Category: Insights

Executive Summary

• Private credit is dominating headlines, with continued stories of redemption limits and valuations falling, prompting questions as to whether this asset class is headed for a systemic collapse.
• Private credit headlines today reflect liquidity stress and investor expectations more than a systemic collapse in credit quality. It remains unclear how much distress will emanate in private credit.
• Many investors treated semi-liquid private credit vehicles as liquid fixed-income substitutes despite the underlying assets being intrinsically illiquid.
• Redemption gates and withdrawal limits are often functioning as intended by preventing forced selling of underlying assets and protecting remaining investors.
• Private credit can be attractive when underwriting, manager selection, and vehicle structure are disciplined. In fact, it may become more attractive in the near term for investors in new loans if stress continues.
• Private credit should be viewed as having different risk-return characteristics than traditional private equity, as return potential may be more limited by contractual cash flows while maintaining illiquidity. It is also distinct from traditional fixed income investments, which generally offer greater liquidity.

Parsing Through the Noise of the Private Credit Headlines

The recent headlines around private credit, redemption limits / gating, valuation questions, Business Development Corporations (“BDC”) pricing volatility, and regulatory scrutiny have led many investors to ask whether private credit is entering a crisis. We do not believe the current environment represents a systemic collapse of the asset class. Instead, we believe the market is rediscovering something that was always true: private credit is fundamentally illiquid.

Much of the current stress appears less about widespread loan impairment and more about a mismatch between investor expectations and the underlying liquidity of the assets. In many cases, investors appear to have treated semi-liquid private credit vehicles as though they were liquid fixed income substitutes. That assumption was always likely to be tested during a period of market stress or elevated redemption activity.

The core issue is not necessarily whether private credit is “good” or “bad.” The more important question is whether investors properly understood the bargain they were making.

To be sure, there are certainly examples of distressed loans. There are a lot of loans in credit markets which need to be refinanced, and rising rates naturally hurt companies which borrowed on a “floating rate” basis. But those dynamics are frequently present. What’s different this time is the fact that investors believed they could sell when the credit cycle turned because private credit was purportedly “semi-liquid.”

The Rise of Private Credit

Private credit has moved from a niche allocation to a major part of the lending ecosystem. Investors flocked to the asset class in the past five years believing they could attain double digit returns, beating public credit or fixed income, with shorter duration than private equity and the ability to get out when they wanted. With the base rate increases of 2022, the asset class returns started to pique more investor interest. As the number of “semi-liquid” funds massively increased, retail capital flowed into the space. It was the Goldilocks of investments. Or was it?

The Fallacy of Liquid Private Credit

As the credit market started to wobble, investors started to put in redemptions for their “liquid” private credit only to discover their redemption being limited or gated. How did that happen?

Private loans are not publicly traded securities. They are privately negotiated agreements that are often intended to be held to maturity. Secondary markets exist, but they are substantially thinner than public bond markets and can become especially constrained during periods of stress.

However, certain private credit vehicles, particularly those distributed through wealth-management channels, offer periodic liquidity through quarterly redemption programs or interval structures. Those redemption features often work smoothly during stable periods when redemption requests are modest and inflows continue.

The problem emerges when many investors seek liquidity simultaneously. At that point, funds have only a limited set of options:

• Borrow against the portfolio
• Reduce new lending
• Sell loans into a weak market
• Limit withdrawals

As a result, many vehicles include quarterly redemption caps, frequently around 5% of assets. Recent headlines have portrayed these limits as signs of distress. In reality, they are often functioning exactly as designed: preventing forced selling and protecting remaining investors. In our view, those caps generally make sense. They protect against a total mismatch between the vehicle and the underlying assets. Without them, managers could be forced to sell loans at unfavorable prices, harming long-term investors.

Without such limits, “run-on-the-bank” behavior can emerge, not necessarily because the underlying loans are collapsing, but because investor expectations and vehicle structures have become misaligned.

1. Investors request liquidity
2. Funds sell assets to meet redemptions
3. Asset sales pressure marks and transaction prices
4. Remaining assets are marked to the then-lower-prevailing market pricing
5. Lower valuations trigger more redemption requests
6. Managers become defensive precisely when opportunities may be improving

Notably, even the partial forced-selling noted above may be an opportunity for those with capital. A private credit fund facing heavy redemptions may need to keep more cash on hand rather than making new loans. That can prevent the manager from taking advantage of better spreads or stronger lender terms during market dislocation. A liquidity-constrained fund may be forced to play defense just when the best opportunities require offense. Those with permanent capital or offering access to private credit via typical drawdown private structures may be advantaged in this environment.

