Liquidity as a Product Feature, Not a Market Reality

Is this the end of deep, liquid markets? Not quite—but the model has changed.

Liquidity is no longer an abstract concept; it is being tested in real time. Private markets are illiquid; this is well understood. The issue is that liquidity is increasingly engineered at the product level, often creating expectations that may not hold under stress.

This is a subtle but important shift—from an asset characteristic to what a product promises.

• Practitioners used to ask: How liquid is this asset?
• Now they should ask: How is this product making it seem liquid—and when does that break?

We see it in redemption pressure across private credit. The broader ecosystem is showing signs of strain: business development companies (BDCs) are trading at persistent discounts to net asset value (NAV), withdrawals are being gated, capped, or delayed, secondary markets are clearing at discounts, and fundraising has slowed alongside weaker distributed to paid-in capital (DPI).

These are not isolated dislocations; they reflect a change in how liquidity is being designed and delivered. What once felt like a stable feature of markets is now proving to be conditional, and increasingly fragile under stress.

Traditionally, liquidity was an inherent characteristic of asset classes, driven by three key factors: depth and diversity of participants, transaction frequency, and transparency of price discovery. These elements determined the bid-ask spreads, execution speed, and the ease of entering or exiting a market.

In portfolio management, it was clear that public equities were highly liquid with tight spreads and continuous trading; private equity was inherently illiquid; and government bonds were typically liquid, though not immune to stress in certain conditions.

This traditional model is now outdated. Today, liquidity is no longer a natural feature of markets, but a deliberate design choice made by product creators. Modern financial products leverage financial engineering and innovative structures to create the illusion of liquidity, even within typically illiquid assets. But this liquidity is conditional, functioning well in stable market conditions but failing to materialize during times of stress.

Interval funds, evergreen private market vehicles, and semi-liquid credit products now offer periodic redemption windows, even though they hold inherently illiquid assets such as infrastructure or private equity stakes.

Evergreen funds typically invest in private equity (buyouts, growth companies), private credit, and infrastructure. These are assets with multiyear cash flow profiles and no active secondary market. Despite the long-term illiquid nature of these assets, the funds allow for ongoing subscription and periodic redemptions.

Similarly, interval funds invest in asset backed loans and commercial real estate, however they provide quarterly redemption windows. The same trend is seen in semi-liquid funds.

Three main forces are driving this shift in liquidity structures:

• Technology and Automation: Digitized onboarding, automated subscription/redemption workflows, and always-on distribution channels reduce friction and speed up processes. What was once a slow, relationship-driven process can now be scaled and repeated. By quickly aggregating investor demand, products appear more liquid, as inflows and outflows are managed operationally rather than through secondary-market trading.
• Financial Engineering and Fund Structuring: Fund terms are increasingly designed to create specific liquidity profiles, offering features like monthly or quarterly repurchase offers, redemption notice periods, gates, lockups, side pockets, swing pricing, or in-kind redemptions. These features allow illiquid assets to appear more liquid.
• Distribution and Platform Economics: As private markets expand into broader wealth channels, there’s increasing pressure for product offerings to resemble liquid alternatives. Wealth management platforms and model portfolios prioritize smoother entry/exit features, often favoring simplicity over transparency. As a result, products that appear liquid are marketed, even if the underlying assets remain structurally illiquid.

These forces combine to create products that seem more liquid but don't always address the fundamental liquidity risk when markets are under stress.

A critical risk arises: Markets can function smoothly, until they don’t. Liquidity works in stable conditions but may disappear under stress. During turbulent times, outflows become correlated, bid-ask spreads widen, and buyers retreat. When secondary markets clear, they often do so at steep discounts.

This is the moment when what was marketed as “liquid” reveals itself as being “conditionally” liquid. The key failure is the mismatch between funding liquidity (the ability to redeem shares) and market liquidity (the ability to sell underlying assets without affecting prices).

In traditional markets, these two types of liquidity tend to align because assets can be sold continuously with rapid price discovery. However, with evergreen and semi-liquid products, the liquidity promised by the product may outpace the liquidity that the underlying assets can deliver.

This isn’t necessarily mismanagement, but rather the predictable outcome of offering liquidity features that are more generous than the asset class can support.

Right now, many allocators are taking product-level liquidity at face value. Redemption windows, quarterly liquidity, and smooth NAVs are often treated as stable features rather than cycle-dependent outcomes. That assumption breaks down under stress when funding liquidity and market liquidity diverge.

Therefore, allocators and analysts need to shape their due diligence as follows:

• Treat liquidity as conditional, not contractual.
• Stress-test redemption terms against the actual liquidity of the underlying assets (the same way you would approach underwriting credit risk).
• Focus on realizable value, not reported NAV.
• Examine the mechanics: redemption caps, gates, notice periods, in-kind distributions, and valuation practices in thin markets.
• Ask whether liquidity is supported by the assets or engineered through structure and flows.
• Assume liquidity will compress under stress, prices will gap, and access will be constrained when it is most needed.

Then interrogate the structure:

1. What happens if redemptions spike while exits stall?
2. When do gates, caps, or in-kind distributions activate?
3. What discount to NAV would be required to generate liquidity today?
4. Who bears the cost of liquidity under stress—the remaining investors or exiting ones? Top of Form

While liquidity can be engineered, it cannot make inherently illiquid assets truly liquid. For allocators, the implication is clear: liquidity is not a feature to accept at face value, but a risk to evaluate. Understanding liquidity design is now as critical as assessing returns.