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“Eventually, the private credit fund will need to refinance its fixed-rate debt at higher rates, which will compress the net interest margin.”
  • July 2025

Evergreen fund liquidity will be challenged in turbulent times

An independent analyst has projected that in a base case scenario, private credit will deliver gross leveraged returns of 13.6 per cent.
This reduces to 10.05 per cent for portfolio leveraged net returns. Investment analyst Solomon Nevins, who founded an alternative investment research firm called The Fund Review, said that his calculations demonstrated the significant upside of private credit investing. “This highlights the potential for attractive returns for both the asset class and funds, but also the dilutive impact of the liquid assets allocation and fund fees,” said Nevins.
“These factors are worth modelling alongside a manager’s investment capability when selecting semi-liquid private credit funds.” Nevins has shared his formula for calculating private credit returns. He follows three steps: the leveraged return of the private credit portfolio; an adjustment for the allocation to liquid assets in the semi-liquid fund; and adjusting for the fees paid to the manager of the semi-liquid fund. “In addition to providing inputs for the asset allocation process, a return forecast also ensures there is an understanding and ongoing assessment of the return drivers,” Nevins said. “Furthermore, it can help when assessing relative value between sectors or investments, and provides an objective focal point for investment discussions.”
“Furthermore, it can help when assessing relative value between sectors or investments, and provides an objective focal point for investment discussions.” Nevins added that there are a number of base case assumptions that can be made regarding private credit returns, using observable market data. The principal return driver for private credit is the interest income. Investors should also be aware of the loan hold period, the arrangement fees, prepayment fees, the default rate, the recovery rate, leverage and the cost of debt. “There are numerous offsetting factors in the private credit return model; added Nevins. “For instance, rising interest rates should increase returns as interest income resets at a higher rate and the net interest margin expands. “However, this is likely to be accompanied by higher defaults as borrowers struggle to meet the higher interest burden, and a decline in loan arrangement fees and prepayment fees as capital market activity slows and loans are held for longer. “Eventually, the private credit fund will need to refinance its fixed-rate debt at higher rates, which will compress the net interest margin.”
“These factors are worth modelling alongside a manager’s investment capability when selecting semi-liquid private credit funds.”
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