When illiquidity turns benign credit exposure into a governance problem.
Sector: Family Office – Private Capital / Alternatives
Asset Class: Private Credit – US Middle-Market Direct Lending
Situation Type: Mature private credit portfolio with no secondary liquidity and no direct hedging instruments
Primary Issue: Clustered drawdown risk and governance fragility driven by illiquidity, lagged marks, and lack of defensible downside control – not credit selection
The Situation
A multi-family office built a sizeable private credit allocation to generate stable income in a low-yield environment.
Early performance was benign. Distributions were reliable. Quarterly marks were smooth.
On paper, the portfolio appeared resilient. In practice, once capital was deployed, the exposure became effectively irreversible.
As credit conditions deteriorated, public credit repriced immediately while private marks lagged and then adjusted abruptly. Liquidity became binding precisely as risk increased. With no secondary market and no direct hedging instruments, the portfolio lacked a mechanism to manage losses, reduce exposure, or explain downside behaviour in real time.
The issue was not whether private credit was attractive. It was whether the family was prepared to discover its true downside tolerance under stress, with no ability to act.
Why This Scenario Is Common
-
Private credit portfolios are constructed for income, not reversibility
-
Illiquidity is an accepted conceptually, but rarely stress-tested behaviourally
-
Public credit signals move faster than private marks adjust
-
Direct hedging instruments do not exist for most private loans
-
Governance assumes time to respond that disappears in downturns
This is structural exposure asymmetry, not an error.
Why It Matters
When credit deteriorates under illiquidity:
-
Losses cluster rather than unfold gradually
-
Public hedges move before private marks adjust
-
Hedge P&L creates pressure before protection is trusted
-
Trustees question the hedge precisely when it is most needed
-
Forced decisions replace planned responses
Nothing breaks mechanically. Confidence breaks at the worst moment.
How This Is Typically Addressed
-
Accepting private credit as “unhedgeable”
-
Relying on diversification narratives during stress
-
Waiting for marks to stabilise before acting
-
Using public indices that poorly represent private exposure
-
Abandoning hedges prematurely due to optics
These approaches preserve comfort, not survivability.
Primary Engagement Route
Primary Offer: Structuring-as-a-Service™
Synthetic credit hedge architecture designed to compress drawdowns, pace losses, and preserve governance credibility during stress — without requiring liquidity or precision hedging.
Secondary / Bespoke: Proxy mapping, hedge-ratio calibration, CDS/TRS execution design, monitoring cadence, and governance framework.
Read the IC Brief → (2-page decision summary)
Full structural narrative shared selectively on request.
Illustrative scenario for discussion purposes only. Not a transaction summary or client-specific case study.