KBRA releases research examining how redemption limits in evergreen private credit vehicles can help protect investors by aligning investor liquidity with that of the underlying assets.

Redemption limits—commonly referred to as “gates”—have become a widely discussed feature of perpetual private credit vehicles, drawing negative attention when perceived as restricting investors’ access to capital. However, KBRA believes this structural feature was designed to align investor liquidity with the liquidity profile of the underlying assets and reduce the risk of contagion-driven liquidity runs, forced borrowing, and discounted asset sales to meet redemptions.

For investors in KBRA-rated debt transactions with exposure to perpetual vehicles—including 16 perpetual non-traded business development companies (BDC) out of a total of 35 rated BDCs, as well as a growing number of fund investment and fund finance transactions—KBRA believes redemption limits have functioned as intended and are generally a credit positive. They provide additional protection that can support ratings by preserving net asset value (NAV), portfolio income, asset coverage, and interest coverage.

This report examines why KBRA believes redemption limits are an important structural feature of perpetual private credit vehicles, how they protect rated debt investors, why redemption requests are beginning to moderate, and what additional rating considerations they create.

Key Takeaways

• Redemption limits give managers time to generate liquidity and can reduce the need for discounted asset sales or additional fund-level borrowing, helping preserve NAV, portfolio income, asset coverage, and interest coverage.
• Recent performance suggests redemption limits are functioning as intended, while underlying credit performance has remained relatively resilient despite concerns about broader deterioration. KBRA believes this stability has contributed to the recent moderation in redemption requests.
• A growing number of KBRA-rated collateralized fund obligation and rated note feeder transactions invest in perpetual vehicles and rely on fund redemptions for repayment. These structures often include alternative repayment mechanisms—such as withdrawal accounts or in-kind redemptions—that give the underlying investments time to liquidate and can reduce the risk of forced asset sales but require additional rating consideration.
• Continued institutional fundraising suggests elevated redemption activity has not translated into a broad retreat from private credit, supporting KBRA’s view that recent pressure has reflected sentiment and liquidity preferences more than widespread credit deterioration.

Click here to view the report.

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About KBRA

KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.

Doc ID: 1016949

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