Behind the Yield
Behind the Yield: March 12, 2026
Start with what was sold.
FIXED INCOME RESOURCES
Weekly Clarity Brief | March 13, 2026
Start with what was sold.
Private credit raised $50 billion from retail investors in the first half of 2025 alone. The message from every salesperson was that private credit funds offer yields between 9 and 11%, first lien protection, quarterly redemption windows, and no accreditation required.
The message was true as far as it went. First lien loans to middle market companies have been an established form of institutional investing. The underwriting on these loans is reasonable, and the yield is attractive. None of that is a lie.
What was not said in the sales presentations was that the assumption on which this retail offering was founded was something that would never be tested. The assumption was that retail investors would behave in the same way as institutions, none of them would try to redeem their investments during the quarterly redemption windows. The quarterly redemption window would be sufficient for the average retail investor.
That assumption was wrong.
Now look at the distribution system that was built upon that assumption.
The prospectus for CCLFX says there is no sales load up front for the investor. The figure on page 43 of the prospectus says that CCLFX makes payments to third-party distributors of its shares. The significance of such a provision is that such payments may lead those third-party distributors to recommend CCLFX to their clients instead of their clients' other investment options.
That is not a footnote. That is the prospectus for CCLFX, which discloses a conflict of interest and relies on the investor not finding it.
The funds required to make these payments are collected through the 1.79% annual expense ratio on $33 billion in assets. That is $590 million per year. Part of that goes to Cliffwater, the manager of the fund. Part of that $590 million goes to the wirehouses, the independent broker-dealers, and the individual financial advisors who placed retail clients into this fund.
The mutual fund industry has used this type of distribution system for 45 years. The 12b-1 fee, named after the regulation that allowed mutual funds to pay such fees in 1980, is what mutual funds pay to their financial advisors. This is a conflict of interest. This is a conflict of interest that has always been present. The difference is that it shows up in the expense table. Four seconds on Morningstar and every client in the business will know what they are paying for. 💡
With private credit interval funds, the conflict of interest is the same. The level of transparency is not. And there is one more significant difference.
In mutual funds, the investor can exit at any time. The conflict of interest has no impact on the ability of the fund to take investors out of the fund. With private credit interval funds, the investor can only exit during the quarterly redemption window. The conflict of interest has a direct and material impact on the time it takes for the investor to get their money out of the fund.
The distribution system placed retail investors into these funds on the assumption that the quarterly redemption window would be sufficient. This was not close to being true. The advisors who placed retail investors into these funds are now receiving the calls from those investors.
Now here is where the story gets worse. And then worse again. 📉
This week, JPMorgan marked down the value of the loan portfolios that are held by private credit funds. The loans were made to software companies—the largest category of borrowers in the private credit industry. The reason is that artificial intelligence is threatening the business models of these software companies.
Since the private credit funds use these loans as collateral to borrow money from banks, the markdown by JPMorgan reduces the amount of money that these funds can borrow. The marked down value of these loans also means that the funds may be required to put up additional collateral for the loans that they already have taken.
Retail investors are moving out of these funds from the front door. At the same time, JPMorgan is tightening the back door.
On top of that, Glendon Capital, a five billion dollar distressed debt investor, has published a warning about some private credit portfolios. The particular private credit fund that Glendon Capital is talking about is Blue Owl. According to this report, Blue Owl valued the junior debt of HR software company Cornerstone OnDemand at 90 cents on the dollar. The value of the senior debt of the company was marked at 78 cents. Junior debt valued at a higher value than the senior debt of the same company. That is a significant problem.
Glendon Capital also noted that the same problems were found in loans made to Barracuda Networks, Peraton, and Conair Holdings. The flagship BDC of Blue Owl is trading at a 25% discount to the net asset value that is reported for the fund. Over the past year, the shares of Blue Owl have dropped 20%. Glendon Capital also argues that the reported loss rates in some of its portfolios are below 0.1%, but this significantly understates the actual risk.
Three weeks ago, Blue Owl halted redemptions. Cliffwater received requests from investors to redeem their investments that exceeded the 7% cap that they set. Morgan Stanley North Haven fulfilled less than half its redemption requests. JPMorgan marked down the collateral underpinning the entire structure. Now, a major distressed debt investor is saying that the value of the loans that private credit funds have is not being correctly marked.
This is not a series of separate events. This is one event with a variety of symptoms. The symptoms are getting worse.
Let me be precise in what I do and do not say.
I would never say that what has happened is the same as the financial crisis of 2008. The loans are performing fine. The problem was the wrapper. There are no CDOs, no bank failures, and no daisy chaining of financial institutions that took the United States financial system down eighteen years ago.
Yet I will not tell the retail investor that the loans are fine when a credible distressed debt investor with a five billion dollar track record is saying that the loans may not be marked correctly.
The retail investor was sold a product that was on page 47 of the prospectus and on the cover page of the prospectus. The distribution system built upon invisible incentives and assumptions. That assumption has now been tested. It has failed. And the question of the quality of the assets in these funds, which was a question nobody wanted to ask three weeks ago, is now being asked by the advisors who are paid to find such problems.
The advisor who understood the wrapper three weeks ago was a head start in the market. The advisor who understands the mechanics of the collateral this week is even further ahead in the market. The advisor who can sit across from the investor and explain these valuation issues is the advisor that the investor will choose for the next twenty years.
When your phone rings, here is the script for today. 📞
"The fund is doing what it was designed to do. The loans are being serviced. This is not a credit crisis. There is a queue of investors who would like to come out of the fund, and we are working through it."
That is the best answer to give today. Do not speculate. Do not editorialize. Just answer the question that has been asked of you.
Then schedule a follow-up call. Your client will have more questions for you next week. You want to be the advisor who spotted this in time. Not the one who is catching up.
Charles Urquhart, CFA
Fixed Income Resources
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