What Are Private Credit Investments?

Private credit investments are loans made by nonbank lenders typically to private companies. Part of the universe of alternative investments—alongside hedge funds, private equity, and real estate—private credit allows qualified retail investors to access additional strategies that go beyond publicly traded stocks, bonds, and cash investments.

There are many private credit strategies—based on the borrower, loan type, and collateral—but direct lending is encompasses 46% of all private debt capital raised globally in 2025.¹ Similar to traditional bank lending but negotiated directly with private investors, private credit funds typically lend to middle- and upper-middle market companies that are unable to borrow in the public markets or require a bespoke financing solution.

The appeal to investors, especially in a low-interest-rate environment, is that such investments may provide a yield premium to high yielding public fixed income assets, such as high-yield bonds or emerging-market debt.

Here's what to know about this potential investment opportunity.

Traditionally, even private credit funds that catered to individual investors required million-dollar commitments and locked up capital for seven to 10 years. However, "evergreen" funds—with much lower minimums and other retail-investor-friendly features such as reporting distributions on 1099s—have made the asset class more accessible to individual investors. These funds also generally provide some flexibility to redeem a portion of or the entire investment, subject to fund redemption limitations.

The two most common types of evergreen funds are:

• Business development companies (BDCs)—non-listed or publicly listed investment vehicles that provide access to a diversified portfolio of loans. Investment minimums may be as low as $2,500.² Liquidity depends on the structure: Non-listed BDCs, or tender funds, may offer limited (typically up to 5% of the fund) quarterly repurchase programs at the fund's net asset value (NAV), while publicly listed BDCs can be bought or sold daily at prevailing market prices, which may be higher or lower than the NAV.
• Interval funds—closed-end funds whose shares can be purchased daily via ticker symbol but can be redeemed only at specified times and in limited amounts, typically 5% quarterly. Investment minimums are generally much lower than the private funds that cater to institutional investors. That said, while redemptions are guaranteed to occur, these funds have the added risk that the fund may need to sell large blocks of illiquid loans at a loss to raise capital.

Both types of funds may require investors to meet net-worth requirements, provide limited liquidity, and may charge early exit penalties if minimum holding periods aren't met.

Over the past three years, private credit yields have offered an average 1.66 percentage point premium compared to publicly listed leveraged loans.³ They were able to do so partly because of risk factors such as the "illiquidity premium"—the additional return investors demand for holding assets that can't be easily sold. Private credit funds also typically make loans to smaller, unrated companies, which generally are viewed as riskier and therefore are required to pay higher yields on their debt.

Another potentially attractive feature of private credit is the floating-rate nature of the underlying loans, which are often pegged to an interest-rate benchmark like the Secured Overnight Financing Rate (SOFR). If interest rates rise—due to, say, higher inflation—so does the income from a private credit fund; the drawback of this, however, is that if rates fall, so do a fund's income payments. (Most loans have an interest-rate floor, often as low as 1%, that guarantees a minimum rate regardless of how far the benchmark sinks.)

Beyond the potential for outsize returns, private credit may provide additional diversification to a fixed income portfolio.

Though private credit's risks are inherently what makes it potentially rewarding, you should be aware of some key financial metrics across private credit that have weakened in recent years, demonstrating the need for fund-level scrutiny when evaluating investments. These include:

• Deteriorating interest coverage ratios (ICRs), which is a measure of how easily a company can make its interest payments. In 2021, average ICRs stood at about 3x EBITA (earnings before interest, taxes, and amortization), meaning companies' earnings could cover their annual interest expenses three times over. Since then, average ICRs plunged to below 2x.4 This decline largely reflects both loosened underwriting standards as well as the deterioration of ICRs due to outstanding floating-rate loans that were originated when interest rates were exceptionally low. As short-term rates rose sharply in 2022 and 2023, debt-servicing costs increased, leaving many borrowers more vulnerable to financial distress and default.
• A rise in payment in kind (PIK), which allows borrowers to defer cash interest payments by instead taking on more debt—potentially leading to compounding debt, higher default risks, and reduced lender recovery rates. According to valuation firm Lincoln International, 11.4% of the private loans it valued in the second quarter of 2025 had some form of PIK, up from just 6% in 2022.
• A rise in annual recurring revenue (ARR) loans, which are made to companies based on their annual revenues, before deducting expenses and losses, rather than their actual earnings. Because these borrowers may produce no profits at all, at least in the near term, ARRs are generally considered riskier than earnings-based loans and thus command interest payments 1 to 3 percentage points higher than similar loans to profitable companies.

Structurally, the greatest liability for private credit in evergreen funds is still illiquidity risk—especially during times of market distress. The percentage of assets under management (AUM) that a fund is willing to redeem typically is capped at 5% per quarter. If redemption requests exceed that percentage, investors may receive less back from the fund than they requested because redemptions are prorated. Evergreen funds typically have a sleeve of liquid investments that can be sold to support investor redemptions and can borrow against credit lines, but these tools may not be enough to accommodate a surge in redemption requests. Under extreme circumstances, a tender fund may suspend redemptions altogether; while an interval fund cannot do the same, it may be forced to liquidate illiquid loans—likely at substantial discounts that could create losses for both exiting and remaining investors in the fund.

As concerns mounted about private credit over the last year, redemption requests rose and, in some cases, exceeded the periodic limits. Some private credit funds were able to meet those elevated redemption requests while other funds enforced their stated limits.

If you're seeking to maximize cash flow, private credit may offer yields that are difficult to find in traditional fixed income portfolios, but you need to consider the increased risks that accompany these higher returns as well. You should also be prepared to subscribe to and hold your investment for several years to realize the potential benefits of the illiquidity premium.

Additionally, most of the private companies to which these funds are making loans don't have the same financial reporting requirements as public companies, putting the onus on individual investors to do their own due diligence on a credit fund's management and its loan portfolio. If you're careful and selective, however, private credit could be a compelling addition to a fixed income portfolio.

An investment professional and wealth advisor can help you decide if private credit is right for your income needs and provide guidance on investment options that suit your situation.