If you’ve spoken with a wealth advisor recently, you’ve probably heard about private credit. The asset class has grown from relative obscurity to a $1.7 trillion market in just over a decade, attracting capital from pension funds, endowments, family offices, and increasingly, individual accredited investors seeking yield.

What Is Private Credit?

Private credit refers to loans and debt investments made outside the traditional banking system and public bond markets. Instead of borrowing from banks or issuing bonds that trade publicly, companies obtain financing directly from investment funds and other non-bank lenders.

Private credit emerged prominently after the 2008 financial crisis, when banking regulations tightened and traditional lenders retreated from middle-market lending.

Types of Private Credit Strategies

Direct Lending

The largest private credit category. Funds make loans directly to middle-market companies ($10-500 million revenue). Loans feature floating rates (SOFR plus 4-7%), security against assets, and maintenance covenants. Returns historically range 8-12% annually.

Mezzanine Debt

Sits between senior loans and equity, demanding higher returns (12-20%) combining cash interest and equity participation.

Distressed Debt

Funds purchase loans of companies in financial difficulty at discounts. Returns can exceed 20% in successful turnarounds.

Specialty Finance

Lending against specific assets: aircraft, equipment, real estate, royalty streams. Returns typically 7-15%.

Why Private Credit Has Grown

According to Preqin data, private credit AUM has grown from $300 billion in 2010 to over $1.7 trillion—a compound annual growth rate exceeding 15%.

Key drivers: banking retreat from middle-market lending, yield-seeking in low-rate environments, and private equity growth creating financing demand.

How to Invest in Private Credit

Private Credit Funds

5-7 year terms with limited liquidity. Minimums start at $250,000 for smaller funds, $1 million+ for institutional managers. Fees follow “2 and 20” model.

Business Development Companies (BDCs)

Publicly traded companies making middle-market loans. Daily liquidity through stock trading. Leading BDCs: Ares Capital (ARCC), Owl Rock Capital (ORCC), Main Street Capital (MAIN).

Interval Funds

Middle ground with periodic liquidity (typically quarterly). Minimums around $25,000-$50,000 for accredited investors.

Private Credit Returns and Risks

Return Expectations — Net returns of 8-12% annually over the past decade, premium over high-yield bonds compensating for illiquidity.

Key Risks:

Credit Risk — Borrowers can default. Private credit hasn’t experienced a severe recession test.

Illiquidity Risk — Capital locked for years in traditional funds.

Valuation Risk — Private investments don’t trade publicly; valuations rely on manager estimates.

Manager Selection Risk — Performance varies dramatically across managers.

Private Credit in Portfolio Context

Most institutional investors allocate 5-15% of portfolios to private credit, treating it as a complement to traditional fixed income. The illiquidity premium rewards patient capital but requires honest assessment of liquidity needs.

The Bottom Line

Private credit has earned its place in institutional portfolios through attractive yields, low correlation to public markets, and flexible capital for middle-market companies. For individual investors, access has improved through BDCs, interval funds, and platforms serving accredited investors.

Related: What Is a Hedge Fund? | What Is a Family Office?