Private Credit for Individual Investors: Yield, Risk, Access

Private credit is lending to companies by non-bank investors, outside the public bond and syndicated loan markets. Once the preserve of pension funds and endowments, it is increasingly marketed to individual investors through funds that promise steady income. This guide explains how it works, where its yields come from, and the risks that sit behind them.

What private credit is

Private credit is an umbrella term. The main strategies include:

• Direct lending: senior secured loans made directly to companies, often to fund leveraged buyouts. This is the largest segment.
• Mezzanine and subordinated debt: loans ranking below senior debt, with higher interest and sometimes an equity kicker.
• Asset-based lending: loans secured against receivables, inventory, equipment or other assets.
• Distressed and specialty finance: lending to struggling companies, or niches such as royalties and litigation finance.

Unlike a bond, a private loan is not exchange-traded. The lender negotiates terms directly, often holds the loan to maturity, and may include protective covenants.

Why private credit grew

Several forces drove expansion after the 2008 financial crisis:

• Bank regulation: tighter capital requirements made some types of corporate lending less attractive for banks, leaving a gap non-bank lenders filled.
• Search for yield: a long period of low interest rates pushed institutional investors towards higher-yielding assets.
• Borrower demand: private equity sponsors value the speed, confidentiality and certainty of dealing with a single lender or small group rather than a syndicate.
• Floating rates: when rates rose sharply from 2022, floating-rate loans paid more income, attracting further inflows.

The market is now widely estimated at well over US$1 trillion globally. Much of that growth has not yet been tested through a prolonged recession.

Yields versus risk

Private loans typically pay a spread of several percentage points over a floating benchmark such as SOFR in the US, SONIA in the UK or CORRA in Canada, plus upfront fees. That yield premium compensates for real risks.

Credit risk

Borrowers are generally smaller and more indebted than investment-grade companies, and defaults rise in downturns. Senior secured loans tend to recover more than unsecured debt, but recoveries are uncertain.

Illiquidity and valuation

You cannot sell a private loan quickly at a fair price, so funds impose lock-ups or withdrawal limits. Loans are valued using models rather than market prices, which makes reported returns look smoother than public bonds and can understate true volatility.

Interest rate sensitivity

Floating rates protect against rising rates, but income falls when rates fall, and higher rates strain borrowers' ability to pay.

Leverage and concentration

Many vehicles borrow to enhance yield, which amplifies losses. Some hold relatively few loans or concentrate in particular sectors.

Ways individuals can access private credit

Business development companies are US vehicles that must distribute most of their taxable income, so they tend to pay high dividends. The UK has listed investment trusts and the Long-Term Asset Fund; Europe has the European Long-Term Investment Fund; India offers Category II alternative investment funds, which typically require a minimum investment of ₹1 crore for most investors; and Australia has listed investment trusts and unlisted wholesale funds.

Accredited and wholesale investor rules

Many private credit funds are restricted to investors who meet wealth or income tests, and the definitions differ:

• United States: accredited investors generally need income above $200,000 ($300,000 jointly) in each of the past two years, or net worth above $1 million excluding a primary residence, or certain professional licences.
• Canada: accredited investor tests include financial assets above $1 million, net income above $200,000 ($300,000 with a spouse), or net assets of at least $5 million. Some provinces offer other exemptions.
• United Kingdom: investors may self-certify or be certified as high-net-worth or sophisticated under rules that have been revised in recent years.
• India: SEBI operates an accredited investor framework based on income and net worth thresholds.
• Australia: the wholesale or sophisticated investor test is commonly met with net assets of at least A$2.5 million or gross income of at least A$250,000 in each of the past two years, certified by an accountant.

Meeting a threshold does not make an investment suitable; it means regulators assume you can assess and bear the risk yourself.

Fees and their effect

Private credit vehicles often charge a management fee of roughly 1% to 2% a year, sometimes calculated on gross assets including borrowed money, plus an incentive fee on income above a hurdle. Fund expenses and borrowing costs add more.

Worked example: from gross yield to net return

Suppose a fund's loan portfolio yields 11% a year. Annual fees and expenses total 2.5%, and credit losses average 1.5% a year.

Invested for 10 years with income reinvested, $100,000 would grow to about $196,700 at 7%. At the gross 11%, it would have been about $283,900. A lower-risk alternative returning 5% would grow to about $162,900. The net premium over the safer option is real but far smaller than the headline yield suggests, and in a severe downturn, losses could exceed this assumption.

Due diligence checklist

• Track record: how did the team's loans perform through previous credit cycles, including defaults and recoveries?
• Portfolio: what share is first-lien senior secured, and how diversified is it?
• Leverage: how much does the fund borrow, and on what terms?
• Fees: what is the management fee charged on, and how is the incentive fee calculated?
• Valuation: who values the loans, how often, and with what independent review?
• Liquidity: how often can you redeem, and can withdrawals be suspended?
• Distributions: is the payout covered by net investment income, or partly a return of capital?
• Tax and conflicts: how are distributions taxed where you live, and does the manager earn fees from or own equity in borrowers?

Common mistakes to avoid

• Judging a fund by its distribution yield without checking whether income covers it.
• Assuming smooth reported returns mean low risk.
• Investing money you may need before the lock-up or redemption window allows.
• Allocating a large share of a portfolio to a single manager or vehicle.

Watch: a visual explainer

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Video by Ben Felix, embedded via YouTube. Private.Finance is not affiliated with the creator.

Frequently asked questions