BDC Redemptions: Looking Beyond the Gates

Private credit vehicles offer investors a degree of liquidity—generally a quarterly redemption limit of 5% of net asset value (NAV). But in a fast-evolving market, these limits are being tested, and questions about gating – or limiting investor withdrawal requests – have begun to arise.

Gates are a temporary way to manage cash flow based on contractual limitations. They are designed to protect managers that invest in less liquid investments, providing them the confidence they can hold these investments until maturity. Yet with tender offers from several non-traded business development companies (BDCs) set to expire in the coming weeks, it could bring the next round of concerns to private credit. Advisors should be prepared for the possibility that redemption requests could exceed the standard 5% threshold. But they should also understand that credit is income producing and that underlying loans have a shorter average life (three-years) relative to other assets.¹ This provides greater embedded liquidity and is a basis for funds to fulfill redemption requests in an orderly manner. History shows that in the case of excess redemption requests; it can take roughly a year to fulfill the scope of such requests.

Many non-traded business development companies (BDCs) are near or above their 5% quarterly redemption mark for Q4 2025.² And first-quarter tender offers – which are due to expire in the next few weeks – are all but certain to climb even higher.³  There are different ways fund managers can approach such an oversubscribed tender including: 1) purchasing shares on a pro-rata basis, 2) increasing the amount investors can redeem, or 3) other liquidity options such as a special distribution. How fund managers decide to satisfy these shareholder demands will be an important factor for investor confidence.

In these situations, we often use history as a guide. It’s helpful to look back and understand how much selling pressure occurred and how managers worked through tender offers in instances when they were oversubscribed (i.e., above 5%). From the few precedent examples that exist (including real estate funds), it can take a few quarters to over a year to get through elevated redemption requests.

Non-traded real estate investment trust as a case study

Blackstone’s Real Estate Income Trust (BREIT) is one fund that faced a period of heightened redemption requests where investors asked to withdraw roughly 20% of shares at the peak (Exhibit 1). The fund ultimately fulfilled 100% of requests over a fourteen-month period.

Even though the fund delivered on the obligations specified in its prospectus, some investors couldn’t sell all the shares they wanted. A lack of clarity on how the fund’s liquidity mechanics work contributed to negative sentiment at the time but can now serve as a proxy for what’s next for BDCs.

A scenario analysis can also be used to forecast possible outcomes

In Q4 2025, BDC redemptions increased across the board. According to Cliffwater, redemptions in its index rose to 4.8% in Q4 2025 compared to 1.6% in Q3 2025.⁴ The largest non-traded BDCs are also near the 5% threshold (Exhibit 2). And in instances where requests exceeded 5%, the funds fulfilled 100% of the tender, signaling efforts to conduct an orderly process.⁵

Assuming redemptions spike two to four times their quarterly limit in Q1 2026, we estimate oversubscriptions could continue for a three to five quarter period. In this scenario, we assume that redemption requests follow a similar path as BREIT with a maximum 20% request for two quarters, declining from 12% to 8%, before settling below the 5% level. However, it is important to draw a distinction between performance and market-driven redemptions. Performance-driven redemptions can lead to asset sales at significant discounts. For private credit, we believe redemptions are market-driven based on uncertainty as the underlying performance of portfolios remains healthy and the assets are less likely to be significantly impaired as they are primarily senior loans.

The difficult input is forecasting the continued sales of shares given the concerns that are now hovering over the industry. From a positive standpoint, BDCs generally have ample liquidity and low leverage with average debt-equity ratios of 0.91x well below the regulatory limit of 2.0x.⁶

Limits exist for a reason

Redemption limits are designed to protect investors from a “run on the bank” scenario. Advisors can reiterate these funds are not public market funds (i.e., ETFs) and do not provide the same type of liquidity. Private assets are long-term investments and require features that allow the management of fund capital over the long-term. Investments by the fund are purchased with a buy-and-hold intent and to keep this strategy balanced, funds are designed to allow small periodic withdrawals. But in periods of stress, this balance gets tested.

It’s also worth understanding that redemptions are divorced from credit quality. Credit quality is based on the breadth of origination opportunities, where these opportunities are priced, and underlying loan performance. Redemptions are driven by shareholder behavior.

Another challenge for private credit is the different fund vehicles. Publicly traded BDCs have daily price discovery, and the recent sell-off suggests investors don’t trust valuations (i.e., marks on underlying loans). On average, public BDCs are trading at 80% of net asset value (NAV) and are pricing in recent reductions in dividends.⁷ Non-traded BDCs have an added responsibility of fulfilling investor demand for liquidity.

To help investors through this uncertainty, advisors can look at several metrics for a measure of fund liquidity.

• Structural-based liquidity: BDC vehicles have access to plenty of capital. They continually issue shares, where advisors can look at monthly securities sale information for capital inflows. And they have access to debt. Fitch-rated BDCs issued $21 billion of debt in 2025, and another $4 billion in January 2026.⁸
• Portfolio-based liquidity: A typical private credit portfolio can provide cash inflows from 1) interest, 2) dividend reinvestment, and 3) loan turnover.

1. 1. Average life of a loan: A typical private credit loan has a three-year life until a refinancing event. Consequently, about one-third of the portfolio will turnover every year which provides a natural liquidity buffer above the maximum 20% stated annual redemption threshold.
   2. Interest: Based on average new issue direct lending yields over the last three years, a typical private credit portfolio should naturally generate annual cash flow yields of 10%.⁹
   3. Dividend reinvestments: To the extent investors opt-in to dividend reinvestments, this can act as a natural subscription tail as funds actively raise capital.

These are particularly important factors for advisors when separating fundamentals from market sentiment. Especially when comparing BDCs to other asset classes such as private equity or real estate. Because credit is an income-producing asset with a shorter average life of the underlying investment, it will provide higher levels of cash liquidity to the fund relative to other assets such as real estate. These distinct private credit characteristics provide a basis to expect an orderly process in period of heightened redemption requests.