What Is Private Credit and How Can Individual Investors Access It?

Private credit has grown into one of the largest segments of the alternative investment market. As of 2023, private credit assets under management globally exceeded $1.5 trillion (Preqin, "Global Private Debt Report," 2024), and the asset class continues to attract capital from institutional and individual investors alike.

For individual investors exploring options beyond traditional stocks and bonds, private credit is worth understanding — both what it actually is and, equally important, what risks it carries that may not be immediately apparent.

Important note:This content is educational and is not a recommendation to invest in private credit or any specific fund or security. Private credit investments involve significant risks, including the risk of loss of principal. Suitability depends on individual circumstances, risk tolerance, liquidity needs, and investment objectives. Consult a qualified financial advisor before making any investment decision.

What Is Private Credit?

Private credit refers to debt instruments originated and held outside of public capital markets. Rather than buying a corporate bond that trades on an exchange, a private credit investor (or fund) is directly lending to businesses, real estate operators, or other borrowers — and holding that loan to maturity rather than trading it.

The borrower is typically a company that either cannot access public bond markets (due to size or credit quality) or prefers the terms and certainty of a private loan over a public offering process.

The Main Categories

Direct lendingis the largest private credit strategy. A lender provides senior secured loans directly to middle-market companies — typically businesses with $10 million to $1 billion in annual revenue. These loans often carry floating interest rates (tied to benchmarks like SOFR), reducing interest rate duration risk compared to fixed-rate bonds. Loan sizes typically range from $20 million to $500 million.

Mezzanine debtsits between senior debt and equity in the capital structure. It carries higher risk than senior loans and typically offers higher potential returns — often in the form of higher interest rates plus equity warrants (a right to purchase equity in the borrower). In a default scenario, mezzanine holders are paid after senior lenders.

Distressed debtinvolves purchasing debt of companies that are in financial difficulty, often at a significant discount to face value. Returns depend on recovery values in restructuring or bankruptcy proceedings. This strategy carries higher risk and requires specialized expertise.

Real estate debtincludes commercial mortgage loans, bridge loans, and construction financing — often for projects that do not qualify for conventional bank financing.

Why Some Investors Consider Private Credit

The primary appeal of private credit has historically been its yield profile relative to public fixed income. Private credit funds have generally sought to offer higher income potential than investment-grade corporate bonds — reflecting the additional risks investors assume, including illiquidity, credit risk, and complexity. However, gross yields do not equal investor returns; management fees, fund expenses, and carried interest can meaningfully reduce what an investor actually receives. Comparing gross and net return figures for any specific fund is essential before drawing conclusions about income potential.

Important context on yield:The additional yield of private credit over public fixed income is sometimes described as an "illiquidity premium" — compensation for the inability to sell the investment before maturity. However, higher yield in private credit also reflects higher credit risk (lending to borrowers who cannot access public markets often means they carry lower credit quality), less covenant protection in recent years ("covenant-lite" loans), and greater complexity. The additional yield is not free return — it corresponds to real additional risk.

Floating rate structure.Many direct lending loans carry floating rates, meaning interest payments increase when benchmark rates rise. This provided some protection against rising rate environments compared to fixed-rate bonds — though a falling rate environment has the opposite effect on income.

Potential diversification.Private credit returns may have lower correlation to public equity markets than high-yield bonds in some market environments. However, in periods of severe credit stress, defaults in private credit portfolios tend to increase alongside public credit stress — the diversification benefit may not be present precisely when it is most needed.

The Risks — A Detailed View

Private credit carries a set of risks that require careful consideration. These risks are not minor footnotes; they are central to evaluating whether the asset class is appropriate for any given investor.

Credit Risk

Borrowers in private credit are frequently companies with below-investment-grade credit profiles — in some cases, companies that could not qualify for traditional bank financing. If a borrower defaults, recovery rates depend on collateral quality, loan structure, and the workout process. While senior secured loans have historically had relatively higher recovery rates than unsecured debt, recoveries are not guaranteed and vary significantly by loan and cycle.

Default rates in private credit tend to be cyclical. During economic downturns, defaults rise. The private credit market has experienced significant growth since the 2010s and has not been tested by a severe credit cycle with its current size and structure. Historical default and recovery data from prior periods may not fully reflect current market conditions (Moody's, "Annual Default Study," published annually; Moody's.com).

Illiquidity Risk

Most private credit investments cannot be sold before maturity. Unlike publicly traded bonds, there is no liquid secondary market for most private loans. If you need to exit a private credit fund investment, you may face substantial discounts on secondary markets, redemption queues, or suspension of withdrawals. For retirement investors with ongoing cash flow needs, illiquidity is a meaningful structural risk.

Some vehicles (business development companies, interval funds) offer periodic redemption features — but these can be suspended at the fund manager's discretion and are not a guarantee of liquidity.

Valuation Risk

Private loans are not marked to market daily. Fund managers value loans quarterly, typically using proprietary models or market-comparable approaches. This means the NAV you see in any given quarter may not reflect the price at which a loan could be sold, and problems in the portfolio may not be reflected in reported valuations until they are significant.

Fee Risk

Private credit funds typically charge management fees of 1–1.5% of assets annually, plus performance fees (carried interest) of 15–20% of returns above a hurdle rate. These fees can substantially reduce net investor returns. A fund earning 10% gross may deliver 7–7.5% net of fees after accounting for management fees and carried interest — and lower in underperforming years where management fees are still charged. Comparing gross and net return figures is essential.

