with Designed Securities in Toronto, hasn’t allocated to private credit because she’s not comfortable with the liquidity constraints. But several years ago, the pitch was attractive when investors were chasing yield. 

“The yields are so high compared to what you’re getting elsewhere, especially in the low-interest-rate environment five years ago,” she said. “You’re able to get things like 8%, 8.5%, 9% yields … and then they add leverage … so it looks like there’s a 12% yield, she said. “But you have to understand, with leverage comes a certain amount of risk, so your 12% yield, or 10% yield comes at a great cost.” 

Newer products are scooping up loans on the cheap through secondaries, said Schenk. If you trust the fund manager’s ability to assess those opportunities, and the fees are reasonable for what they’re offering, it may appeal to investors, he said.  

Schenk also said he expects to see more products offering a “sleeve” of liquidity, setting aside a certain portion of the fund for public equities. “I think we’re going to see that more and more,” he said. “It makes sense for products coming to the retail channel.” 

Due diligence  

In comparison to public market funds, there is less transparency in a private credit fund, and what the loan covenants and potential concentration risks are. Advisors need to ask the right questions and fully understand the risks, Leung said. “If you don’t look under the hood, you might not know the right questions to ask.”

“There is a place for mid-market loans run by smart money — and these are some of the smartest people you know, at Blue Owl, Blackstone Group, KKR,” she said. 

The problem is, they’re pitching to retail investors who are accustomed to public market pricing, which is “what you see is what you get, whereas in a private market, what you see is … what they say you get.” 

Leung said before investing, she would make sure to question private credit fund managers on default rates, the percentage of loans that are payment-in-kind (where companies defer cash payments on a loan) and liquidity limitations. 

For Schenk, deal flow is a key factor in assessing managers. Asset managers like Carlyle and Apollo, for example, are “private giants” that see consistent deal flows, something that’s not always true of smaller managers in Canada, he said. 

His team also asks for auditing reports, financial statements and importantly, the fund’s valuation policy. 

For example, in 2022–23 there were private real estate funds reporting 15% returns at the same time publicly traded real estate investments were down 30%, he noted. Look for more frequent valuations conducted by independent third parties.

Advisors also need to assess fees, lock-up periods and look at the restructuring history of a portfolio, as well as the use of leverage to fund redemptions, which can be a warning sign that a fund may gate. 

“Taking on excess leverage … is really a detriment to other unit holders as now remaining unit holders are stuck with that loan on the books, and they’re funding it,” Schenk said. 

You have to trust the managers, Leung said. 

“I try very hard to meet the private credit managers to learn what they’re doing. The lead time or runway to actually allocating takes a bit longer because I have to feel comfortable when we meet the portfolio manager, when we meet their marketing guys,” she said. “There are some private managers that I do like, and some Canadian ones. But right now, it’s scary, because there’s contagion.” 

Bighill says his team goes as far as reaching out to other advisors and other people that have had experience with the fund, to get their feedback on what the managers are like to work with. 

Suitability 

The client’s need for liquidity is key to assessing the suitability of private credit investments. “Draw rate is the biggest thing that we look at,” Bighill said. A client with a drawdown rate of higher than 2% might not be suited to the investment, he said. 

In terms of allocation, Schenk said he wouldn’t go higher than 5% in private credit, while Bighill said 2% was an appropriate allocation. 

That provides enough room to benefit from the exposure while ensuring the client is not overexposed, Bighill said. 

“There is a minimum asset size where we will include private credit options into models for clients, so generally, we need account sizes of probably $500,000 or more in an account to start looking at, does a slice of private credit make sense?” 

While a fund may have liquidity provisions, advisors and clients need to understand that doesn’t mean liquidity will be available when they want it, Bighill said.