Leverage flatters an investment’s performance until it wrecks it.
That’s true for all funds, but especially for semiliquid funds. Vehicles like interval funds, tender-offer funds, nontraded business development companies, and nontraded real estate investment trusts straddle private and public markets. They let everyday investors dip into illiquid assets, including private credit, real estate, infrastructure, and venture capital, that traditionally have been reserved for institutions. These vehicles often have tempting yields, but they come with complexity and potential big downsides.
Why the Yields Look So Good
Leverage, a defining feature of many semiliquid strategies, is paramount among those risks. By borrowing money to buy more assets, funds can amplify gains and offer bigger distributions—especially in private credit, where double-digit yields have drawn crowds.
Nowhere is this more apparent than in nontraded business development companies. These vehicles, predominantly private credit funds, can borrow up to $2 for every $1 of investor capital, fueling eye-catching yields. For instance, Blackstone Private Credit yielded over 10.0% for the 12 months ending August 2025—well above the typical yield of around 8.6% for interval funds invested in the same asset class.
Other semiliquid funds are less aggressive. Interval and tender-offer funds cap debt at 33% of assets, while nontraded REITs face no regulatory limits, though their debt-to-assets range from 30% to 60%. Private equity and venture capital funds tend to hold less debt. Only about 30% of them employ fund-level leverage, and even then, they often use it for liquidity—bridging redemptions or acquisition timelines—rather than to amplify returns. That restraint makes sense because venture and private equity returns tend to be lumpier and harder to predict. And selling these assets quickly and at a good price is rarely easy.
When the Cycle Turns
A modest loss in a fund’s underlying assets can swell into something more painful when debt is involved. Recovering takes more than just time—it takes huge gains.
Consider a fund with $100 of investor capital that borrows $40. A 13.0% decline (like the one investment-grade bonds suffered in 2022) becomes an 18.2% hit to investors’ original investment equity—$18.20 lost on $100.0 (ignoring expenses). Because the loss leaves a smaller base ($81.80), the fund needs a 22.2% gain to break even.
Semiliquid funds can mask that downside, at least temporarily. Their holdings often don’t trade daily, so they value them only periodically with their own inputs and assumptions or those of third parties. Returns often look steadier than comparable public-market securities, with fewer abrupt losses on paper. But the calm can be cosmetic. When market conditions deteriorate or assets are reappraised, leverage can inflict sharper and more harmful consequences than the fund’s past performance would suggest.
Fund Redemptions Add Fuel to a Fire
The dangers of leverage can flare when investors redeem en masse. Semiliquid funds restrict withdrawals; often, a set percentage of assets per quarter. If too many investors want out, they may only get a portion of their request—or nothing at all. That limited liquidity is meant to protect the portfolio from forced selling. But it can also bunch up withdrawal requests into single redemption windows, creating a rush for the exits.
When that happens, managers scramble to raise cash. The most liquid holdings usually go first. What remains is a portfolio skewed toward its hardest-to-value, hardest-to-sell parts. The fund becomes a less diversified, more opaque, and riskier version of itself.
If it has debt to repay—as many do—that pressure gets worse. Managers may have to meet loan covenants or margin requirements by selling assets in a weak market. This can devolve into a self-reinforcing downward spiral in which fire sales feed losses, and losses drive more selling.
Some Wrong Incentives
Another concern lurks in semiliquid funds’ fee structure. Some funds charge management fees based on total assets—including borrowed money. That gives managers an incentive to raise leverage, regardless of whether it benefits investors.
Interval funds disclose this leverage-incentive risk, but it’s seldom obvious. For instance, Prospect Enhanced Yield’s PAYIX August 2025 prospectus warns that the firm “may have an incentive to increase portfolio leverage in order to earn higher base management fees” since that fee is “based on average total assets.” But as the 29th out of 36 risk factors in the document, it’s easy to miss. If you did miss it, you’d miss a big part of such funds’ potential costs.
There’s a chance the larger, levered asset base will generate enough incremental income to more than offset those costs. In practice, though, the expected returns don’t justify the risks funds take.
Beware the Fragility
Leverage can make semiliquid funds look impressive until market stress exposes their cracks. The combination of illiquid assets, infrequent pricing, and redemptions can cause hidden risks to appear all at once. Investors should weigh not just the potential for income, but the risks that come with it.