The 'Liquidity Illusion' of Private Credit: Cracks May Emerge Under Stress

The head of research at the European Capital Markets Institute, part of the European Policy Research Centre, Apostolos Thomadakis, pointed out in a letter to the Financial Times that the biggest hidden danger in the private credit market at present is not illiquidity itself, but the "illusion of liquidity" created by semi-liquid structures.

As more and more asset management companies offer semi-liquid private credit products to their clients, the boundary between accessibility of funds and genuine liquidity is becoming increasingly blurred. Thomadakis calls this phenomenon "methodological mismatch" - a large number of asset management companies that have accumulated rich experience in the field of liquid Ucits funds are transferring this methodology to private credit products, yet the valuation of the underlying assets of the latter is more difficult, more challenging to liquidate, and less frequent in pricing.

He pointed out that the valuation of private loans and listed securities are essentially two different tasks. Low frequency of data arrival, weak price discovery mechanisms, and thin liquidity in the secondary market are characteristics particularly prominent in the European market. Smoothed valuation and model pricing can suppress book volatility, but they cannot make the real risks disappear. Once the market enters a stressful period, this artificially created sense of stability may collapse rapidly.

Thomadakis' core argument is that the real problem faced by investors is not only whether the portfolio is diversified enough, but more importantly, whether the structure design, valuation methods, and risk narratives of semi-liquid private credit products match the underlying assets they are packaging. Pricing non-liquid assets with liquid market assumptions, diversification alone cannot provide real protection for investors.