For decades, access to private credit—loans made outside of traditional banks—was largely reserved for institutional investors, hedge funds, and ultra-high-net-worth individuals. However, the financial landscape is evolving, and retail investors now have opportunities to participate in this growing asset class.
As interest rates remain high and businesses seek alternative funding sources, private credit is experiencing a surge in popularity. In 2023 alone, the global private credit market surpassed $ 1.5 trillion, with forecasts predicting continued expansion in 2025. But how does private credit work, and what are the risks and rewards for retail investors?
What Is Private Credit?
Private credit refers to non-bank lending, where investors provide direct loans to businesses, real estate projects, or individuals in exchange for higher yields than traditional fixed-income products. Unlike corporate bonds, which are publicly traded, private credit deals are often negotiated privately.
Common forms of private credit investments include:
- Direct Lending: Businesses borrow directly from investors instead of banks.
- Real Estate Debt: Funding for property development or mortgage-backed lending.
- Consumer Credit: Peer-to-peer lending platforms that allow individuals to lend to others.
Companies turn to private credit when they cannot secure funding from traditional banks due to regulatory constraints, stricter lending standards, or the need for more flexible loan structures.
Why Is Private Credit Booming?
Several factors are driving the rise of private credit:
- Higher Interest Rates: With central banks keeping interest rates elevated, borrowing from banks has become more expensive. Private lenders can offer competitive terms while still earning attractive yields.
- Tighter Bank Regulations: Following the banking crises of the past decade, regulators have imposed stricter capital requirements on banks, making it harder for them to extend loans. This gap has allowed private lenders to step in.
- Institutional Interest: Large pension funds and asset managers have increasingly allocated capital to private credit, validating its role as a mainstream asset class.
- The Search for Yield: With public bond yields fluctuating and equity markets volatile, private credit offers investors stable, high-yield returns that are largely uncorrelated with stock market movements.
How Retail Investors Can Participate
Traditionally, private credit required large capital commitments and was restricted to accredited investors. However, financial innovation has democratized access. Retail investors can now gain exposure through:
- Private Credit Funds & ETFs: Funds like the Blackstone Private Credit Fund (BCRED) or the Oaktree Specialty Lending Corporation (OCSL) pool investor money to lend across diversified sectors.
- Peer-to-Peer Lending Platforms: Companies like LendingClub, Prosper, and Mintos allow individuals to lend small amounts to borrowers, earning fixed interest over time.
- Real Estate Debt Platforms: Platforms such as Fundrise and Yieldstreet let investors participate in real estate-backed loans, often with lower minimums than traditional real estate investments.
Some of these platforms require minimum investments as low as € 500, making it easier for everyday investors to enter the space.
The Returns: Is Private Credit Worth It?
Private credit has historically delivered higher yields than traditional fixed-income investments, reflecting the additional risk involved.
- In 2023, private credit funds delivered average annualized returns of 8-12%, compared to corporate bond yields of around 5-6%.
- Direct lending strategies have produced double-digit returns, especially in niche markets where banks have limited lending capacity.
- Real estate debt funds have consistently returned 7-10%, outperforming many publicly traded REITs in recent years.
While the returns are attractive, they come with trade-offs. Private credit investments are typically less liquid than publicly traded bonds, meaning investors may need to lock up their capital for months or years.
Risks to Consider
- Liquidity Constraints: Unlike stocks and bonds that trade daily, private credit investments often have lock-up periods, making it harder to access funds quickly.
- Default Risk: Since private borrowers often lack access to traditional bank financing, they may have higher credit risk.
- Interest Rate Sensitivity: Rising rates can impact borrowers’ ability to repay loans, affecting fund performance.
- Lack of Transparency: Private credit markets are less regulated than public debt markets, requiring investors to conduct thorough due diligence.
Despite these risks, many investors view private credit as a viable way to diversify portfolios, generate passive income, and reduce reliance on stock market fluctuations.
Is Private Credit Right for You?
Private credit isn’t for everyone, but for investors looking to earn higher yields in a rising-rate environment, it offers compelling advantages. The key is diversification—allocating a portion of a portfolio to private credit while maintaining liquidity in other asset classes.
If you’re comfortable with longer investment horizons and can tolerate some risk, private credit could be a valuable addition to your financial strategy. With increasing accessibility through ETFs, funds, and digital platforms, retail investors now have the chance to lend like banks—potentially reaping the rewards of this booming asset class.
