Private credit has had a remarkable decade. What was once the exclusive domain of pension funds and endowments has opened to individual accredited 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 private credit actually is
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
After the 2008 financial crisis, tighter bank regulations caused traditional lenders to pull back from certain types of corporate lending — particularly to mid-sized companies that were too small for the public bond market and too leveraged for conservative bank balance sheets.
Private credit funds stepped into that gap. They could lend faster, with more flexibility, and on terms customized to the borrower. Companies were willing to pay higher interest rates for that speed and flexibility. Investors were willing to accept illiquidity in exchange for those higher yields.
The math worked well for most of the 2010s. Interest rates were low, defaults were rare, and private credit delivered consistent returns that looked attractive relative to public fixed income.
The yield premium — and what drives it
Private credit typically yields more than comparable public debt. The extra yield comes from several sources:
Illiquidity premium — your capital is locked up, often for three to seven years. You cannot sell your position if you need cash or if conditions change. You are compensated for accepting that constraint.
Complexity premium — evaluating a privately negotiated loan requires significant due diligence that most investors cannot conduct independently. The fund manager's expertise commands a premium.
Floating rate structure — most private credit loans pay floating rates, meaning yields rise when interest rates rise. This was a significant advantage during the 2022-2023 rate hiking cycle and is a key structural feature for income-focused investors.
Negotiated protections — private credit lenders negotiate covenants, collateral requirements, and other structural protections that are often stronger than what you'd find in publicly traded high-yield bonds. Better protection justifies better pricing.
What the recent turbulence has revealed
Private credit's growth has not been without problems. Beginning in 2024 and accelerating into 2025, a series of high-profile defaults and credit stress events exposed weaknesses that were obscured during the low-rate, low-default environment of the previous decade.
Several patterns have emerged from these stress events that every investor should understand.
Valuation opacity is real. Private loans are valued periodically — often quarterly — by the fund manager itself, not by a market. When a borrower starts struggling, there can be a lag between the deterioration and the fund's reported valuation. Unlike a public bond whose price drops immediately, a private loan may carry at book value until a formal default or workout. This means reported NAV can overstate true value in stressed conditions.
Concentration in leveraged buyouts. Much of the private credit market has funded private equity buyouts — companies acquired with significant debt. When PE sponsors over-leveraged borrowers at peak valuations in 2021 and 2022, those companies entered the higher-rate environment of 2023-2025 with more debt service than their cash flows could comfortably support. The resulting defaults and amendments were not random — they were concentrated in LBO-backed companies from that vintage.
Evergreen fund liquidity mechanics matter. The newer class of "evergreen" private credit funds — designed for individual investors with periodic redemption windows rather than fixed lockups — faced redemption pressure during stress periods. Some funds limited redemptions. Understanding whether a fund has a hard lockup, a soft lockup, or a periodic redemption window is essential before investing, and understanding what happens to those windows under stress is equally important.
Manager dispersion is significant. Not all private credit funds have struggled. The spread between the best and worst performers has widened considerably. Funds with more conservative underwriting, lower leverage ratios, and stronger covenant packages have navigated the stress environment far better than those that chased yield by loosening terms during the boom years.
What this means for individual investors
The lesson from the recent turbulence is not that private credit is broken. It is that private credit requires the same careful evaluation as any other alternative investment — and that the metrics that matter most are not always the ones on the marketing slide.
When evaluating a private credit fund, ask:
- What is the default and loss rate across the fund's history, including 2023-2025?
- What percentage of the portfolio is in LBO-backed companies versus other borrowers?
- How are loans valued, and by whom?
- What are the redemption terms, and have they ever been gated?
- What is the average loan-to-value ratio across the portfolio?
- Does the fund use leverage at the fund level (borrowing to amplify returns), and if so, how much?
These are not hostile questions. Any credible manager will have clear answers.
How private credit fits in a portfolio
For investors who understand the risks, private credit can serve a specific role: generating income that is less correlated to public equity markets, with floating rate exposure that provides some protection against inflation and rising rates.
It is not a substitute for bonds. The liquidity profile, complexity, and risk level are meaningfully different from a bond fund or ETF. It is better understood as a distinct alternative allocation — one that complements equity-focused private market investments like real estate syndications and private equity.
Most experienced allocators suggest limiting private credit to a portion of your total alternative allocation rather than treating it as fixed income. The income profile feels bond-like, but the risks are closer to leveraged lending.
Tracking private credit alongside your other alternatives
One challenge individual investors face with private credit is that the reporting is inconsistent. Different funds report at different frequencies, use different benchmarks, and define terms differently. A fund might report "net IRR" where another reports "gross yield" — and those numbers are not directly comparable.
Tracking your private credit investments alongside your real estate syndications and private equity funds — with consistent metrics like XIRR, DPI, and yield — gives you a clearer picture of how the asset class is actually performing in your portfolio, not just how the fund manager says it is performing.
Private credit deserves a place in the toolkit of a serious alternative investor. It also deserves the same rigorous attention you bring to every other investment in your portfolio.