Financial advisors are increasingly endorsing an arbitrage strategy in private credit, advising clients to move out of illiquid, non-traded private credit funds and into publicly traded alternatives. This shift is driven by the significant discount—between 10% and 20%—at which public versions of the same first-lien corporate loans are currently trading, compared to their illiquid counterparts. The illiquid private credit funds are often valued at 100% of Net Asset Value (NAV), while public BDCs holding nearly identical assets are available at 80 to 90 cents on the dollar with daily liquidity. This disparity has led to a re-evaluation of private credit allocations, particularly for positions established in 2022 and 2023.
This trend is emerging as private credit faces mounting redemption pressures and concerns about liquidity. Blackstone's BCRED, for example, saw repurchase requests hit nearly 10% of shares in Q2, exceeding its 5% cap and prorating tenders. Similarly, Apollo's private credit fund experienced redemption requests hitting 16.8% of NAV in Q2 2026, or approximately $2.4 billion, against a 5% withdrawal cap of about $0.7 billion. Overall, in Q2, investors requested close to $14 billion in withdrawals from the largest retail private credit funds, with only about half of these requests being met. This structural issue, where investors realize that promised liquidity is conditional on others not seeking it concurrently, is accelerating what some analysts are calling a "slow bank run.
The cooling sentiment towards private credit is reflected in advisor behavior; while 60% of advisors still report existing exposure, only 23% plan to increase their allocation in the next 12 months, a significant drop from 64% in late 2024. Wealth-channel alternative asset flows to private credit have fallen from 56% to 32% year-over-year. As redemption gates make exiting illiquid funds difficult, advisors are now focused on the arbitrage opportunity, questioning why clients should hold assets marked at 100% NAV when liquid equivalents are on sale at a discount. This situation is compelling advisors to confront the "inertia" of holding onto positions that, if marked to market, would reflect a real-world discount.
