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Private credit has moved from niche to mainstream in 2025, establishing itself as a prominent credit asset class. Assets under management in private credit funds climbed from about $1.5T in early 2024 and are projected to reach ~$3T–$3.5T by 20284, driven by banks' retreat from middle-market lending after the 2023 regional banking stress, and by investor demand for higher, floating-rate income. For borrowers, private lenders offer speed and flexible structures; for credit investors, the appeal is 9–13% target yields, lower correlation to public markets, and built-in rate protection.
This guide breaks down private credit investing — what it is, why it's booming, the yields and risks that matter, and realistic access points for different investors (BDCs, ETFs, interval funds, and private funds).
Private credit, also known as private debt, is non-bank lending to businesses. Instead of issuing a public bond or applying for a traditional bank loan, a company borrows directly from a private lender, often a private credit fund, BDC, or specialist manager, under negotiated terms. For credit investors, that typically means contractual income, senior claims on assets, and floating-rate coupons linked to benchmarks such as SOFR. The private credit markets are expanding because banks have pulled back from parts of middle-market lending, investors are seeking higher income than public bonds, and access has widened through vehicles that make private credit investments easier to own.
Although they're often mentioned together, the two private fund strategies are built on different engines of return. Private credit is debt: investors lend capital and receive interest payments with principal due at maturity, often in senior secured or unitranche structures that prioritize lenders in a downside. Private equity is ownership: investors buy stakes in businesses and rely on operational improvements and exit valuations for returns.
For the end investor, that means a different ride: private credit usually delivers steadier, income-led outcomes over three to five years, while private equity accepts greater volatility and a longer hold in pursuit of higher upside. In today’s market, private credit typically targets 9–13% with tighter dispersion, whereas private equity is commonly underwritten to mid-teens to ~20% net IRRs, depending on strategy and cycle, with materially higher risk over five to ten years.
Mid-sized companies, those with revenues between $50 million and $1 billion, value speed, certainty, and customization. Private lenders can complete diligence and close in weeks instead of months, tailor amortization and covenant packages to match cash-flow profiles, and often provide more total capital than a bank facility would allow. For acquisitive or fast-growing businesses, that combination can be decisive. The trade-off is cost, private credit is usually more expensive than bank debt, but many borrowers accept a higher rate in exchange for execution certainty and flexibility1. As a result, private credit has shifted from an alternative option to a preferred financing channel for a large segment of the middle market.
Yields and risks are the heart of any private credit investment decision. The asset class has scaled to roughly $1.7 trillion by mid-2025, but size alone isn't a reason to invest. Before committing capital, it's essential to understand what drives returns, how protections work, and where the main hazards lie in credit investments.
In a higher-for-longer rate environment, direct-lending yields typically land in the 9–13% range on an unlevered basis2. Even with some spread compression, elevated base rates keep all-in coupons attractive for senior debt risk. Fund managers who prudently apply leverage can push results into the low-teens, but the added debt cuts both ways: magnifying gains in benign conditions and losses if credit weakens.
Here's where private credit shines compared to traditional fixed-income investments. Most private credit loans are indexed to benchmarks like SOFR, with interest payments that automatically adjust upward when rates increase. Many private credit instruments also incorporate interest rate floors, ensuring minimum yields even if rates decline. This floating rate structure provides natural protection against inflation and interest rate risk—something traditional bonds simply can't offer.
Default rates for private credit have remained relatively contained, with Proskauer's Private Credit Default Index reporting 1.76% for Q2 2025, down from 2.42% in Q16. However, recovery rates tell a more complex story. Post-default value of direct loans averages around 33%, notably lower than the 52% for broadly syndicated loans (FED again). This difference stems from private credit's concentration in sectors with fewer tangible assets, such as software and healthcare services.
The yield premium isn't free. Private funds typically lock capital for 5–10 years with limited secondary options. Fees are meaningful, many vehicles sit near 1.5% management and 15% carry, and preferred returns that once anchored at 8% drifted to 6–7% in low-rate eras. Terms vary across managers: covenant packages, payment-in-kind features, and subscription lines can all influence how risks (and timing of returns) show up in practice.
Accessing private credit has become more feasible for different investor types, though each option comes with specific considerations you should understand.
Private credit funds are the traditional route. They're generally limited to accredited investors (typically $1M+ net worth excluding a primary residence, or $200k/$300k income thresholds)9 and require multi-year lockups—often five to ten years. Fees commonly hover around a 1.5% management charge plus 15% performance carry, and capital is called over time. Diligence should focus on underwriting discipline, historic loss and recovery experience, sector specialization, use of leverage at the fund level, and how credit decisions are made (investment committee process, veto rights, and workout capabilities).
