When Liquidity Disappears, Reality Appears

For years, private equity and private credit were sold as the smart alternative.

Higher yields. Less volatility. Access to deals that Main Street could not touch. It sounded exclusive. It sounded sophisticated. It sounded like easy money for those willing to lock up their capital.

But markets do not reward complexity. They reward discipline.

This week, the Financial Times reported that retail investors are pulling back from private credit funds after Blue Owl Capital permanently halted redemptions in one of its non-traded vehicles.  

According to data from Robert A. Stanger & Co., commitments to non-traded business development companies fell 40% in January. That’s a pretty big deal. 

Because private equity and private credit were built on one core promise. Stable returns without daily volatility. The tradeoff was simple. You give up liquidity. In exchange, you receive smoother reported performance. 

But smooth performance is not the same as safety.

When investors ask for their money back and are told they cannot have it, something fundamental shifts. The illusion fades. Risk becomes visible. This was bound to happen.

Private equity thrived during a decade of zero interest rates. Capital was cheap. Debt was abundant. Valuations expanded. Funds could buy companies, add leverage, refinance at lower rates, and exit at higher multiples.

It worked in that environment. But it depended on that environment.

Once the Federal Reserve raised rates, the math changed. Debt costs rose. Exit multiples compressed. Defaults began creeping higher across parts of the credit market. 

Suddenly, the promise of high income with low risk did not look so simple.

Large players like Blackstone, Apollo Global Management, Ares Management, and BlackRock built massive retail channels around semi-liquid funds. Investors were told they could redeem up to 5% of assets each quarter.

That structure works only as long as inflows exceed outflows. 

When new money slows, and redemption requests rise, gates appear, meaning the fund limits or temporarily blocks investors from withdrawing their own money.

We saw a version of this in 2022 when Blackstone limited withdrawals in its Blackstone Real Estate Income Trust. It survived. Returns later recovered. But something changed in investor psychology.

The idea that you can always get your money back quietly disappeared.

At American Prosperity, we have never built our strategy on illiquidity.

We invest in publicly traded businesses with durable advantages. Companies that generate real cash flow. Companies you can buy or sell on any trading day.

Liquidity is not a luxury. It is protection.

Private equity funds often mark their portfolios quarterly. There is no daily market price. That creates the appearance of stability. 

Yet the underlying companies face the same economic forces as public firms. Rising interest rates hurt them. Slower growth hurts them. Higher default rates hurt them.

The difference is that public markets reprice instantly. Private markets reprice slowly. Delay does not eliminate risk. It hides it. There is another issue.

Private equity managers earn fees on committed capital. They earn performance fees on reported gains. 

Their incentives are clear. Raise more money. Put more money to work. Extend fund lives if necessary. Rinse and repeat. That model can work. Many talented managers have built impressive firms.

But it does not align with the American Prosperity approach.

Our approach is simple. Own great American businesses. Focus on tailwinds. Study leadership. Demand strong financials. Respect price.

We do not rely on leverage to manufacture returns. We do not depend on financial engineering. We do not surrender access to our capital in exchange for smoother statements. We’d take lumpier, higher returns hands down. 

The United States remains the most dynamic economy in the world. Innovation thrives here. Capital flows here. The rule of law supports investors here.

You do not need complex structures to participate in that growth.

Look at the public markets over time. Quality companies with durable competitive advantages have compounded wealth for decades. They endured wars, recessions, rate cycles, and political shifts.

They adapted.

Private equity often attempts to accelerate outcomes through leverage. That works when credit is abundant. It becomes fragile when credit tightens. 

The current slowdown in fundraising is not a temporary headline. It is a stress test of a structure that depends on constant inflows.

If outflows overwhelm inflows, managers must sell assets, draw on credit lines, or gate redemptions. None of those outcomes inspires confidence among retail investors.

American Prosperity was built on transparency and strength.

When markets fall, you see it. When markets rise, you see it. There are no gates. There are no quarterly marks determined behind closed doors.

There is ownership. There is discipline. There is liquidity.

Private equity is not evil. It is not foolish. It simply does not fit our philosophy.

We believe in businesses, not structures. We believe in cash flow, not complexity. We believe in America’s public markets as the greatest wealth-building engine ever created. 

When liquidity disappears, reality appears. 

And when reality appears, quality always wins.

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Regards,

Charles Mizrahi
Prosperity Insider