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Private credit became known as a good portfolio diversifier when interest rates rose in 2022, but more recently, worries about these loans are roiling financial markets. Here, we take a deep dive into private credit and what investors need to know about this alternative asset class.
What is private credit? The term “private credit” most often refers to direct lending to small and midsize private businesses that takes place outside of traditional banking channels or the public bond market.
Borrower companies, numbering in the thousands, might range from mom-and-pop shops with $5 million in annual sales to companies with $1 billion in revenues, according to Mark Steffen, alternative asset strategist at Wells Fargo Investment Institute.
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Such loans used to be primarily the province of banks. But as banks stepped back amid regulatory and economic constraints after the great financial crisis, alternative asset managers stepped in. Moody’s estimates assets under management in the global private-credit market will exceed $2 trillion this year and approach $4 trillion by 2030.
Can individual investors access the private-credit markets? It used to be that private markets were accessible only to institutions such as insurance companies, pension funds and endowments. But amid a push to “democratize” the asset class, investment management firms have expanded offerings.
Individual investors have been buying shares in closed-end private-credit funds and business development companies (BDCs) — finance companies created in the 1980s to help fund emerging businesses — that do not trade on an exchange.
Most of these vehicles are purchased through advisers, and there may be some net-worth or suitability restrictions, or high minimum investments. These funds have limited liquidity — meaning investors can make withdrawals only periodically, and redemptions may be capped.
More accessible are publicly traded BDCs. Think of them as stocks that operate like closed-end funds, holding mostly private debt and sometimes private equity. income to shareholders.)
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Relatively new exchange-traded funds invest in baskets of BDCs or in private credit in limited amounts, mixed in with other fixed-income holdings.
Then there are the big alternative-asset management companies that manage private-credit funds, among other types of assets. The layers can get a little confusing.
Ares Management (ARES) and Blackstone (BX), for example, are two of several publicly traded alternative-asset managers that sponsor non-traded funds and BDCs as well as publicly traded BDCs, the latter including Ares Capital (ARCC) and Blackstone Secured Lending (BXSL).
ETFs with a private-credit focus include VanEck BDC Income (BIZD), a relative old-timer launched in early 2013, and newer entrants such as State Street IG Public & Private Credit (PRIV), which debuted in February 2025 and invests in a mix of public and private IOUs.
What’s the attraction of private credit for investors? In a word (or two): high yields. “These types of loans produce expected yields in the high single and low double digits,” says Steffen. For example, the average dividend yield for BDCs in the S&P BDC Index, which tracks publicly traded BDCs, is a whopping 12.1% at last report. (The regulatory structure of BDCs requires them to pay out at least 90% of their taxable
When interest rates rose in 2022, private credit was one of few assets that did well, cementing a reputation as a good portfolio diversifier.
In 2022, when interest rates were rising and the broad bond market got crushed (bond prices fall when rates are rising, and vice versa), “shockingly, one of the few assets that did well was private credit,” says investment adviser Jonathan Treussard, of Treussard Capital Management. That cemented a reputation for being a good portfolio diversifier.
What are the risks? Private credit shares the risks inherent in all lending — making bad loans being the foremost. But a particular risk is a lack of transparency when it comes to the underlying loans, in contrast to publicly traded debt securities, whose value is settled in the market each trading day.
“With private credit, funds are valuing the assets — the loans — themselves. Investors have no idea what their investment is worth at any one time,” says Ben Schiffrin, director of securities policy at Better Markets, an advocacy group. Even with ETFs that routinely disclose holdings, “just listing the loans doesn’t help you figure out what their supposed value is,” he says.
There’s also a significant liquidity risk, considering that private loans are meant to be held for years — think six, seven or even 10 years — but investors might need or want their money back sooner. The potential for a liquidity mismatch is understandable with investments that don’t trade and only periodically allow withdrawals.
But investments that trade daily yet hold hard-to-sell underlying assets merely deliver the “illusion of liquidity,” said fixed-income guru Jeffrey Gundlach about private credit on a Bloomberg podcast, with sellers in bad markets likely able to unload their shares only at steep discounts.
Why are people so worried now? The canaries in the coal mine were two private-market bankruptcies last fall, igniting fears on Wall Street about the potential for problematic loans. Then came a tech wreck in the software sector, as investors worried about artificial intelligence eroding the recurring revenues generated by software subscriptions. It turns out, perhaps as much as 30% of private-credit loans are made to software firms.
“Many software-focused loans were originated in 2020-21, when recurring-revenue models commanded premiums and AI risk seemed remote,” reads an analysis by LPL Financial. Market expectations now call for private-credit default rates overall to rise to about 6% this year, up from 4.5% last year, according to LPL, with more bearish scenarios pushing the estimate toward 15%.
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As these concerns unfold, redemption requests are soaring in non-traded funds and BDCs, with several managers, including Ares Management and Blue Owl Capital, capping withdrawals. The practice is typical of such funds in order to avoid having to sell loans at a discount in distressed markets — a feature, not a flaw, say some, considering the long-term nature of the assets. But the restrictions have fueled more anxiety.
“Presumably, insurance companies understood what they were getting into, and they have long horizons. But retail investors are reading the same headlines, and there’s a degree of panic. The next thing they say is get me out of here, only to realize that getting out is more challenging than getting in,” says Treussard.
Meanwhile, prices have plunged for publicly traded securities. The S&P BDC Index is down more than 10% so far this year (through March 31). Asset managers with private-credit ties have been hit hard: Blue Owl Capital stock is down 37%; Ares Management, 32%.
Will private credit trigger the next financial crisis? “I’ve been saying for two years now that the next big crisis in the financial markets is going to be private credit,” Gundlach said back in November, adding that it has the “same trappings” of the subprime-mortgage crisis of years ago.
But the forecasts of other observers aren’t quite as dire. Rising defaults and an increase in the use of payment-in-kind features that allow borrowers to skip interest payments and instead add them to the loan balance are “immediate concerns,” say the analysts at LPL. “However, an immediate shock and contagion from the asset class failing are not in our forecasts.”
Is the panic overdone? Bargain hunters certainly think so. Publicly traded BDCs are trading at an average 22% discount to the net asset value of their underlying holdings, 20 percentage points wider than normal. Some have little exposure to software loans, adhere to conservative lending practices overall or boast long histories of minimizing loan losses. And yields are more than generous.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
