The Rise of Private Credit in Retail Portfolios

Private credit, the umbrella term for loans made by non-bank lenders directly to companies, has grown into one of the larger pools of capital in global finance. The International Monetary Fund's April 2024 Global Financial Stability Report put the size of the market at roughly $2.1 trillion in assets and committed capital at the end of 2023, with about three-quarters of that concentrated in the United States. A decade earlier, the same figure was a fraction of that size.

The growth has come from two directions at once. On the demand side, middle-market companies that once relied on syndicated bank loans have turned to direct lenders for speed and certainty of execution. On the supply side, insurers, pension funds and now retail-oriented vehicles have allocated more capital to the asset class in search of yield, particularly during the long stretch of low rates that ended in 2022. The IMF has flagged that this expansion has happened largely outside the scope of bank supervisors.

How retail access works

Until recently, this market was effectively closed to individual investors. That has changed through two structures regulated by the US Securities and Exchange Commission: the business development company (BDC), a closed-end fund structure created under the Investment Company Act of 1940, and the interval fund, a registered closed-end fund that offers periodic, limited repurchases of shares rather than daily liquidity. Non-traded BDCs and interval funds from large managers including Blackstone, Apollo, Ares and KKR have together raised tens of billions of dollars from non-institutional investors over the last several years.

The yield is the headline. Many of these vehicles target net distributions in the 8% to 11% range, well above what investment-grade bonds and money-market funds offer. The underlying loans are typically senior-secured and floating-rate, which has helped distribution yields stay elevated as base rates rose. Total return, of course, is yield minus credit losses, and credit losses are where the story gets less straightforward.

Where the risks sit

Three issues recur in regulatory and central-bank commentary. The first is valuation. Loans are marked through manager-led processes rather than continuous market prices, which can smooth reported volatility in a way that disguises rather than reduces risk. The second is liquidity. Interval funds typically offer to repurchase 5% of outstanding shares per quarter at most, and non-traded BDCs operate under similar constraints. In a stress scenario, redemptions can be gated or pro-rated, and the holder may not be able to exit at the headline net asset value.

The third is leverage. Many private-credit vehicles use fund-level borrowing to amplify returns, and the underlying portfolio companies are themselves often highly leveraged. The Bank for International Settlements has noted that interconnections between private credit funds, banks providing them with subscription-line financing, and insurers funding the equity tranches create channels through which stress can spread. The IMF's 2024 GFSR includes a dedicated chapter that walks through these channels in more detail.

“The fastest-growing pocket of credit risk is one where the supervisor has the least visibility. That asymmetry deserves attention.”

Fitting it into a portfolio, or not

For an individual investor, the practical question is whether the yield premium compensates for illiquidity, opacity and credit risk that has not been tested through a deep recession at the current size of the asset class. Most private-credit interval funds and non-traded BDCs are sold with prospectuses that disclose these features at length; reading them is a useful corrective to marketing material that emphasises the distribution rate. The SEC's Office of Investor Education has published bulletins on both interval funds and BDCs that summarise the structural features in plain language.

Anyone evaluating one of these vehicles should at minimum look at the manager's track record across a credit cycle, the fund's fee structure including incentive fees, the percentage of the portfolio in first-lien versus second-lien debt, and the historical pattern of repurchase requests being honoured at the stated levels. This piece is general reporting and does not constitute investment advice; an allocation to private credit is a portfolio-construction decision that belongs in a conversation with a licensed adviser.