Financial advisors are retreating from private credit funds at a record pace, redirecting client assets into venture capital and private equity vehicles, according to a new report from Morningstar Inc. The shift marks a sharp reversal from the boom years of semiliquid alternative funds, which have more than doubled in size since 2022 to nearly $600 billion in net assets as of March 2026.
Morningstar's analysis, titled "The State of Semiliquid Funds 2026," found that investors pulled $1.8 billion from the ten largest direct lending funds in the first quarter of 2026. Among the funds experiencing redemptions were those managed by Blackstone, Cliffwater, and Blue Owl. The outflows follow a broader slowdown in private credit demand that began in the second half of 2025, driven by concerns over exposure to software companies and the impact of lower base rates on yields.
"Private credit fund demand began to slow in 2025's second half as concerns over software exposure and lower base rates cooled investors on the asset class," the report states. In Q1 2026, net assets for the Morningstar direct lending category dipped by approximately $1 billion. The trend echoes the boom-and-bust cycle that previously affected nontraded real estate investment trusts, which fell out of favor after interest rates spiked in 2022.
Advisors are now pivoting to semiliquid venture capital funds, which offer exposure to high-profile private companies such as SpaceX, Anthropic, and OpenAI. Morningstar noted that assets in the venture capital category nearly tripled in 2025, and the momentum continued into the first quarter of 2026. The surge reflects advisor and client enthusiasm for the red-hot initial public offering market, with many seeking to participate in the growth of pre-IPO companies.
The cost of these alternative investments remains a significant consideration. Morningstar reports that semiliquid funds carry an average expense ratio of 3%, substantially higher than traditional mutual funds or exchange-traded funds. Advisors typically recommend these products to clients seeking yield and portfolio diversification beyond stocks and bonds, but the fees can erode net returns over time.
The shift away from private credit comes as redemption requests have mounted. In a related development, Blackstone's BCRED fund recently saw 10% of its net asset value requested for redemption, signaling liquidity strain in the private credit space. Meanwhile, some advisors are integrating platforms like iCapital to meet growing demand for private market access, as highlighted by RFG Advisory's recent integration of iCapital's alternatives platform.
Morningstar's data underscores the cyclical nature of alternative investments. After the collapse of nontraded REITs, private credit became the top-selling alternative, only to face headwinds from credit quality fears and potential defaults. The current rotation into venture capital and private equity suggests advisors are chasing the next wave of returns, but the high fees and illiquidity risks remain constant challenges.
For advisors navigating this landscape, the Morningstar report serves as a reminder that semiliquid funds, while offering diversification, are subject to rapid shifts in investor sentiment. As the IPO market heats up, venture capital may provide a gateway to high-growth opportunities, but the associated costs and risks demand careful due diligence.
