Private credit's $1–2 trillion liquidity gap explained: how secondary markets are evolving from $6bn to $20bn in annual transactions, why they can't yet meet $45bn+ in redemption demand, and what this means for the asset class's structural future.

Key Highlights

  • Private credit has grown into a $1–2 trillion asset class, but liquidity architecture remains structurally constrained.
  • Redemption caps and gating mechanisms are being tested as institutional investors rotate toward liquid assets.
  • Secondary market transaction volumes in private credit have expanded from $6bn to approximately $20bn between 2023 and 2025.
  • Short-term secondary market capacity remains insufficient relative to potential fund outflow volumes.
  • Deeper secondary markets may unlock price discovery and quasi-mark-to-market behaviour over the medium term.

Overview: A decade of growth meets a moment of reckoning

Private credit was supposed to be the rational alternative to public bond markets. It offered higher yield, lower volatility on paper, and predictable cashflows in the form of floating-rate interest payments. For much of the past decade, that promise held. Capital flowed in at scale, managers proliferated, and the asset class grew from a niche corner of institutional portfolios into a dominant capital allocation strategy worth an estimated $1 to $2 trillion globally.

The narrative has begun to fracture. Share prices of publicly listed private-asset managers have declined sharply in 2025. Collateral values on leveraged loans are under review by banks. Senior figures across the financial system have flagged that credit losses in this cycle may exceed earlier expectations. And retail-facing fund structures, which had broadened the investor base considerably, are now experiencing elevated redemption demand. The asset class is, for the first time at scale, being stress-tested on its most fundamental vulnerability: liquidity.

The Structural Problem: Illiquidity by design, liquidity by demand

Private credit funds are built around a fundamental asymmetry. Their assets, which are negotiated loans made to middle-market companies, leveraged buyouts, and in some cases startup borrowers, are inherently illiquid. They cannot be sold on an exchange, do not carry a continuous market price, and in stressed conditions may find no immediate buyer at any price. Their liabilities, however, are the expectations of investors who entered these funds through open-ended vehicles that permit periodic redemptions.

The tension between these two realities is not new. It is embedded in the product design. Open-ended private credit funds typically permit collective quarterly withdrawals of up to 5% of net asset value. When demand for redemption exceeds that ceiling, the excess is deferred, disbursed proportionally, or in extreme cases suspended altogether. This is not a failure of fund management; it is the structure operating as designed under conditions it was not built to handle at scale.

The difficulty intensifies when macroeconomic conditions shift. Rising interest rates increase refinancing pressure on borrowers, which can erode collateral values and create marking uncertainty. At the same moment, institutional investors who had allocated heavily to private credit during the low-rate era begin reassessing the risk-adjusted case for holding illiquid assets when liquid alternatives once again offer competitive yields. The result is a convergence of sell pressure at precisely the moment when selling is hardest.

Liquidity demand in private markets tends to arrive precisely when liquidity is most structurally constrained. That is the design paradox the secondary market is now being asked to resolve.

The Emerging Solution: Secondary markets as a liquidity release valve

The secondary market for private credit provides an exit mechanism that does not require the underlying loans to be sold. Instead, investors can sell their stakes in credit funds, or in some cases individual loan positions, to third-party buyers who are willing to acquire them, typically at a discount to stated net asset value. This preserves the fund structure, avoids forced asset liquidation, and gives distressed sellers an executable option where none previously existed.

The infrastructure supporting this market has expanded considerably. Dedicated secondary funds have been established by several of the larger private-asset managers, providing institutional capital willing to absorb stakes at discount prices. Digital platforms have emerged to facilitate matching between buyers and sellers across a broader range of instruments. Securitisation mechanisms are being introduced to allow loan bundles to be repackaged and sold to a wider investor universe, further broadening potential demand.

