The Music Has Stopped in Private Markets

Two Decades of Excess Investment is Trapped in Private Markets

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.

—CHUCK PRINCE, former CEO of Citigroup (July 2007)

Many fund managers, journalists, and investment advisors continue debating whether the run on private credit funds — which has prompted Cliffwater, Morgan Stanley, and BlackRock to gate redemptions — is merely a hiccup in a maturing industry or the beginning of a panic that is likely to accelerate rapidly. My assessment comes out squarely on the latter side.

Why the Run is Likely Structural, not Cyclical

My rationale begins with recognizing the true nature of semi-liquid private market funds. Fund managers portray them as innovative marvels of modern financial and liquidity engineering, but that characterization only holds when they are positioned as solutions to immediate challenges within a compressed time frame.

When evaluated against centuries of financial history, they appear neither novel nor durable. Instead, they are simply an ill-advised revival of a structure that has appeared many times before — and often fail.

Semi-liquid private market funds suffer many flaws, but the most egregious is that they violate one of finance’s oldest principles: never fund illiquid assets with redeemable claims unless a lender of last resort stands behind the structure. Private market managers have not only defied this principle, but they have also amplified the risk by selling these structures to individual investors, who historically are far more prone to run when conditions deteriorate.

But that’s not all. The danger becomes clearer when you consider the primary functions for which these vehicles were created in the first place. The first was to provide an outlet for aging private equity positions that cannot be exited at attractive prices. The second was to prolong the flow of capital into private credit markets that are already saturated with far too much of it.

Seen in this context, the recent gating of redemption requests at funds managed by BlackRock, Cliffwater, Morgan Stanley, and Blue Owl no longer seem like temporary disruptions. The far more likely explanation is that they are the first visible cracks in a structure that has been quietly absorbing pressure for many years.

As this post went to press, news broke that redemption requests at Stone Ridge Asset Management — a fund holding consumer and small-business loans — were so high that it would honor only 11% of the amount investors wanted back.

Private credit may be experiencing the first tremors, but private equity is likely even more problematic because it has absorbed excess capital for longer. The reckoning appears to have begun in early 2026. If this is the beginning of a broader unwind, three questions help explain how it is unfolding:

Question 1: Why have private equity and private credit become inundated with too much capital?

It seems nearly all investors assume that alternative asset classes are permanent, large-scale features of capital markets, but historically this has never been the case. Instead, they typically emerged to fill temporary voids in niche segments of the economy.

Venture capital formed to fund the commercialization of post–World War II innovations and expanded during the rise of the computing age in the 1970s and 1980s. Buyout funds flourished in the 1980s as firms benefited from a decades-long decline in interest rates combined with a massive expansion in equity multiples. Private credit attracted enormous capital after a cottage industry stepped in to fill a temporary funding gap following the Global Financial Crisis.

In each case, early investors generated unusually attractive returns because capital was scarce relative to the number of attractive opportunities. As is usually the case, those returns attracted imitators. Over time, an entire industry formed around opportunities that were originally scarce. As more capital entered, the supply of capital soon dwarfed the demand for genuinely attractive investments.

How Institutional Imitation Fueled Capital Inflows

In 2000, David Swensen, CIO of the Yale University Endowment, published a book titled  Pioneering Portfolio Management. The book outlined a framework Yale used to generate exceptional returns over a 15-year period.

Rather than recognizing that Yale’s performance depended on unusually strong governance, uniquely talented staff, and early access to a limited number of highly skilled managers, they concluded that simple exposure to alternative asset classes was sufficient to generate superior returns. In response, institutional portfolios rapidly increased their allocations to private equity, venture capital, and other illiquid strategies (Figure 1).

Figure 1: Allocation to Alternative Asset Classes for State and Local Pensions

Source: Public Plans Data. “National Data – Investments.” Center for Retirement Research at Boston College; MissionSquare Research Institute; National Association of State Retirement Administrators; Government Finance Officers Association. Accessed March 15, 2026. https://publicplansdata.org/quick-facts/national/#investments

Over time, the performance dynamics of private equity and private credit took a predictable turn. The success of early capital providers became the catalyst for its own undoing. As more funds entered the market, the supply of capital soon dwarfed the demand for genuinely attractive investments.

The consequence was unsurprising. Returns declined as entry valuations rose. Underwriting standards weakened as managers struggled to deploy ever-larger pools of capital. Financial and liquidity engineering become more integral to marketing pitches.

Question 2: Why do allocations persist despite clear signs of excess?

The obvious next question is why investors continue allocating to private markets if the prospects have deteriorated. The reason is because the presence of a speculative supply chain compels them to. In its simplest form, a speculative supply chain is a financial ecosystem in which the incentives of nearly every participant are aligned toward expanding the production and distribution of a particular investment product. Each participant may behave rationally according to their own incentives, yet collectively they amplify risk across the system.

This dynamic has appeared repeatedly throughout financial history. During the Global Financial Crisis, mortgage originators, investment banks, rating agencies, specialized insurers, and asset managers all benefited from increasing the volume of mortgage-backed securities. Each participant added incremental risk to the system, but the structure of incentives encouraged expansion rather than restraint. The result was a chain reaction of rational behavior that contributed to  systemic instability.

Private markets today display many of the same features.

