The Rising Cost of Liquidity: Why Private Credit Exits Are Getting Expensive

Private credit exits are getting expensive. Reuters flagged the trend in a recent roundup: discounts are now the price of liquidity in a market where secondary buyers hold leverage. Meanwhile, 9fin reports the asset class is flirting with preferred equity structures as exit paths narrow. Two data points, same conclusion — getting your money out of private credit is no longer a given.

The Discount Problem

The mechanics are straightforward. When LPs or direct lenders need liquidity, they sell positions at a markdown. Reuters labels this "the cost of getting out" — no euphemism, just a spread between par value and what the secondary market will pay. In a higher-rate environment where vintage 2021–2022 deals are maturing without clean exits, that spread widens. We see a repricing of illiquidity itself.

Key variables to watch:

• Bid-ask spreads on secondaries — if they're expanding, the market is pricing in longer hold periods.
• Default rates in private credit portfolios — even modest upticks compress recovery assumptions.
• LP redemption queues — the longer they get, the steeper the discount needed to clear them.

No specific discount figures were cited in the available reporting. That absence is itself a signal: participants aren't eager to publicize the haircut.

Preferred Equity as a Workaround

9fin's piece points to private credit funds exploring preferred equity structures. Translation: when borrowers can't refinance and sponsors can't exit, the debt instruments morph. Preferred equity sits above common equity but below senior debt — a hybrid that lets lenders participate in upside while deferring the exit clock. For managers with underwater positions, it's a way to avoid crystallizing a loss on the balance sheet.

The risk: preferred equity in a down market is a bet on recovery, not a hedge. If the underlying asset doesn't appreciate, you've just moved the loss from one column to another.

Sector Stress Tests: Trucking as a Case Study

FreightWaves' analysis of PE in trucking offers a concrete example. Most deals fail. The piece doesn't sugarcoat the base rate of PE returns in a capital-intensive, low-margin vertical. One successful deal out of many doesn't validate the thesis — it highlights survivorship bias.

This connects to the broader private credit narrative. Funds that loaded up on cyclical sectors — logistics, commercial real estate, rate-sensitive services — are now holding paper that's harder to exit at par. The trucking data is a micro version of the macro problem.

What Builders Should Track

• Your fund's secondary market exposure. If your LP base includes institutions needing liquidity, expect capital calls or forced sales at a discount.
• Covenant-lite structures from 2021–2022 vintages. These are the most vulnerable to renegotiation or preferred-equity conversions.
• Sector concentration. Cyclical exposure amplifies the exit problem. Diversification isn't just risk management — it's exit management.

The bottom line: private credit's growth story assumed liquidity would be available at fair value. It isn't. The discounts Reuters and 9fin are describing aren't anomalies — they're the clearing price for an asset class that expanded faster than its secondary market infrastructure. Plan accordingly.