Recent headlines have included multiple well-known private credit managers with redemption requests upwards of 10-20%, with the outlier of 40% for Blue Owl’s Technology Finance Fund in Q1, far above the 5% threshold.1 Many of these managers have enacted the 5% gate. It will be interesting to see if this potential shrinking demand for making loans, coupled with some poorly underwritten loans and a wall of maturity hitting in 2027/2028, leads to broader credit market distress.

A Re-evaluation of the Place for Private Credit

Recent market developments may prompt investors to re-examine the role of private credit within their portfolios. As liquidity constraints have become more visible, investors may revisit the trade-offs among income generation, return potential, diversification benefits, and liquidity needs when evaluating where to allocate their illiquid capital.

Private credit can produce attractive income and may offer diversification, lower volatility, and better contractual protections than equity. But it is still credit. Upside is usually capped at interest and principal repayment. The lender does not generally participate in open-ended enterprise value creation in the same way an equity owner does. As a result, the risk-return profile of private credit differs from that of traditional private equity. It is also distinct from traditional fixed income investments, which generally offer greater liquidity.

With this rediscovered lesson that private credit is not liquid, we anticipate investors may re-evaluate the risk-return trade-off of private credit and the place it has in their portfolios.

Conclusion

The lesson from the current private credit debate is not that the asset class necessarily should be avoided. The lesson is that private credit must be underwritten carefully at three levels: the loan, the manager, and the vehicle. The vehicle level is most relevant today, as many of these “liquid” private credit structures are liquid until they are not. Unfortunately, semi-liquid usually means “liquid until you want or need liquidity”.

Private credit can be a useful allocation. But it is not a substitute for liquid fixed income, and it is not private equity with better liquidity. It is an illiquid credit strategy whose success depends on underwriting discipline, structure, valuation integrity, and thoughtful liquidity design. The next phase of the market will likely separate managers who earned the illiquidity premium from those who merely sold the prospect of this premium. We also believe that many investors will return to traditional private equity exposure for their illiquid allocation now that the market has come to agree broadly that semi-liquid means illiquid. Some investors appeared to believe they could earn nearly private-equity-like returns while receiving liquidity terms far superior to a traditional private equity fund. In many cases, both expectations were too optimistic.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Brad Calder, Managing Director Head of Equities, was quoted in an article from Top 1000 Funds about investment strategies in emerging markets. Calder discussed why active management makes the most sense for many developing countries high in technology stocks.

Read the full article here

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Brendon Parry, CFA, Head of Private Markets, Deputy CIO, was quoted in a recent article in Buyouts Insider discussing the rise of novel private equity fund structures. Parry discussed TIFF’s investment philosophy in the independent sponsor market and shared why he believes the independent sponsor structure remains advantageous compared to newer hybrid structures.

Read the full article here
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The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Executive Summary

• The rules of corporate behavior in Japan are changing, increasing the investment case for active management and shareholder engagement. Change is being driven by governance reform, pressure from the Tokyo Stock Exchange, the unwinding of cross shareholdings, and demographic pressures.
• The dispersion of speed and change integration is creating an opportunity for active management that can discern the differences between companies and help accelerate them.
• Across public markets, a growing share of equity ownership now sits with passive vehicles, systematic strategies, and shorter horizon investors, which are generally not designed to exercise detailed company-specific influence.

From Cheap Market to Changing Market

The rules of corporate behavior in Japan are changing, increasing the investment case for active management and shareholder engagement. For decades, many Japanese companies prioritized stability, employment, bank relationships, supplier relationships, and other stakeholder objectives over shareholder returns. Cross-shareholding reinforced that system by placing large ownership stakes in the hands of friendly firms that tended to support existing management teams and resisted outside pressure. The result was often inefficient capital allocation, low returns on equity, excess cash, and limited accountability to minority shareholders.

That environment is shifting, with a meaningful increase in shareholder engagement now that change feels feasible. Since the mid-2010s, governance reforms have encouraged stronger board independence, better disclosure, higher returns on capital, more disciplined balance sheets, and the unwinding of cross-shareholdings. These reforms have made shareholder engagement (such as the submission of shareholder proposals by activist investors) more relevant and more effective. They have also helped move Japan from a “cheap market” opportunity to a more targeted, company-by-company opportunity.

