Are we there yet!? Perspective on private credit extensions

Back in 2010, electric cars and European private credit investments had some things in common, limited range and low adoption. How things have changed over the past 15 years!

As driving electric has become a more common part of our journeys, so too has investment in private credit accelerated over this period, with institutional investors attracted to its contractual cash flows, stronger loan protections (vs. public markets), favourable risk-adjusted returns and diversification benefits. This trend shows no signs of slowing down and we see significant innovation in the range of solutions available. 

Source: Preqin. As of May 2025.

Of course, electric cars are more expensive and private credit investment is not a free ride as investors give up liquidity and pay higher fees. Private credit funds are typically structured as closed-ended vehicles; investors commit capital for a set period (often at least seven to ten years) during which time a redemption from the fund is not possible. These liquidity terms are justified as they align with the maturity profile of the underlying loans. You may be able to sell your position to another investor, but the price may not be attractive.  

Typical lifecycle of a close-ended private credit fund

Source: LCP. For illustrative purposes only. Note that the investment period typically starts from the final close date, which is often 12 months following the first close.

However, sometimes there can be detours or accidents along the road which slow the journey. This can mean extensions to prolong the fund’s lifespan beyond its scheduled termination date, in order to facilitate an orderly realisation of the fund’s remaining assets. In recent years, the number of extensions has increased. This includes executing extensions at the manager’s discretion, the use of which has become almost universal in Europe, and further requests for additional extensions subject to investor approval. Anecdotally, we have already seen a large number of managers request fund extensions since the start of 2025.

Managers often signpost the impacts of Covid-19, inflation, rising interest rates and slower M&A activity as key drivers for needing extensions – but there are of course other idiosyncratic stories. For some investors, like pension schemes navigating towards buy-out, liquidity delays can be problematic. If capital is not returned when expected (even for a small number of residual positions), investors may be forced to sell on their fund holding on the secondary market, often at significant discounts.

The chart below shows data on the level of discount compared to the managers stated fund value for both senior debt funds and opportunistic lending funds.

Source: LCP. For illustrative purposes only. Various Secondary Market Advisors/Brokers, Secondary Buyers. 

Where we continue to have confidence in the fund management team, we typically recommend that investors accept extension proposals. While we are concerned about the increased frequency of extension requests, and the resulting liquidity stresses for investors, extensions often allow the manager the best chance to maximise the value of the remaining assets in the fund.

Many managers offer fee discounts or waivers during the extensions, sometimes with catch-up provisions for good performance. We have an increasingly negative view on those managers who do not offer investors compensation.

Risks to watch if you decline a fund extension

In many cases voting against an extension introduces its own risks:

• Forced sale at discounts: The manager could seek buyers for assets in the short-term and may not realise their full value. Meaningful discounts are typically required to sell these sorts of assets, particularly as sales would often involve distressed assets. 
• Risk of subordination: If a borrower requires additional capital, and you are not prepared to fund that, a new lender could secure senior positions, diluting recoveries for you as an existing investor. Enforcing on a loan, taking the equity and seeking to sell the business is clearly not a quick route to liquidity either.
• Transfer in specie (very unlikely): Remaining assets might be transferred directly to investors, obliging them to manage the loans themselves. In most cases, however, the manager has continued to service these assets.

It is difficult to estimate the performance impact from an unorderly realisation of assets, that might arise from investors rejecting an extension request; however, we have seen some estimate reductions in overall fund returns (IRR) by as much as 2%. We have seen some extension requests be rejected, but it is exceedingly rare.

How investors can manage risk

Investors must therefore remain vigilant about extension clauses and your own liquidity constraints. Key mitigators include:

• Map your route before setting off: Review and negotiate extension terms at inception, aiming for clear thresholds and well-defined approval requirements. Some specialist consultants (including LCP) offer this sort of enhanced due diligence service.
• Pack provisions for the journey: Build in sufficient liquidity in the rest of your portfolio to minimise the disruption of unexpected extensions. Knowledge of the market and manager history can help to better inform your decisions.
• Identify alternative routes: Consider the manager’s experience in assisting with potential secondary sales and whether there is active market demand.
• Keep an eye on the road ahead: As evergreen and semi-liquid models for fund structures become increasingly available, these may be more suitable to your requirements. It’s an area we have been extensively reviewing over the past few years, driven by expected investor demand.

Private credit has become a core asset class for institutional investors offering a compelling risk-return profile. It would be rash to exclude it from your portfolio on the back of a prior bad experience (new electric cars get to their destination faster than those of years gone by). To be clear, when we say bad experience, we are only talking about extensions, overall investment performance across the market has on average been very reliable historically.

Source: Preqin. As of January 2025. IRR data shown for European direct lending funds with vintages between 2011 and 2023.

While there is still very much a place for closed-ended vehicles, new evergreen fund solutions may help some investors to more effectively navigate the private credit landscape without jeopardising their long-term goals. Based on current market dynamics, we have a preference to overweight private credit at the expense of public credit. We think investors should consider these innovations in fund structuring and investment solutions in the private credit space that mitigate some of the liquidity risks associated with traditional direct lending close-ended structures.