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Private debt investing is becoming increasingly popular, particularly among higher-income investors seeking yield and diversification. The global market value reached $1.5 trillion in 2024, up from $1 trillion in 2020, and is expected to reach $2.6 trillion by 2029.
Access is also expanding thanks to the rise of digital investment platforms that offer more opportunities to the average retail investor. As a result, it’s more important than ever to understand this alternative investment.
Let’s explore what you should know about private debt, including how it works, its pros and cons, and where you can invest in it. We’ll also cover the role it usually plays in a well-diversified portfolio.
Key Takeaways
- Private debt refers to lending that happens outside public markets, typically from non-bank lenders to private companies or projects.
- Unlike corporate bonds, private debt isn’t exchange traded, so your funds are usually tied up for the life of the loan.
- Private debt typically offers a higher return than traditional fixed-income investments because of its illiquidity, default risk, and complexity.
- You can invest in private debt through specialized funds, online platforms, or direct placements, but some opportunities are only open to accredited investors.
- Private debt can improve returns and provide diversification, but it should typically be a complement to traditional fixed-income strategies.
What Is Private Debt (a.k.a. Private Credit)?
Also known as private credit, private debt refers to a type of financing in which a non-bank creditor lends to a private entity, such as a company or a project. It’s similar to corporate bonds, but is arranged between borrowers and lenders directly—or through a fund—rather than facilitated by an exchange.
“Private debt is simply lending that happens outside public markets,” said Dean Lyulkin, president and co-CEO of Cardiff, Inc. “You’re not buying a traded bond, you’re funding a loan directly or through a private fund.”
Because private debt isn’t publicly traded, it’s less liquid than corporate bonds. Your funds are typically tied up for the length of the underlying loan’s repayment term. However, it also tends to carry a higher average yield to compensate for the elevated risk and complexity.
In other words, private debt often costs more for the borrower than traditional types of debt financing. Because of this, borrowers are typically those who:
- Can’t issue corporate bonds, like mid-sized companies
- May not qualify for traditional bank financing, like startups
- Will pay a premium for highly customized financing, like infrastructure projects
As a result, private debt comes in many different forms. These include direct lending to businesses, asset-based lending that uses some kind of collateral, and mezzanine debt, which the lender can convert to equity if the borrower defaults.
Benefits of Private Debt
For many investors, the primary appeal of private debt is its potential to provide stronger returns than traditional fixed-income investments. “The main draw is higher yields than traditional bonds—often in the high single to mid double digits—because you’re taking on more complexity, less liquidity, and sometimes specialized collateral,” said Lyulkin.
However, another significant advantage is that those returns have less exposure to the volatility of the stock and bond exchanges. “Many of these loans also have low correlation to public markets,” said Lyulkin. “Their returns depend on borrower repayment and collateral value rather than daily trading sentiment.”
Combined with private debt’s predictable repayment structure—typically involving regular interest payments over the life of the loan—these traits make it an attractive way for investors to create a steady stream of income.
Risks of Private Debt
Private debt may offer the potential for higher yields, but it also has an inherent risk of default. “Default risk is that you do not receive either your interest payments or principal back because the borrower cannot pay,” said Evan Rothschild, CFP, CFA, senior wealth advisor at Focus Partners Wealth. “And with private debt, there is typically some expectation of defaulting bonds, even in good times.”
The other main risk with private debt is that it isn’t traded on public markets, so it isn’t easily convertible to cash. “Private debt investments may take months or years to become liquid, depending on the types of loans and the underlying asset class,” said Jan Brzeski, founder of Sage Credit Investment Partners.
When investing through a private fund, transparency can also be an issue, especially if the structure of the underlying loan is complex. “As an example, it may be hard to tell how a given fund manager is generating their returns,” said Brzeski. “Is it from senior loans or junior loans? Is the manager borrowing money from banks? If so, how much does this impact the risk of principal losses?”
Tip
Private debt ultimately offers a tradeoff: the potential for more substantial returns and steadier income at the price of higher complexity and less flexibility.
How To Invest in Private Debt
Because of its increased risk and complexity, private debt is often only available to accredited investors. In the U.S., that generally means having an annual income of at least $200,000 ($300,000 with your spouse) or a net worth of over $1 million, excluding your primary residence.
However, some opportunities are accessible to non-accredited investors, especially through certain funds and online platforms. Speaking of which, the three main avenues for investing in private debt include:
- Private credit funds: These specialized investment vehicles pool funds from investors that their managers can lend to private entities or use to buy existing private loans. For example, some types of funds that may invest in private debt include business development companies (BDCs) and interval funds.
- Online platforms: Fractional and crowdfunded investment sites like Fundrise and Yieldstreet are arguably the most accessible way to invest in private credit. They commonly have relatively low minimum investment requirements—just $10 for Fundrise—and accept contributions from non-accredited investors.
- Direct placements: This involves investing in a private loan directly, though you can also arrange deals through an investment advisor. This method offers the most control and potentially higher returns but also requires greater due diligence and a larger investment amount.
Whichever strategy you use, private debt typically requires you to commit your money for an extended period. Because each deal is negotiated individually, timelines can vary significantly between investments.
Example
Fundrise’s private credit fund lent $28 million to Integral Communities in 2019, helping finance a real estate development project it expected to build 774 units over two years and earn an annual return of 8.5%.
Where Private Debt Fits in a Portfolio
Private debt can be a valuable addition to a diversified portfolio, especially as a complement to your fixed income strategy. However, it’s generally not a suitable replacement for more traditional options, like corporate bonds.
“Private lending to small businesses or real estate borrowers can be a yield enhancer and a diversifier,” said Lyulkin. “It may also serve as a partial hedge against public market volatility, since repayment streams are contract-based. But because defaults can spike in downturns, these are best as a targeted slice of an ‘income’ or ‘alternatives’ allocation—not a core holding.”
Before investing in private debt, ensure you’re confident in the manager—whether you’re yourself or a professional—and understand the risks. “In this space, manager skill is everything,” said Lyulkin. “Do your due diligence, know the collateral, and make sure your time horizon matches the loan terms—this isn’t capital you can pull back on short notice.”
What’s the Difference Between Private Debt and Corporate Bonds?
Corporate bonds are traded on public exchanges, making them relatively easy to buy and sell. In contrast, private debt is arranged directly between lenders and borrowers, making it less liquid. However, it usually carries a higher yield to compensate.
Is Private Credit Only for Accredited Investors?
In many cases, private debt is only for high-net-worth or accredited investors, especially if you’re looking to invest through private funds or direct placements. However, some online platforms and specialized funds offer opportunities to non-accredited investors, often with lower investment minimums.
How Long Is My Money Typically Locked Up?
Your money is typically locked up for the life of the loan, which typically ranges from several months to a few years. However, the exact lock-up period depends on the underlying deal’s structure.
The Bottom Line
Private debt offers the potential for steady income and stronger returns than traditional corporate bonds. However, in exchange, it’s less liquid, higher risk, and more complex. As a result, it can be a valuable addition to the fixed income portion of a well-diversified portfolio, but it doesn’t make sense as a core holding for most investors.