Private-credit ETFs offer daily liquidity and simple access, but most achieve their “private” exposure by adding a sleeve of privately originated loans to a core of public investment-grade credit. A clear example is State Street’s SPDR SSGA IG Public & Private Credit ETF (PRIV): it blends public IG bonds with a private-credit sleeve sourced by Apollo Global Securities that SSGA says will generally range around 10%–35% of assets, supported by an Apollo liquidity framework to help the ETF meet redemptions8. This design broadens access but reduces look-through transparency and raises familiar questions about valuing and managing illiquid loans inside a daily-traded wrapper — concerns that have already drawn regulatory attention. Before investing, read each fund’s methodology and liquidity disclosures to understand what “private credit” means in practice for that specific ETF.
BDCs bridge traditional private credit and publicly traded securities. With market capitalization growing substantially, BDCs provide debt financing to middle-market companies while offering investors daily liquidity. Commonly yielding high single-digits to low-teens, these SEC-registered funds can employ leverage up to 2:17, which enhances returns but increases risk. BDCs often focus on first lien and senior secured loans, providing a degree of downside protection in case of borrower default.
Large alternative managers such as Blackstone, KKR, and Apollo dominate origination and offer a range of vehicles—from flagship drawdown funds with high minimums to semi-liquid products designed for wealth-management channels. Brand scale can signal sourcing advantages and deeper workout capabilities, but outcomes still vary by strategy and team. Evaluate the specific mandate, fee structure, track record across cycles, and the manager's alignment of incentives before assuming size alone equals safety.
The key is matching your liquidity needs with the investment vehicle's structure. Limited partners (LPs) in private credit funds should be prepared for long-term commitments and understand the potential impact of fund level leverage on returns.
Creating a private credit strategy that works for your specific situation requires more than just picking the first fund you encounter. Success in this space demands strategic thinking about several key factors that directly impact your returns.
Manager choice is often the biggest driver of results. Dispersion between top- and bottom-quartile managers is wide, so process and discipline matter as much as deal flow. Due diligence should center on portfolio fundamentals and how they behave under stress: interest coverage should remain at or above 1.0x even after a 100–200 bps rate shock, and—where loan-to-value is relevant—sub-0.5x suggests meaningful equity cushion while 0.7–0.8x warrants closer scrutiny. Look for evidence of consistent underwriting, realized (not just unrealized) performance through tougher markets, workout capability, alignment of incentives, and a clear investment-committee framework that doesn't dilute accountability.
Sector mix shapes both resilience and upside. Healthcare and software tied to recurring revenue often prove less rate-sensitive and more defensive, while critical infrastructure can offer durable cash flows anchored by long-term contracts. These areas have attracted growing lender appetite into 2024–2025, reflecting their relative stability5. Niche strategies—whether in lower middle market buyouts, specialty finance, or sponsorless lending—can add edge through sourcing and diligence advantages, but concentration risk should be monitored.
Know how you're being charged and when returns show up. Many drawdown funds have shifted to fees on invested (not committed) capital, with management fees around 1.5% and performance carry near 15%, often with a preferred return and catch-up. Subscription lines can smooth cash flows and modestly boost IRR timing, but they also change when risk and return are recorded — understand the policy. Public BDCs package private loans inside an exchange-traded vehicle; expense loads combine base management and incentive fees, and dividends (often high single-digit to low-teens) vary with net investment income and funding costs3. Comparing net, after-fee outcomes across vehicles, rather than headline gross yields, gives a truer picture of fund performance.
Clarify the job you want private credit to do before sizing it. For income, consider first-lien, senior-secured strategies (including many BDCs). They can lift yield with less mark-to-market noise than public high yield. Liquidity is lower, and leverage can deepen drawdowns in stress. For portfolio diversification, look for loans backed by recurring revenue, hard assets, or infrastructure-style contracts. They can behave differently from equities and duration-heavy bonds. Correlations often rise in recessions and risk-off periods, especially in sponsor-heavy, cyclical loans. Some strategies add equity kickers or warrants. Those boost upside but add variability. Match the vehicle and strategy to your liquidity needs and risk tolerance. Then size the position so it complements, not overwhelms, your plan.
Private credit is no longer a side bet — it's a credible income sleeve offering 9–13% target yields with floating-rate structures that can cushion rate and inflation shocks. But the trade-offs are real: illiquidity, manager dispersion, fees, and credit risk require careful due diligence and a clear role in your plan (income engine vs. diversifier).
Choose your access vehicle to match your constraints: BDCs and ETFs for liquidity and smaller tickets; interval funds for semi-liquid exposure; private debt funds for accredited investors willing to lock up capital. From there, focus on manager quality, underwriting discipline, sector mix, and fee transparency — these are the levers that drive net returns in private credit investments.
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