Private credit has had a remarkable decade. What was once the exclusive domain of pension funds and endowments has opened to individual investors — and with that democratization has come both opportunity and, more recently, some high-profile turbulence worth understanding.
Before deciding whether private credit belongs in your portfolio, you need to understand what it actually is, how it generates returns, and why the current environment requires more scrutiny than it did a few years ago.
What is private credit?
Private credit is lending — but outside the traditional banking system and outside public bond markets.
When a company needs to borrow money, it has several options. It can borrow from a bank. It can issue bonds that trade publicly. Or it can borrow privately from a direct lender — an asset manager, a fund, or a group of institutional investors — through a privately negotiated agreement.
That third option is private credit. The loan is not registered with the SEC, does not trade on any exchange, and is not rated by Moody's or S&P. It is a bespoke agreement between a borrower and a lender, with terms negotiated directly.
From an investor's standpoint, you are the lender. Your capital goes into a fund that makes these loans. You earn returns through interest payments, typically at floating rates tied to benchmarks like SOFR. When loans are repaid, your principal comes back.
Why private credit grew so quickly
Several forces drove the expansion of private credit from a niche strategy into a mainstream alternative asset class.
Bank retrenchment after 2008 left a lending gap. Regulatory capital requirements pushed banks away from middle-market lending — loans to companies too small for the public bond markets but too large for traditional bank credit. Private credit funds stepped into that gap and found willing borrowers who preferred the speed and flexibility of private lending to the regulatory constraints of bank financing.
The yield environment of the 2010s made private credit attractive relative to public fixed income. When investment-grade bonds were yielding 2-3%, private credit funds offering 7-9% floating-rate yields with senior security looked compelling. That spread attracted capital, which attracted more managers, which expanded the market further.
The floating rate structure provided additional appeal during the rate increases of 2022-2023. As SOFR rose from near zero to over 5%, the yield on private credit loans — which float with the benchmark — rose accordingly. Investors who owned private credit benefited from rising rates in a way that holders of fixed-rate bonds did not.
The main categories of private credit
Private credit is not a single strategy. The term covers a spectrum of lending approaches with different risk and return profiles.
Direct lending is the most common and most straightforward. The fund lends directly to middle-market companies — typically those with $10-100 million in EBITDA — usually as senior secured loans. The loans are floating rate, typically maturing in three to seven years. Direct lending is generally considered the lower-risk end of the private credit spectrum because of the senior security and the covenant protections built into the loan agreements.
Mezzanine debt sits below senior loans in the capital structure. It carries higher risk — it is subordinate to senior lenders in a restructuring — and higher return. Mezzanine loans often include equity warrants or profit participation that give lenders some upside if the borrower performs well.
Real estate debt funds lend against real property — construction loans, bridge loans, and term loans secured by real estate assets. The fund is a lender, not an equity owner. Returns come from interest rather than appreciation.
Specialty finance covers a range of lending strategies outside corporate credit — consumer lending, small business loans, litigation finance, royalty financing, and asset-backed lending. These strategies have different underwriting approaches, different borrower profiles, and different risk characteristics than corporate private credit.
Distressed debt involves buying the loans or bonds of companies already in or approaching financial difficulty, typically at a discount, with the expectation of recovering more through a restructuring or workout than the purchase price reflects.
What private credit actually looks like for individual investors
Most individual investors access private credit through commingled funds rather than direct loans. You invest capital into a fund managed by a private credit manager; the fund deploys that capital across a portfolio of loans; you receive income from the interest payments and eventually return of principal.
The income is one of the distinguishing features of private credit relative to private equity or real estate equity. Private credit funds typically distribute interest income quarterly or monthly, which makes them behave more like income investments than the total-return orientation of equity strategies. For investors seeking yield from their alternative allocation, this is part of the appeal.
The structure of your fund matters significantly. Traditional private credit drawdown funds — where you commit capital that is called over time and then returned at maturity — behave very differently from open-end or interval fund structures that allow periodic entry and exit. The latter are more accessible but come with liquidity features that are more constrained than they appear in marketing materials.
The turbulence of 2024 and 2025
The private credit market has not been without stress. The rapid growth of the asset class — total private credit AUM grew from roughly $500 billion in 2015 to over $1.7 trillion by 2024 — brought new entrants, looser underwriting standards in some segments, and a flood of capital chasing the same borrowers.
The rate environment created stress for some borrowers. Companies that had borrowed at floating rates — typically SOFR plus 5-7% — faced significantly higher debt service costs as SOFR moved from near zero to 5.3%. Companies that had taken on aggressive leverage at low rates found themselves stretched in a higher-rate environment.
Some private credit funds, particularly those in more junior parts of the capital structure or those with exposure to weaker credits, saw elevated default rates and markdowns. Interval funds and non-traded BDCs in the private credit space faced redemption pressure, with some limiting withdrawals in ways that surprised investors who had expected more liquid access.
This is not a condemnation of the asset class. Senior secured direct lending to profitable middle-market companies has continued to perform largely as expected. It is a reminder that private credit, like any asset class, requires attention to manager quality, credit quality, capital structure position, and the specific structure of your investment.
What to look for when evaluating a private credit fund
Credit quality and underwriting discipline. What is the fund's historical default rate relative to peers? How does the manager underwrite credit risk? Is the portfolio concentrated in any sector or borrower type that could create correlated stress?
Position in the capital structure. Senior secured lending is meaningfully safer than junior or mezzanine lending in a credit event. Know where your capital sits before assuming you have the protection of seniority.
Floating rate versus fixed rate exposure. Most private credit is floating rate, which provides protection in rising rate environments and creates headwind when rates fall. Understand how the fund's returns would be affected by a significant rate decrease.
Liquidity structure. Is this a drawdown fund, an interval fund, or an open-end vehicle? What are the actual redemption mechanics? What conditions can restrict redemptions?
Fee structure. Private credit management fees range from 1% to 2% on committed or invested capital, with carried interest typically in the 15-20% range above a preferred return. Higher fees require commensurately higher gross returns to deliver the same net return to investors.
How AltTrack tracks private credit investments
Private credit investments have specific tracking needs that differ from equity investments. Income yield matters more than TVPI. Distribution history is more meaningful than NAV trajectory. The DPI calculation — how much capital has actually been returned relative to what was invested — is the most important metric for an income-oriented strategy.
AltTrack tracks private credit alongside your equity positions, calculating yield on invested capital from your actual distribution history, flagging funds that have suspended or reduced distributions, and giving you a clear view of how your private credit income compares to your original yield expectations. Knowing what your private credit positions are actually generating — not what the fund's marketing materials projected — is the starting point for evaluating whether the allocation is working.