Do Redemption Gates Discipline or Destabilize? Evidence from the 2026 Run on Semi-Liquid Private Credit Funds
This paper analyzes the 2026 run on semi-liquid private credit funds to demonstrate that redemption gates do not discipline investors or reflect underlying asset distress, but instead merely queue redemption demand by triggering a sharp increase in requests when prorations are announced.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
Imagine a bank that does not hold cash in a vault but instead owns a collection of private loans to small and medium-sized businesses. These loans are valuable, but they are not like stocks that can be sold instantly on a computer screen. They are illiquid, meaning they take time to value and time to sell. To let everyday investors access these assets, financial firms created a special type of fund. These funds allow investors to put their money in and take it out, but with a catch: you cannot ask for your money back every day. Instead, you can only ask for it back once every three months, and the fund promises to buy back only a small slice of the total money invested at that time. This limit is a safety valve, designed to stop a panic. If everyone tries to leave at once, the fund would have to sell its loans at a fire-sale price, hurting everyone who stays. The limit forces a slow exit, protecting the remaining investors.
In the second quarter of 2026, this safety valve was tested in a way no one had seen before. A group of ten of these private credit funds, managing roughly $150 billion in investor capital, faced a sudden surge in requests to withdraw money. The number of people asking to leave jumped from a normal level to nearly seven times that amount. Because the funds had a strict rule limiting how much they could buy back, they could not say yes to everyone. Instead, they had to say yes to only a portion of the requests and tell the rest to wait for the next quarter. This situation created a puzzle for financial experts. The rule was supposed to prevent a panic, yet the panic happened anyway. The question was whether the rule itself was the problem, or if something else was driving the investors to run.
A researcher named Jihwan Woo set out to solve this mystery by looking at the actual paperwork filed by these funds. Unlike many private investment vehicles that keep their internal numbers hidden, these funds are required by law to file detailed reports every time they offer to buy back shares. By collecting and analyzing 136 of these filings from 2024 through mid-2026, the researcher built the first clear picture of what was happening inside these funds. The data revealed that the rush to leave was real and widespread. In the first half of 2026, the amount of money investors asked to withdraw rose from an average of 1.2 percent of the fund's total size to 6.9 percent. At seven out of the ten funds, the requests were so high that the funds had to enforce their limits, turning away more than half of the people who asked to leave.
The study then asked why this was happening. There were two main theories. The first theory suggested that investors were simply trying to make a quick profit because the funds were valuing their assets higher than the market actually did. If the fund says a loan is worth $100 but the market thinks it is worth $90, an investor might rush to sell to the fund at $100 before the price drops. The second theory suggested that the limit itself caused the panic. If investors believe that next time they ask, the fund might be even more crowded, they might rush to get in line now, creating a self-fulfilling cycle of fear.
The evidence pointed strongly to the second theory. The researcher compared the funds that had limits to similar funds that were listed on the stock market and managed by the same companies. These stock-market funds held the exact same types of loans but allowed investors to sell their shares instantly at whatever price the market set. When the private funds started turning people away, the stock-market funds did not drop in value. This proved that the problem was not with the quality of the loans themselves. The assets were fine; the structure of the private funds was the issue.
Furthermore, the data showed that the rush to leave was not just about trying to beat a price drop. While there was a small link between the size of the requests and the difference between the fund's value and the market price, the biggest factor was the announcement of the limits. As soon as the first funds announced they would have to turn people away, the number of requests from everyone else jumped sharply. It was as if the news of the limit triggered a race to the exit. The researcher found that when the first funds announced they would only pay out a fraction of what was requested, the remaining funds saw a discrete, sudden increase in people trying to leave. The limit did not calm the investors; it made them anxious that they would be left behind.
The study also looked at what happened after the initial shock. In some cases, the funds managed to clear the line of waiting investors, and the panic subsided. In other cases, where the limits were very tight and the line of waiting investors was very long, the requests actually grew even larger in the following quarter. This suggests that when people are stuck in a queue, they do not just wait patiently; they often try to get in line again, hoping to move up, which keeps the pressure high. The researcher noted that this pattern had happened before in a different type of real estate fund, where the line of waiting investors grew for months before finally draining away.
The conclusion of the study is that these redemption gates, while successful at preventing the funds from collapsing or selling assets at a loss, did not stop the panic. Instead, they changed the nature of the panic. Rather than a sudden, chaotic crash, the panic became a slow, grinding queue. The gates did not fix the underlying fear; they simply delayed the exit. For the investors who managed to get their money out, they received the full value the fund claimed, even if the market valued the assets lower. For those who remained, they were left holding the bag, waiting for the fund to eventually adjust its values to match reality. The study suggests that the safety mechanism, intended to protect everyone, ended up creating a new kind of risk where the speed of the exit became a game of who could get in line first.
This finding matters because these types of funds are growing rapidly, spreading into real estate and infrastructure. Regulators and fund managers now face a difficult choice. They can keep the limits to prevent a fire sale, but they must accept that this will create a queue that can fuel its own anxiety. Or, they can try to find other ways to manage the flow, perhaps by adjusting how they value their assets to match the market more quickly. The research shows that simply putting a cap on withdrawals is not enough to stop a run; it only changes how the run plays out. The stability of these funds depends less on the rules of the gate and more on the trust investors have in the value of the assets inside. When that trust wavers, the gate becomes a bottleneck that amplifies the fear rather than soothing it.
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