Is now a good time to consider investing in Private Credit?

Private credit has gone from underdog to darling of the alternative asset universe in the space of a few years.

The boom began in the aftermath of the Global Financial Crisis, when banks reined in their lending. At the same time investors – pension funds, family offices, insurance companies, ultra high-net-worth individuals, and sovereign wealth funds – started looking for yield in a zero-interest rate environment. This led to an upsurge in demand for Private Credit.

The amount invested in Private Credit has increased roughly tenfold in a decade to nearly $2 trillion at the end of 2023 and is forecast to reach $3.5 trillion by the end of 2028. The market is dominated by a handful of giant firms, including Apollo, Ares, Blackstone and Oaktree.

Yet all this has largely passed private investors by: only a few are familiar with Private Credit, let alone have exposure to it.

Part of the reason is that, until recently, there wasn’t an easy and affordable way for individual clients to invest in this asset class. However, this is now changing with the advent of semi-liquid funds – helping experienced investors claim a place at the table.

So what is Private Credit? What are the benefits and risks of investing in Private Credit? Could now be a good time to consider Private Credit?

Broadly speaking, Private Credit refers to lending that takes place outside the traditional banking sector – usually between a corporate borrower and a Private Credit fund.

After raising capital from investors, the fund will lend to businesses, generally over a term of around five years. Interest is commonly applied at a floating (variable) rate usually tied to a market benchmark, so will follow interest rate movements.

Usually, a deal will complete if the borrower agrees to strict repayment criteria and ongoing monitoring, and the fund manager believes it can get the capital back plus interest, although this is not guaranteed.

Borrowers range from ‘mid-market’ companies (i.e. revenue from $10 million to $1 billion) to large firms. For instance, the likes of Intel, AT&T, AB InBev, and Sony Music are increasingly shunning bonds or mainstream credit facilities and turning to Private Credit instead. Private Credit is also commonly used to finance large real estate and infrastructure projects.

There are potential benefits for all involved, although there are also considerable risks.

Investors could benefit from higher yields than available from listed vehicles such as bonds (see more on historic performance below). This reflects their greater illiquidity and the increased credit risk assumed by lenders.

Moreover Private Credit could offer greater downside protection than usually available from, thanks to a number of contractual provisions Private Credit managers usually put in place (e.g. financial maintenance covenants, first-lien senior-secured loans, etc.).

Lastly, Private Credit may help diversify an existing portfolio of listed stocks and bonds. Since private credit funds lend to companies that can’t – or are not willing to – use public financing, they offer access to a market many investors will be missing in their portfolio.

Borrowers, on the other hand, might choose Private Credit for different reasons. Deals are typically faster to put together than issuing a bond and can be easily tailored to the borrower’s and lender’s specific needs. What’s more, there’s greater confidentiality than with public market bond or loan issuance. That could be reassuring when the borrower is experiencing temporary cashflow issues.

Private Credit has performed significantly better than its public market equivalents in recent years. Over the past two decades (2004 to 2024), annualised returns from Private Credit funds were 5.5% p.a. higher than global high-yield bond funds.

To illustrate, if you’d invested $10,000 into a hypothetical basket of Private Credit funds in early 2004, you could have around $67,000 today. That’s significantly higher than the $24,000 an equivalent investment in global high-yield bond funds could have generated in the same period. Past performance is not a guide to the future – returns are not guaranteed, and capital is at risk. The charts below are for illustrative purposes only.

Needless to say, Private Credit is a risky investment class – you could get back less than you invest or lose it altogether. Note, too, that any coupon payments will usually be subject to income tax, even when investing in accumulation units, where any income is reflected in the unit price rather than being paid out. So, you’ll need to factor this into your return expectations.

Despite the name, semi-liquid funds are still more illiquid than, for instance, publicly traded bonds. You can usually only submit redemption requests once a month or quarter – depending on the fund – and there are often restrictions. In general, it could take several months for a redemption request to be met.

Finally, structures tend to be more complex than regular bonds or loans. So, these funds are for experienced investors only.

The market for Private Credit has expanded rapidly – and is expected to continue to do so, although only time will tell.

Banks continue to pull back from lending. Meanwhile, demand for customised lending solutions with more flexibility than available from traditional bank lenders appears on the up – both from corporates and Private Equity firms needing capital to finance deals.

Private Credit managers could be ideally placed to meet this demand and indeed we are seeing more firms stepping in to fill the void left by banks.

For individual investors, the good news is that Private Credit is no longer completely off-limits.

New semi-liquid funds allow eligible investors to put money in, and request redemptions, on a quarterly (or even monthly) basis. Investment minimums are also much more accessible – as low as £26,000 via Wealth Club.