The scale of growth is notable. From approximately $6bn in 2023, annual secondary transaction volumes in private credit reached around $20bn by 2025. Analysts tracking the pace of institutional adoption and the lengthening duration of loan portfolios, partly a function of borrowers staying private for longer, estimate that $80bn annually is a plausible target within a few years. At that scale, the secondary market would represent a genuinely meaningful proportion of assets under management in the sector.

Critical Evaluation: The constraints that matter now and later

Short-term relief from secondary markets is real but bounded. Estimates suggest that meeting 5% quarterly withdrawal demand across the full universe of open-ended non-traded credit funds could generate outflows exceeding $45bn annually. That is more than double current secondary transaction capacity. For investors facing redemption queues or gating today, the secondary market offers an exit at a price concession, but it cannot absorb systemic outflow pressure in the current cycle at its present size.

Discounts also matter analytically. Secondary transactions do not preserve book value. They execute at prices that reflect illiquidity premium, uncertainty about underlying loan performance, and the relative negotiating position of a motivated seller. This creates a visible divergence between the valuations that funds report and the prices at which investors can actually convert holdings to cash. Over time, as secondary market depth improves, this pricing signal may become more informative. In the near term, it represents a cost of liquidity rather than its elimination.

There is also a second-order risk to consider. Greater price transparency through secondary market activity can be stabilising in normal conditions by improving information flow. In stress conditions, however, falling secondary prices can amplify negative sentiment, trigger additional redemption requests from investors interpreting price declines as distress signals, and accelerate the very dynamics that fund managers seek to manage. Price discovery, in other words, is not uniformly stabilising.

Medium-Term Outlook: Structural evolution toward tradable credit behaviour

The longer-term implications of a maturing secondary market extend beyond liquidity management. A liquid secondary market that produces frequent observable transaction prices provides information that the primary market cannot. It enables better risk pricing, more credible portfolio valuations, and a clearer basis for capital allocation decisions by institutional investors. Over time, private credit may begin to behave functionally more like traded credit, without necessarily adopting the institutional architecture of public bond markets.

This evolution will depend on sustained participation from buyers, not just sellers. Secondary buyers must believe that discounts adequately compensate for the risks they are absorbing, and that portfolio quality in the underlying funds justifies long-term exposure. If credit quality deteriorates materially in this cycle, buyer appetite will constrain market depth at the moment it is most needed. The secondary market is an ecosystem that requires both sides to function.

What the current period is demonstrating is that private credit cannot remain a one-directional capital flow indefinitely. Investors need exit mechanisms, and those mechanisms need to be credible under stress, not just in benign conditions. Secondary market infrastructure is the most plausible answer available. It does not resolve the illiquidity mismatch at the heart of open-ended private credit fund design, but it mitigates its consequences and may, over a longer horizon, reshape the market's operating assumptions about what liquidity in private credit actually means.

Conclusion: Risk transformation, not risk elimination

The secondary market for private credit is neither a cure nor a distraction. It is a necessary piece of market infrastructure arriving at a moment when the absence of credible liquidity mechanisms has become the sector's most visible structural weakness. Its growth from a marginal activity into an increasingly institutionalised market reflects a broader recognition that private credit, at the scale it has reached, cannot function sustainably without exit pathways that work under stress.

What secondary markets accomplish is a redistribution of risk rather than its removal. Illiquidity does not disappear; it is repriced and transferred to buyers who are compensated through discounts for accepting it. Valuation uncertainty does not vanish; it becomes more visible through observable transaction prices. Redemption pressure is not eliminated; it is partially absorbed and partially deferred. These are meaningful improvements to market function, but they operate within limits that are currently being tested.

The trajectory points toward a private credit market that increasingly resembles tradable credit in its operational behaviour, even if the underlying instruments remain privately negotiated. That shift, if it materialises, would represent a structural maturation of the asset class. Whether the current period of stress accelerates or interrupts that evolution will depend on how credit quality holds, how buyer participation develops, and whether fund structures adapt to align investor liquidity expectations more honestly with the realities of the underlying assets. The secondary market cannot resolve those questions. It can only provide the space in which they get worked out.