Manager Risk

Manager skill and underwriting discipline vary significantly across private credit funds. The quality of loan covenants, collateral evaluation, portfolio concentration, and workout capabilities differs substantially. In private credit, there is no equivalent to a passive index strategy — every investor is implicitly making a manager selection decision. Historical performance is an imperfect predictor of future results.

Regulatory and Structural Risk

The private credit market has grown rapidly, with many new entrants including insurance companies, banks, and fund managers who have not previously operated through a full credit cycle. Regulatory changes affecting bank lending standards, BDC regulations, or tax treatment of carried interest could affect the private credit landscape. Leverage within private credit structures (many funds borrow at the fund level to amplify returns) amplifies both returns and losses.

How Individual Investors Can Access Private Credit

Business Development Companies (BDCs)

BDCs are SEC-registered companies that lend to middle-market businesses. They are required to distribute at least 90% of taxable income as dividends, making them income-focused structures.

Traded BDCs(e.g., listed on NYSE or NASDAQ) offer daily liquidity. Examples include Ares Capital Corporation (ARCC), Blue Owl Capital Corporation, and FS KKR Capital Corp. Traded BDC prices fluctuate with market sentiment, and shares may trade at a premium or discount to NAV.

Non-traded BDCsare not listed on exchanges and offer more limited liquidity (typically through periodic repurchase programs). They may provide access to private credit strategies with less daily price volatility — but that reduced volatility reflects infrequent valuation, not absence of risk.

Key BDC risks:Leverage (most BDCs borrow to amplify their loan portfolios, with regulatory limits of roughly 1:1 debt-to-equity); credit losses from borrower defaults; dividend cuts in periods of high defaults; management quality and fee structures; and conflicts of interest between external managers and shareholders.

Individual investors considering any BDC investment should review the specific fund's prospectus, financial statements, and fee structure in detail.

Interval Funds

Interval funds are closed-end registered investment companies that invest in illiquid assets including private credit, but offer periodic redemptions (typically quarterly). The SEC-registered structure provides some investor protections; the periodic liquidity feature provides more flexibility than traditional private funds.

However, interval fund redemptions can be limited to a percentage of outstanding shares each period and may be suspended. In periods of high redemption requests, an investor may not be able to access all or any of their capital in a given quarter.

Direct Private Credit Funds

Access to institutional private credit funds typically requires qualified purchaser status ($5 million in investments; SEC.gov, accessed 2025) or at minimum accredited investor status ($1 million net worth excluding primary residence, or $200,000+ annual income). Minimum investments are generally $250,000 and often significantly higher. Regulatory thresholds are subject to change; readers should confirm current definitions with a qualified financial or legal professional.

These funds offer access to institutional-quality managers and strategies but carry all the illiquidity risks described above, often with 5–10 year fund terms.

Questions to Work Through With Your Advisor

Before considering any private credit investment, work through these questions with a financial advisor:

• What percentage of my investable assets would this represent, and can I afford for that portion to be illiquid for the fund's full term?
• What is the specific credit quality of the borrowers in this portfolio, and how have defaults been managed historically?
• What are the total fees (management + carried interest + fund expenses), and what has the net return to investors been, net of all fees?
• What is the redemption mechanism, and under what circumstances could it be suspended?
• How does this investment interact with my RMD obligations, tax situation, and retirement income plan?
• Do I meet the accredited investor or qualified purchaser thresholds required for this specific investment?

The Bottom Line

Private credit can provide access to income streams and strategies not available in traditional fixed income — but it comes with meaningful trade-offs: reduced liquidity, higher fees, less transparency, credit risk concentrated in below-investment-grade borrowers, and dependence on manager skill.

For some investors with sufficient investable assets, long time horizons, and limited liquidity needs, private credit may be worth exploring as part of a broader diversified approach. For others — particularly those who will need to access capital in retirement for living expenses or RMDs — the illiquidity alone may be disqualifying.

The question is never whether private credit has attractive characteristics in the abstract. The question is whether a specific private credit investment, with its actual fees, actual portfolio, and actual liquidity terms, is appropriate for your specific retirement plan.

Key Sources Referenced

• Preqin, "Global Private Debt Report," 2024 (Preqin.com, accessed 2025)
• Cliffwater Direct Lending Index, 2024 Annual Report (Cliffwater LLC; Cliffwater.com, accessed 2025)
• Moody's, "Annual Default Study" (Moody's.com, current vintage, accessed 2025)
• SEC, "Business Development Companies" investor resource (SEC.gov, accessed 2025)
• SEC, "Accredited Investor" and "Qualified Purchaser" definitions (SEC.gov, accessed 2025)
• SEC, "Investor Bulletin: Interval Funds" (SEC.gov, accessed 2025)

This content is for educational purposes only and does not constitute investment advice or a recommendation to purchase any security, fund, or investment product. Private credit investments involve significant risks, including the risk of partial or total loss of principal, illiquidity, credit losses, and fee drag. Past performance of any strategy, index, or fund is not indicative of future results. These investments are not suitable for all investors. Investors should carefully review all offering documents and consult with a qualified financial advisor and tax professional before making any investment decisions. Inventa Wealth Advisors | 7440 South Creek Road, Suite 250, Sandy, UT 84093 | Telewealth virtual appointments available nationwide.