Latest quarterly flow data show modest redemptions relative to NAV, though the balance of redemptions against fundraising points to materially weaker conditions.
Balance sheet stress in semi-liquid credit vehicles does not begin with credit losses. It begins when replacement capital slows.
In previous research notes (November 6 & 10, 2025) I cautioned investors, advisors, and investment managers why I anticipated the coming storm and a suggested call to action.
New Q4 flow data from publicly registered non-traded BDCs shows a sharp deterioration in replacement dynamics: among funds reporting both fundraising and redemptions, redemptions equaled approximately 71.73% of fundraising (not including DRIP proceeds), up from roughly 15.41% in Q1.
Redemptions measured as a percent of NAV remain modest (about 4.8% for reporting funds). That is not the primary risk signal. The more relevant indicator is replacement capacity. It is whether new capital offsets exiting capital. On that measure, conditions weakened materially in Q4. This is not a solvency signal. It is a balance-sheet trajectory signal.
What changed
Using like-period measurement, quarterly redemptions divided by quarterly gross fundraising for publicly registered non-traded BDCs that reported both figures, the ratios were approximately:
- Q1: ~15.4%
- Q2: ~31.7%
- Q3: ~24.3%
- Q4: ~71.7%
Coverage context:
- Total NAV universe measured: $128.6B
- NAV of funds reporting Q4 redemptions: $95.8B
- Q4 redemptions ≈ 4.8% of NAV for the reporting subset.
The NAV percentage is informative but incomplete and may lead to a false sense of stability. Replacement capacity on the other hand is the forward indicator.
Why NAV % redeemed is not the primary risk lens
Redemptions as a percent of NAV is a stock measure. Replacement capacity is a flow measure.
They answer different questions:
- NAV % redeemed = How large were withdrawals relative to equity?
- Redemption / Fundraise = Are capital exits being replaced?
Replacement capital is the canary in private credit – Not % of NAV
A fund can experience mid-single-digit NAV redemptions ( • above) and still face balance sheet pressure if fundraising slows, originations continue, and leverage and liquidity targets must be maintained. The danger is to look at the right-side axis without paying attention to the left-side axis.
Balance sheets shrink or balance sheet leverage increases when replacement capital fails. You can have redemptions at a low percentage when total NAV is large and still find your balance sheet under pressure. Indeed, the larger the fund the more likely this math is true. Said clearly, you can have less than 5% redemption rates but if your fund redemptions rise above 100% of replacement capital (inflows) you have balance sheet pressure, which triggers “issues”.
The balance-sheet shrink mechanism
When replacement weakens, the sequence is mechanical:
- Net flows deteriorate
- Cash buffers are used
- New originations slow
- Portfolio turnover is not fully replaced
- Fee and spread income bases compress
- Fixed costs do not compress proportionally
- Distribution coverage tightens
- Balance-sheet contraction follows if sustained
- Portfolios with high levels of PIK become exposed
This is a funding dynamic, not a credit event.
Price discovery under synchronized selling
Semi-liquid credit vehicles are typically valued using model inputs, comparable spreads, and dealer indications rather than continuous transaction prices. That framework works well when flows are balanced.
When multiple vehicles shift toward net selling at the same time, executable secondary prices can diverge from prior marks because dealer balance sheets are finite and bid depth is episodic. Secondary markets are negotiated, not continuous. The market memory on this phenomenon is well documented.
This is not a valuation failure. It is market structure. Transaction price discovery becomes flow-driven rather than model-driven. I recommended in previous notes a call to action. I would underscore that the need is greater today and likely to become critical by Q2 2026.
What this analysis does not claim
This analysis does not assert solvency stress, credit impairment, distribution cuts, or valuation mis-marking. It highlights replacement-capital dynamics that historically precede balance-sheet contraction in semi-liquid credit vehicles.
Takeaway
Boards, analysts and product committees should monitor redemptions versus fundraising not just redemptions versus NAV. Replacement capacity deterioration is a measurable signal that semi-liquid balance sheets may be under pressure.
