Private Credit in Distressed Brand Portfolios: Navigating Liquidity and NAV Volatility Risks

Private credit has emerged as a cornerstone of alternative asset strategies, with over $3 trillion in assets under management (AUM) as of 2025, according to an MSCI analysis. Its appeal lies in its ability to offer floating-rate yields, tailored financing, and a buffer against public market volatility, as noted in a Boston Fed report. However, for investors in distressed brand portfolios-companies with weakened balance sheets or declining market positions-the risks of liquidity constraints and net asset value (NAV) volatility have become acute. These challenges are magnified by structural shifts in the private credit market, including the decline of specialized distressed debt strategies and the rise of opportunistic credit mandates, according to the MSCI analysis.

Liquidity Challenges: A Double-Edged Sword

Private credit's liquidity advantages are often overstated. While the asset class provides flexibility in capital deployment, its inherent illiquidity poses significant risks. Most private credit funds operate with long lock-in periods, and secondary markets remain underdeveloped, making it difficult to offload distressed assets without steep discounts, according to a Hausfeld analysis. For example, the 54% drop in fundraising for dedicated distressed debt strategies since 2020 has pushed general partners (GPs) to adopt broader "opportunistic credit" mandates, per the MSCI analysis. While this diversification reduces exposure to single-asset distress, it also dilutes focus on specialized workout capabilities.

Payment-in-kind (PIK) structures further complicate liquidity management. By deferring interest payments, PIK arrangements offer short-term relief to borrowers but compound debt over time, increasing the risk of default-the Hausfeld analysis highlights this dynamic. This was evident during the 2023 regional bank crisis, where private credit filled a critical gap in deal financing but also exposed portfolios to overleveraged borrowers, as the Boston Fed report observed. As of 2025, regulators like the U.S. Federal Reserve and the Bank of England have raised concerns about the systemic risks posed by opaque private credit markets, particularly during economic downturns, the Hausfeld analysis also warned.

NAV Volatility: The Hidden Cost of Illiquidity

NAV volatility in private credit strategies is driven by inconsistent valuation practices and macroeconomic shocks. Unlike public markets, private credit lacks standardized valuation frameworks, leading to divergent assessments of loan values. For instance, lenders' valuations of Pluralsight's debt ranged from 83 cents to 97 cents on the dollar in 2024, illustrating the subjectivity of NAV calculations noted by Hausfeld. This inconsistency hampers early risk recognition and exacerbates volatility during periods of distress.

Rising interest rates have compounded these issues. Distress rates for leveraged and senior private-credit loans have tripled since mid-2022, with mezzanine loans facing even higher default risks (18% in Q2 2024), according to the MSCI analysis. Such volatility is further amplified by the lack of liquidity in secondary markets, forcing funds to mark down assets aggressively during redemptions. A 2024 report notes that private credit's return premium of 200–220 bps over high-yield bonds is eroding as spreads tighten and competition intensifies, as summarized in a Northleaf update.

Systemic Risks and Strategic Implications

The interplay of liquidity and NAV volatility creates a feedback loop that threatens both GPs and limited partners (LPs). For example, private credit funds with high dry powder ($1.05 trillion in 2024) face pressure to deploy capital quickly, often at the expense of credit quality, per the MSCI analysis. This dynamic was evident in the 2023 energy sector downturn, where overleveraged energy service companies defaulted on private loans, triggering NAV markdowns across portfolios, as detailed in a White & Case commentary.

To mitigate these risks, investors must prioritize transparency and active risk management. Strengthening in-house workout capabilities-such as negotiating covenant amendments or injecting equity-can provide breathing room for borrowers, as White & Case suggests. Additionally, diversifying across senior and mezzanine debt, while hedging macroeconomic exposures, may reduce NAV swings. However, the Boston Fed warns that the rapid growth of private credit (from $46 billion in 2000 to $1 trillion in 2023) has outpaced regulatory oversight, raising concerns about systemic stability.

Conclusion

Private credit's role in distressed brand portfolios is both a strategic asset and a potential liability. While its flexibility and yield advantages remain compelling, the risks of liquidity constraints and NAV volatility demand rigorous due diligence. Investors must balance the pursuit of returns with the need for liquidity buffers, robust valuation frameworks, and proactive engagement with borrowers. As the market evolves, the ability to navigate these challenges will define the resilience of private credit strategies in an increasingly volatile world.