Overview
Private credit describes direct loans, mezzanine debt, unitranche financing, and other non‑bank lending arrangements made by private funds, specialty lenders, or online platforms. For individual investors, this asset class offers higher yields than many public bonds but comes with greater complexity, limited liquidity, and reliance on manager underwriting. The private credit market expanded rapidly over the last decade — estimates put global private credit assets under management near $1.5 trillion in 2022 and continuing to grow as banks retrench from certain corporate lending lines (McKinsey, 2022). This growth has increased the number of vehicles available to individuals, from institutional-style closed-end funds to retail-oriented lending platforms.
(References: McKinsey & Company, “Private Markets — The New Frontier”; SEC, Accredited Investor rules.)
How private credit works for individual investors
Individual exposure to private credit typically comes through one of three paths:
- Private credit funds (closed-end or evergreen): These pooled vehicles are managed by specialist firms that underwrite loans to middle‑market companies, real‑estate sponsors, or specialty finance niches. Investors provide capital and receive periodic interest distributions and return of principal as loans amortize or are repaid.
- Online lending marketplaces / platforms: These platforms may let accredited or non‑accredited investors buy interests in consumer or small business loans or fractionalized slices of loans. Platform models vary widely in underwriting rigor and investor protections.
- Direct or club deals: Wealthy individuals or family offices may co‑invest directly with a manager in single loans.
Managers typically charge management and performance fees, and funds often use covenants, collateral, or senior secured claims to protect capital. Liquidity is limited: many funds have lock‑ups, notice periods, or quarterly gates that restrict redemptions.
Access, eligibility and regulation
Most private credit vehicles offered to U.S. investors are structured as private placements under Regulation D or similar exemptions. As a result, many offerings are limited to accredited investors, which the SEC defines (summary): a person with net worth over $1 million (excluding primary residence) or income of $200,000 in each of the prior two years ($300,000 with a spouse) (SEC). In addition, the SEC recognizes certain professional certifications and entities as qualifying investors.
For retail investors seeking lower minimums, some platforms and interval funds offer access with smaller ticket sizes, but they still carry the same credit and liquidity risks.
Internal resources at FinHelp:
- See our glossary entry on Accredited Investor for the SEC criteria and what it means for private markets exposure: Accredited Investor.
- For investors comparing strategies that look like private credit but sit in broader private markets, review our Private Equity primer: Private Equity.
Yield expectations and comparisons
Yields vary by strategy, seniority, collateral and borrower credit quality. Typical ranges (generalized):
| Strategy | Typical gross yield range | Typical risk profile |
|---|---|---|
| Senior secured middle‑market loans | 5%–9% | Lower credit risk, seniority protects principal |
| Mezzanine / subordinated debt | 8%–14% | Higher yield, higher default risk |
| Real estate bridge loans | 6%–12% | Collateral mitigates losses but valuation risk exists |
| Specialty consumer / SMB platforms | 8%–18% | Higher yield, often unsecured or lightly secured |
Compared with traditional investment-grade bonds (often yielding 3%–6% in recent years) private credit aims to capture an illiquidity and complexity premium. Remember reported yields are often gross — net returns after fees, defaults and realized losses can be meaningfully lower.
Real-world examples and a client vignette
In my practice I helped a client allocate 5% of a taxable fixed‑income sleeve to a closed‑end private credit fund focused on senior secured loans to lower‑middle‑market businesses. The fund targeted 7%–9% cash yields. Over a three‑year holding period the portfolio produced roughly 6.5% net due to some borrower restructurings and higher management fees. The tradeoff was lower volatility in market value but limited ability to exit early without a sale on the manager’s secondary market (if available).
Another example: a retail investor used a marketplace to buy fractional consumer loan notes with a stated yield of 12%. After platform fees and several defaults, the realized yield fell below 8% — illustrating the importance of diversification and understanding platform underwriting standards.