The dispersion of speed and change integration is creating an opportunity for active management that can discern the differences between companies and help accelerate them. Japan’s reforms rely heavily on codes, guidelines, incentives, and market pressure rather than hard mandates. This “soft law” approach means companies are moving at different speeds. Some have materially improved governance and capital allocation. Others remain anchored in legacy practices. That gap creates an attractive opportunity for investors who can understand the business, assess management’s willingness to change, and engage constructively where change is possible.

The investment case is reinforced by Japan’s demographics. A large share of Japanese equities are held directly or indirectly by domestic institutions with long-dated retirement obligations, including government-linked pools of capital. As Japan’s population ages, those assets need stronger returns to support retirement obligations. Therefore, governance reform is not just a policy preference; it is tied to a national economic need, often described in Japan as rōgo no anshin — peace of mind in old age. Better capital allocation and stronger corporate returns are aligned with that national priority.

Increasing Number of Shareholder Proposals and Companies Receiving Proposals in Japan1

Increasing Number of Activist Investors in Japan2

Why Ownership Alone Is Not Enough

Equity ownership provides two sources of value: an economic claim on future cash flows and a set of control rights, including voting and engagement. Most public market investors focus primarily on the economic claim. In many markets, that has been sufficient. In Japan today, however, the influence component is becoming more valuable as corporate behavior changes and governance reforms create greater dispersion across companies.

At the same time, a growing share of public equities is owned by investors who are not structured to exercise company-specific influence. Passive vehicles provide efficient market exposure, but they are not designed to engage deeply with management teams on strategic or operational issues. Quantitative investors can identify patterns in data, including signals related to governance change, but they are less equipped to assess management credibility, strategic intent, or execution through direct dialogue. Short-horizon investors face different limitations. If a trader is perceived by management to be likely to be out of their stock within weeks or months, they are far less likely to view those shareholders as credible partners on decisions that may take years to unfold.

As a result, ownership and influence are separating in public markets. That creates an advantage for a narrower group of investors: long-term fundamental owners who can combine research, patience, and credible engagement. In Japan, where reform is underway but uneven, that capability can be especially valuable.

What Engaged Investors Can Do

Engagement does not need to mean public activism or confrontation. In many cases, the most effective approach is often behind closed doors with persistent, informed, and tough conversations. A credible investor can help management teams think through capital allocation, balance sheet structure, board composition, asset sales, shareholder returns, and strategic priorities.

The ability to engage matters even when no formal intervention occurs. Management teams know which shareholders are informed, long term, and willing to act if necessary. The presence of those investors alone can influence behavior and encourage greater discipline around major strategic or capital allocation decisions. Engagement also gives investors a deeper understanding of management quality, strategic intent, and execution risk, insights that are often difficult to capture through public information alone.

Conclusion

Japan reflects a broader shift in global public equity markets. As equity ownership increasingly moves toward passive, quantitative, and shorter-horizon investors, fewer shareholders are positioned to influence companies on long term strategic decisions. That dynamic may increase the importance of long-term fundamental investors who engage credibly with management teams on governance, capital allocation, and strategy. Japan is especially compelling because governance reforms and the unwinding of cross-shareholdings are making shareholder influence more effective. For investors, the implication is that differentiated managers may increasingly be those who can combine ownership with constructive engagement. In some markets, shaping outcomes may become as important as identifying value.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Executive Summary

• By joining an Investment Committee, you are making the decision to contribute to the oversight and governance of long-term institutional capital.
• While all Committees operate differently, there are common themes that can guide the questions you may want to consider as you prepare to step into this new role.
• These key questions include: What is the role of the Investment Committee? How does the Committee define success? How is the investment strategy implemented? How does the Committee fulfill its oversight responsibilities? What makes an Investment Committee successful over time?
• TIFF understands the importance of Investment Committee membership in supporting the missions of non-profits and believes that a mindset of continual learning will help you to become an effective and impactful member of your new Investment Committee.

Joining an Investment Committee is an exciting, albeit intimidating, undertaking. On the one hand, this decision opens the door to supporting an organization whose mission you feel strongly about. On the other hand, you are becoming involved in the governance of a pool of assets which, up to this point, is likely to be unfamiliar to you. It is important to remember that Investment Committee members are overseeing institutional capital, not personal assets, and the governance process must be treated as such. Further, every Committee functions differently in terms of objectives, role and responsibilities, processes, and overall missions, with many Committees working with external partners such as outsourced CIOs (OCIOs). Despite the inherent differences across Committees, we have laid out five key questions for everyone to answer as they begin their Investment Committee member journey.

