“That dynamic can lead to selling whatever can be moved at an acceptable price,” Kim says, contrasting this with traditional lenders: “By contrast, banks can hold credits on balance sheet through full cycles.”
For advisors recommending private credit funds to clients, how should they think about liquidity risk versus yield in today’s higher-rate environment? Kim stresses that not all private credit funds are created equal, making due diligence essential.
“In today’s environment, it’s critical to look very closely at the specific fund’s assets and portfolio composition,” he says. He also warns that broad narratives can distort risk perception. “Contagion can also spread when the industry is painted with a broad brush, particularly around sectors like software and AI.”
Importantly, Kim cautions against taking yield at face value.
“Equating yield as actual return is challenging. The quoted yield assumes the borrower pays, the fund doesn’t need to fire-sell assets, and the investor can actually access capital when needed,” he explains, noting that ultimately, “assessing the true liquidity buffer in a downside environment is key to understanding the risk.”