The Private Markets Supply Chain

Speculative Supply Chain Amplifiers

What is interesting and often under-reported is that the supply chain does not operate in isolation. It is reinforced by a network of amplifiers that includes trade media, trade associations, and academia. These amplifiers often repeat the prevailing narrative that private markets provide superior returns and diversification benefits. When these messages are repeated across multiple trusted intermediaries, the overall system gains momentum and skepticism becomes increasingly rare.

The Danger of a Speculative Supply Chain

The danger of a speculative supply chain is that no single participant needs to behave irresponsibly for the system to become unstable. Each actor responds to incentives that appear reasonable in isolation. Institutional investors pursue diversification, consultants recommend strategies embraced by peers, managers raise funds to meet demand, and advisors seek differentiated products for clients.

But when these incentives become tightly aligned, the system functions like an assembly line with no stop switch and increasingly lax quality control. Capital flows steadily from institutional allocators to fund managers, from fund managers into increasingly marginal investments, and ultimately through distribution networks to retail investors. At that point, the supply chain is no longer responding to opportunity. It is merely sustaining its own existence.

By the 2020s, a speculative supply chain was running at full capacity in private markets. Excess capital, fragile liquidity structures, and a powerful distribution network combined to push illiquid investments toward the broadest investor base — retail investors. Financial history suggests that when a system reaches this stage, it continues expanding until an external shock or a loss of confidence finally disrupts the process.

Question 3: Why are semi-liquid structures causing this multi-decade wave to break?

The investing public is fascinated and captured by the great financial mind. That fascination derives, in turn, from the scale of the operations and the feeling that, with so much money involved, the mental resources behind them cannot be less…The rule will often be here reiterated: financial genius is before the fall.4

—JOHN KENNETH GALBRAITH, A Short History of Financial Euphoria

Allocations by institutional investors, represented by public pensions, have plateaued in recent years. This is unsurprising given the sheer volume of capital already committed, combined with the fact that private equity, the larger of the two allocations, has failed to deliver returns comparable to public markets for many years.

The tapering of new institutional commitments, coupled with a clogged exit environment, created pressure across the private-markets ecosystem. Asset managers still had large portfolios to finance, consultants still had asset classes to recommend, and distributors still needed new products to sell. The solution was a structural innovation that allowed the industry to expand its investor base: semi-liquid vehicles designed specifically for individual investors and marketed as the “democratization” of private markets.

These structures typically offer periodic liquidity, often through quarterly redemption windows, while investing in assets that may take years to sell at reliable prices. The appeal is obvious. Investors are offered exposure to private markets together with the appearance of stability and the reassurance that they can redeem capital periodically.

The problem is that this model violates the previously explained principle of finance. Long-duration, difficult-to-price assets should never be financed with short-term liabilities unless a lender of last resort stands behind the structure. When that rule is ignored, the structure is unstable. As long as inflows continue and redemptions remain manageable, it seems advantageous to both investors and fund managers. But once investors begin to withdraw capital, the mismatch between liquidity promises and underlying assets becomes visible very quickly.

History provides many examples of this dynamic. Wildcat banks in the 1800s, trust companies in the early 1900s, and investment bank warehousing facilities in the early 2000s. In each case, when confidence weakened, investors rationally attempted to redeem before others did. It doesn’t take long before investors run, simply in anticipation of other people running – which is the hallmark of a bank or fund run. This risk is substantially amplified when individual investors provide a large percentage of the capital.

Taken together, semi-liquid private credit and private equity funds are unusually vulnerable to run mechanisms. Not only are Illiquid assets financed with redeemable capital, but the underlying investments were raised at the tail-end of two aged investment cycles. Financial history suggests that such combinations rarely remain stable for very long. They may function smoothly for several years. But when confidence weakens, the structural mismatch becomes impossible to ignore.

That day arrived on February 18, when Blue Owl announced that it had permanently eliminated quarterly liquidity in its OBDC II private credit fund.

The Bear Has Awoken in Private Markets

The history leading up to this moment explains why the recent gating of redemption requests at funds managed by BlackRock, Cliffwater, Morgan Stanley, and Blue Owl is unlikely to be a temporary “speed bump.” Instead, these events are better understood not as a temporary disruption, but as the break point in a long-building structure.

As the run on private market funds progresses, the architects are searching for narratives that might contain the damage. Some argue that the problems are isolated to a few poorly managed funds. Some attribute them to temporary market dislocations or idiosyncratic factors such as sector exposure. Some simply blame the media for socializing the issue —  conveniently, ignoring the fact that it was the same media that amplified the rush into private markets to begin with.

All these explanations miss the larger reality. As of early 2026, we are in the last phase of a multi-decade capital cycle. A narrative may eventually emerge that proves persuasive to some, but it is unlikely to be a sensible one.

The run on private markets will likely accelerate and spread. Many investors will be affected, and the process has only begun.

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The views expressed in this article are solely those of the author and are provided for informational and educational purposes only. They do not constitute investment advice, a recommendation, or an offer to buy or sell any securities. Any language that may appear strong or promotional is intended for emphasis or illustration only and should not be interpreted as marketing or endorsement of any firm, including Index Fund Advisors Inc. (IFA). Readers should not rely on this content as a basis for investment decisions.

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