Private Credit Fund Volatility and Risk Management in the Post-Bankruptcy Era: Re-Evaluating Liquidity Strategies and Due Diligence

The private credit market, now surpassing $3 trillion in assets under management (AUM), has emerged as a cornerstone of alternative investing. Yet, the post-bankruptcy era-marked by elevated default rates, economic uncertainty, and shifting investor expectations-has forced private credit funds to re-evaluate their liquidity strategies and due diligence practices. As the industry matures, the balance between preserving income-driven returns and accommodating liquidity demands has become a critical challenge. This article examines how private credit managers are navigating these pressures, drawing on recent case studies and market trends to highlight evolving risk management frameworks.

Liquidity Strategy Adjustments: From Illiquidity to Investor-Centric Flexibility

Private credit's traditional illiquid structure has long been a point of contention for investors seeking flexibility. However, the 2024–2025 period has seen a seismic shift. According to a 2025 report, 64% of private credit managers observed a growing appetite for liquidity from investors, with two-thirds now offering periodic redemption terms. This trend reflects a broader evolution in fund structuring, including the adoption of evergreen, hybrid, and rated note feeder models to meet diverse investor needs.

A notable example is Blue Owl Capital, which faced class action lawsuits and redemption pressures in 2025. In response, the firm increased redemption capacity for one of its private credit funds from 5% to 17% of net assets-a move that underscores the tension between liquidity demands and the illiquid nature of underlying assets. Similarly, Cayman Islands-based funds have diversified their liquidity options, blending closed-end structures with semi-liquid models to cater to both institutional and retail investors .

However, liquidity adjustments are not without risks. The First Brands Group bankruptcy highlighted the perils of inadequate liquidity planning. With only $190 million in cash to sustain operations, the firm's collapse underscored the need for robust contingency planning and transparent asset structuring. As a result, private credit managers are increasingly prioritizing rated note feeders and targeted leverage (typically 1.0–1.5× NAV) to balance flexibility with capital preservation.

Enhanced Due Diligence: From "Extend-and-Pretend" to Proactive Risk Mitigation

The post-bankruptcy era has also compelled private credit funds to refine their due diligence practices. The rise of "extend-and-pretend" strategies-where lenders prolong maturities to avoid restructuring-has exposed vulnerabilities, particularly in sectors like retail and healthcare. High-profile failures, such as the First Brands Group and Tricolor bankruptcies, have prompted lenders to adopt stricter covenants and demand more rigorous financial reporting.

Key enhancements include:
1. Senior Secured Debt Focus: Managers are prioritizing senior secured loans with loan-to-value (LTV) ratios below 50% to preserve downside protection.
2. Collateral Verification: The First Brands case, which involved allegations of fraud and asset mismanagement, has led to heightened scrutiny of borrower collateral.
3. Proactive Asset Management: Lenders are now more engaged in borrower turnarounds, offering payment-in-kind arrangements, equity injections, and haircuts to avoid formal insolvency.

Regulatory interventions, such as the Bank of England's planned stress tests, are further bolstering transparency and risk management. Meanwhile, the complementary role of traditional banks-maintaining conservative underwriting standards while supporting private credit growth- has provided a stabilizing influence.

Case Studies: Lessons from the Frontlines

1. Blue Owl Capital's Redemption Dilemma

Blue Owl's 2025 liquidity crisis serves as a cautionary tale. By increasing redemption capacity to 17%, the firm attempted to align with investor expectations but faced criticism for potentially overexposing itself to redemptions. This case highlights the need for dynamic liquidity planning and clear communication with LPs.

2. First Brands Group's Collapse

The $10+ billion bankruptcy of First Brands Group revealed systemic weaknesses in collateral verification and covenant structuring. Post-crisis, lenders have adopted real-time financial reporting and independent examiner appointments to mitigate similar risks.

3. BCRED's Resilience

In contrast, BCRED, a private credit fund with a focus on senior secured debt, navigated 2025's macroeconomic headwinds through disciplined underwriting and selective deployment. Its Q3 2025 update highlighted strong performance despite rising interest rates, underscoring the value of high-quality collateral and proactive asset management.

Future Outlook: Balancing Innovation and Caution

As private credit expands into new frontiers-such as consumer debt and retirement-linked investments-the industry must grapple with evolving risks. For instance, private credit firms committed $136 billion to consumer debt in 2025, a 14x increase from 2024. This shift demands enhanced transparency and robust due diligence to avoid repeating past mistakes.

Moreover, the rise of co-investment demand (92% of managers reported increased interest in 2025) suggests that investors are seeking not just liquidity but also active participation in deal sourcing. This trend could further diversify fund structures but may also complicate risk management.

Conclusion

The post-bankruptcy era has forced private credit managers to rethink liquidity and due diligence as core components of risk management. While the industry's flexibility and innovation have enabled it to weather economic headwinds, the lessons from recent failures-such as First Brands and Tricolor-serve as reminders of the perils of complacency. As private credit AUM continues to grow, the ability to balance liquidity demands with rigorous underwriting will determine the long-term resilience of this asset class. For investors, the key takeaway is clear: private credit's potential is vast, but its risks require equally sophisticated strategies.