Balancing Yield and Liquidity: How to Think About Lock-Ups in Private Lending

Every investor faces the same trade-off: higher returns often come at the cost of less liquidity. Nowhere is this more apparent than in private credit. Accredited investors are attracted to private debt because of its reliable income and strong yields, but they must also navigate investment lock-up periods—the time their capital is committed before redemption is possible.

Understanding how lock-ups work, and how to balance them against your portfolio’s liquidity needs, is crucial before allocating to this asset class.

Why Private Credit Has Lock-Ups

Unlike public bonds or equities, private loans can’t be bought and sold instantly on an exchange. When you invest in a private credit fund, your capital is deployed into loans—secured by real estate or other collateral—that have specific maturities.

For this reason:

• Lock-ups ensure stability. Funds need predictable capital to originate and service loans.
• They protect investors. Without lock-ups, funds might be forced to sell performing loans at a discount just to meet redemptions.
• They enable higher yields. By committing capital for longer, investors capture the “illiquidity premium” that pushes returns beyond what traditional bonds offer.

Typical lock-up periods range from 12 months to several years, depending on fund structure.

The Benefits of Accepting Lock-Ups

1. Higher Yields: Private debt funds often generate 8–10% annualized returns compared to 4–6% in public fixed income.
2. Predictable Income: Monthly or quarterly interest payments continue regardless of market swings.
3. Diversification: Capital is tied to contractual loan obligations, not daily stock or bond pricing.

The Risks of Lock-Ups

1. Reduced Flexibility: Investors cannot immediately access funds in case of personal liquidity needs.
2. Opportunity Cost: If another investment arises, locked-up capital cannot be redeployed.
3. Manager Dependence: Investor trust in the fund manager’s underwriting and servicing practices is critical since capital isn’t easily retrievable.

Case Study: An Entrepreneur Managing Liquidity

Michael, a 48-year-old entrepreneur from Los Angeles, sold part of his business in 2023 and had $2 million to invest. He wanted steady income but also needed liquidity for potential real estate purchases within five years.

• He allocated $1.2 million into municipal and corporate bonds for short- and medium-term liquidity.
• He committed $800,000 to a private credit fund with a 24-month lock-up, targeting 9% annualized yield.

Outcome:

• The bond allocation gave him liquidity for emergencies or new opportunities.
• The private lending allocation generated $72,000 in annual income, reinvested monthly.
• Even during inflationary pressures in 2024–2025, his private credit portfolio delivered steady returns unaffected by daily rate swings.

This balance gave him both flexibility and stability, demonstrating how accredited investors can combine liquid and illiquid strategies to strengthen overall portfolios.

How LBC Capital Income Fund, LLC Approaches Liquidity and Yield

At LBC Capital Income Fund, LLC, we understand accredited investors value both steady income and flexibility. Our structure is designed to balance these needs:

• Lock-up periods align with loan maturities, ensuring stability for all investors.
• Monthly distributions provide cash flow even during the lock-up phase.
• Conservative underwriting (first-lien, collateral-backed loans with 60–65% LTV) protects capital through disciplined lending.
• Redemption windows after lock-ups allow for planned liquidity without disrupting fund performance.

Finding Your Balance

Lock-ups in private lending aren’t a drawback—they’re the mechanism that enables higher yields, stability, and investor protection. The key is not to avoid them, but to balance your liquidity needs with your income goals.

For accredited investors, the smartest approach often combines liquid assets like bonds with income-focused private credit, creating a portfolio that can both flex when needed and deliver strong, steady returns. Give us a call to learn more.