Key risks to understand
- Credit/default risk: Borrowers in private credit can default. Recovery depends on collateral quality, seniority, and legal remedies.
- Liquidity risk: Many funds limit redemptions. Closed‑end vehicles can take years to return capital.
- Manager / underwriting risk: Outcomes depend heavily on the sponsor’s track record, credit judgment and collection capabilities.
- Fee drag and complexity: Management and incentive fees reduce net returns. Waterfall structures and catch‑up provisions can be opaque.
- Valuation and transparency: Loan values are not marked daily; NAVs rely on manager models and appraisals.
- Concentration and covenants: Some loans have loose covenants (covenant‑lite), limiting creditor protections.
- Regulatory and operational risk: Platform failures or poor servicing can impose losses for retail investors.
Due‑diligence checklist (practical steps)
- Understand the borrower profile: sector, size, leverage and collateral.
- Review manager track record and team continuity. Ask for realized loss rates and stressed‑scenario outcomes.
- Scrutinize fees, liquidity terms, gates, and exit mechanisms.
- Evaluate legal documents: seniority, covenants, events of default, and remedies.
- Request sample loan tapes or portfolio spreadsheets for existing funds.
- Consider tax treatment: most interest income is ordinary; consult a tax advisor for pass‑through structures.
- Confirm accreditation status and regulatory disclosures (offering memorandum, Form ADV for managers).
Practical allocation guidance
Private credit can complement a diversified income sleeve, especially for investors seeking yield beyond public bonds. As a starting rule, many advisors allocate 5%–15% of a total portfolio to private credit based on risk tolerance, investment horizon, and liquidity needs. Higher allocations suit investors with longer horizons and higher net worth. Always size positions so a single default or restructuring does not harm your financial plan.
Common mistakes and misconceptions
- Treating private credit like a bank deposit: Private loans are not FDIC insured.
- Assuming stated yield equals realized return: Fees, defaults, and prepayment behavior change outcomes.
- Ignoring concentration risk: A few large loans can drive performance in smaller funds.
- Overlooking alignment: Managers with significant GP commitments typically align interests better with LPs.
Tax, reporting and exit considerations
Interest income from most private credit investments is taxed as ordinary income. Some funds operate as partnerships and issue Schedule K‑1s that may complicate tax filing (delayed K‑1s are common). Realized gains or losses can be treated based on holding periods and fund structure. Consult a tax professional for specific guidance.
Frequently asked questions
Q: What’s a typical minimum investment? A: Minimums vary: institutional funds often require $100,000+, while interval funds and some platforms allow $5,000–$25,000. Requirements depend on fund structure and sponsor.
Q: Can non‑accredited investors access private credit? A: Some registered funds and crowdfunding platforms provide routes for non‑accredited investors, but offerings differ in underwriting rigor and regulatory protections.
Q: How do I measure manager performance? A: Look at net internal rate of return (IRR) over full cycles, realized loss rates, recovery rates on defaults, and consistency across vintages.
Final checklist before you invest
- Match the vehicle’s liquidity terms to your cash needs
- Confirm fee and incentive mechanics and model net returns
- Diversify across managers and borrowers
- Verify legal protections (security interest, seniority)
- Consult a qualified financial and tax advisor
Professional disclaimer
This article is educational and does not constitute individualized financial, investment, or tax advice. Investors should consult a licensed financial advisor and tax professional before investing in private credit strategies.
Authoritative sources and further reading
- U.S. Securities and Exchange Commission, Accredited Investor definition: https://www.sec.gov/
- McKinsey & Company, Private markets research (2022): https://www.mckinsey.com/
- Investor.gov and FINRA investor education materials on private placements and fund fees.
Related glossary entries on FinHelp:
- Accredited Investor: https://finhelp.io/glossary/accredited-investor/
- Private Equity: https://finhelp.io/glossary/private-equity/
If you’d like, I can produce a one‑page due‑diligence worksheet you can use when evaluating specific private credit funds or platform offerings.