5 Key Questions for New Investment Committee Members

1. What is the Role of the Investment Committee? Your job as a member of an Investment Committee is to be a fiduciary of the organization and provide governance and oversight, not to be a portfolio manager. Key responsibilities for Investment Committee members include setting high-level objectives for the endowment, approving and ensuring compliance with the Investment Policy Statement, and monitoring outcomes for the portfolio to ensure they meet the organization’s ongoing needs. The Committee may have a relationship with an external investment advisor, which may have a discretionary approach, where the external advisor maintains control over investment decision making, or an advisory approach, where the Committee has a say in some or all portfolio decisions. As a newcomer, it is important to understand where decision making sits and what voting processes entail, where applicable.
2. How Does the Committee Define Success? To understand the goals and uses for their endowment funds, new Committee members should read key documents (e.g., Investment Policy Statement, Spending Policy) and understand the role that the endowment plays in the financials of the institution. For high-level objectives, is the stated long-term goal to simply maintain the pool of capital’s inflation-adjusted principal or does the organization have growth-oriented goals? For impact on the institution’s financials, what is the annual spending rate from the portfolio and how is this expenditure actually allocated (e.g., payroll, grant making, scholarship funding)? To what extent is the organization’s budget reliant on the endowment? A high budgetary reliance on the endowment can, for example, constrain the illiquidity and risk-taking ability of the funds. Should the endowment not be able to meet the stated level of spending, such as in an extreme market event, are there any resulting organizational risks? Understanding the above will help to ensure that the endowment’s investment strategy is aligned with the organization’s overall goals and sensitivities.
3. How Is the Investment Strategy Implemented? Once you understand the goals and objectives, the next step is to familiarize yourself with the investment strategy chosen to support the endowment’s needs. First, you will want to identify the endowment’s risk profile (e.g., equivalent to a 70/30 equity/bond index) and determine whether this is the appropriate level of risk for the organization’s long-term goals and constraints. Within this risk profile, what is the asset allocation strategy for the endowment? Does it take a traditional (i.e., stock and bond) approach or an alternatives-heavy approach (i.e., emphasis on hedge funds, private markets, and other alternative assets)? Does the endowment prefer active investing or passive investing? Is the endowment highly diversified or does it prefer to make bigger “bets”? What is the endowment’s exposure to private markets? Appreciating the answers to these questions is vital for managing expectations, such as whether to expect significant performance deviation relative to a benchmark, how much capital is readily available for withdrawal if the organization has a one-off, urgent need, or the level of drawdown to expect if there is an equity market correction.
4. How Does the Committee Fulfill Its Oversight Responsibilities? Fulfilling the oversight responsibilities of a Committee member requires ongoing monitoring and, at the highest level, ensuring that the Investment Policy Statement is being followed. On a regular basis, Committee members should evaluate whether the endowment is allocated in such a manner that meets its goals and objectives and complies with its stated constraints. As you think about portfolio results, it is important to consider what constitutes investment success for the organization. This could be results relative to a corresponding benchmark, such as a 70/30 equity/bond index, or relative to an inflation + spending hurdle. Over the longer term (TIFF recommends a five- to 10-year period), portfolio performance should be evaluated to determine whether it has proven appropriate in terms of both level and stability of the returns needed to support the current and future needs of the organization.
5. What Makes an Investment Committee Effective Over Time? As the name suggests, Investment Committees function as a team, so ongoing collaboration is important. It is essential to be respectful of this collective decision-making dynamic and avoid letting any single voice overpower the broader process. A successful Investment Committee also has role clarity between parties, including within the Committee, such as the specific role of the Committee Chairperson relative to other voting members, and outside of the Committee, such as whether investment decision making lives with an OCIO. Further, Committee membership is not meant to be perpetual, so ensuring continuity in process and goals is important as membership inevitably turns over. Finally, financial markets are volatile. A successful Investment Committee has a strong willingness and ability to stay the course and remain disciplined in difficult markets, thereby avoiding material changes in long-term strategy in response to shorter-term market signals.

Conclusion

Given TIFF’s history of supporting endowed non-profits over the past 35 years, we understand just how important Investment Committee membership is in supporting the mission and goals for non-profits that work for the betterment of society. We have made it our mission at TIFF to support Investment Committees across market cycles and help them to focus on governance for their various organizations. Answering the questions above will offer you a solid starting point toward becoming an effective and impactful member of your new Investment Committee. Asking the right questions matters more than having all of the answers and we encourage you to be open to continual learning and growth as you begin your new role as a steward of long-term institutional capital.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.