Wealth Transfers And Runs On Unsophisticated Investors In Semi-Liquid Private Credit

Private credit increasingly combines illiquid assets with periodic investor liquidity through capped share repurchase programs. We show that this structure creates distributional and allocative consequences that redemption limits do not eliminate. Reported net asset values adjust slowly to changes in economic value, with public market prices leading portfolio write downs before they appear in reported net asset value (NAV). Redemptions during stress are also selective: some investors exit while NAV remains overstated, whereas others remain in the fund. To interpret these facts and study their consequences, we develop a model in which the manager chooses the responsiveness of reported valuations and repurchases are subject to a fixed pro rata cap. Less responsive valuations support reported performance and attract capital, but they also induce informed investors to redeem at the expense of remaining investors. This transfer provides a private return without increasing productive output, causing informed investors to over-allocate capital to the fund. Their redemptions also consume scarce repurchase capacity and crowd out retail investors with genuine liquidity needs. A manager who maximizes assets under management chooses less responsive valuations than a welfare maximizing planner because the manager does not internalize these costs. The stale-NAV channel is therefore distinct from but complementary to the conventional run channel driven by liquidation costs. Redemption caps may limit fire sales without eliminating transfer-driven redemptions and distortions. The two channels can compound one another and exacerbate fragility. Stale valuations can also generate valuation contagion: by inducing redemptions at one fund, they may strengthen adverse inferences at related funds, prompting withdrawals. In addition, those same redemptions may force asset sales that depress prices of overlapping holdings, triggering further withdrawals. These insights have implications for the design of private credit vehicles and the democratization of private market, including the governance of valuation policies, the structure of repurchase caps, and the allocation of limited liquidity across investors.