Private Credit Investing: A Guide for HNW Investors

Private credit — loans and debt instruments made by non-bank lenders directly to businesses — has become one of the most discussed asset classes in institutional finance. The global private credit market has grown to several trillion dollars in assets under management, driven by regulatory changes that reduced banks' appetite for certain types of lending, combined with investor demand for yield in a post-zero-rate world.

For HNW investors, private credit is increasingly accessible through specialist funds, platforms, and investment trusts. Understanding what it is, how it generates returns, and where the risks lie is essential before allocating capital.

What Is Private Credit?

Private credit refers to lending activity carried out by non-bank entities — typically private credit funds managed by asset managers — rather than by banks. The borrowers are usually mid-sized businesses (not large enough to issue public bonds; too large or specialised for straightforward bank lending).

Common forms of private credit include:

Direct lending: The most common form. A private credit fund lends directly to a company (typically a leveraged buyout or growing mid-market business) at a floating interest rate. Loans are typically secured against the company's assets. Interest is paid quarterly or monthly, providing income to the fund.

Mezzanine debt: A hybrid between senior debt and equity. Ranks below senior loans in the capital structure (gets repaid after senior lenders if the company is in trouble) but above equity. Carries a higher interest rate to compensate. May include equity warrants (the right to buy shares at a fixed price).

Asset-backed lending: Loans secured against specific assets — property portfolios, receivables, equipment, or other collateral. The loan is backed by the value of the assets rather than purely by the borrower's creditworthiness.

Real estate debt: Loans to property developers or investors — bridge loans, development finance, senior property loans. Often short-term, relatively high-yield.

Venture debt: Lending to venture-backed companies that are not yet profitable. Higher risk; compensated by higher rates and often warrant coverage.

Infrastructure debt: Loans to fund infrastructure projects (roads, data centres, renewable energy). Often longer duration, lower risk, more predictable cash flows.

Why Has Private Credit Grown?

Two forces have driven growth in private credit:

The supply side: Following the 2008 financial crisis, bank regulation (particularly Basel III and subsequent capital requirements) made certain types of lending less economical for banks — particularly leveraged loans to mid-market companies, construction finance, and other higher-risk categories. Non-bank lenders (private credit funds) stepped into the gap, able to lend where banks could not or would not.

The demand side: Institutional investors (pension funds, insurance companies, endowments) seeking yield above government bonds have poured capital into private credit funds. The floating rate nature of most direct loans — interest rates that rise with benchmark rates — meant that private credit funds performed well during the 2022-2023 rate hiking cycle, delivering improved income even as fixed income markets fell.

Risk and Return Profile

Return expectations: Direct lending funds have historically targeted returns in the region of 8-12% per annum (before fees), with the income portion typically representing the majority of returns rather than capital appreciation. In the higher rate environment of 2023-2025, many funds delivered towards the upper end of historical ranges. As benchmark rates come down, headline yields will reduce with them, though the spread over risk-free rates tends to be more stable.

The illiquidity premium: Private credit investors are compensated in part for accepting illiquidity. Most private credit funds lock up capital for 4-8 years, with limited ability to exit before maturity. This illiquidity premium is real — investors expect to be paid more than they would receive for similarly rated public bonds that they could sell at any time.

Default risk: Borrowers can default. Private credit tends to lend to companies with meaningful leverage (debt relative to earnings) — if the business deteriorates, the loans may not be repaid in full. Recovery rates (the proportion of the loan recovered in a default) depend on how senior the loan is in the capital structure and the quality of the underlying collateral. Senior secured direct loans typically recover 60-80% in historical defaults; junior/mezzanine positions recover less.

The credit cycle matters. Private credit originated in an expansionary economic environment (2012-2021) has historically performed well. A severe recession — with significant corporate defaults and falling asset values — would test the asset class more seriously. The 2022-2024 period saw rising rates (which benefited floating rate lenders) but relatively benign default rates in most markets.

Valuation opacity: Unlike public bonds, private credit assets are valued by the fund manager using models rather than market prices. This "mark-to-model" approach means that losses may not show up immediately in fund values — the portfolio appears smooth even in stressed conditions. Investors should understand that reported NAVs may lag real-world conditions.

Fees

Private credit funds typically charge:

• A management fee of 1-1.5% per annum on committed capital
• A performance fee (carried interest) of 10-20% of returns above a hurdle rate (often 6-8% per annum)

These fees are material and should be accounted for in return expectations. A fund targeting 10% gross returns with 1.5% management fee and 20% carry on returns above 7% will deliver something meaningfully below 10% net to investors.

How HNW Investors Can Access Private Credit

Institutional private credit funds: Traditionally available only to institutional investors (pension funds, insurance companies) with minimum commitments of £5m-10m+. This remains the primary route for ultra-high-net-worth investors.

Semi-liquid private credit funds: Several major asset managers have launched "interval funds" or "ELTIF" (European Long-Term Investment Fund) structures that allow for more frequent (though still limited) liquidity windows and lower minimums — sometimes from £25,000-£50,000. These are designed to broaden access to alternatives while retaining some of the long-duration characteristics of the asset class.

Listed investment trusts: Several UK-listed investment trusts (on the London Stock Exchange) invest in private credit and trade at a market price that may differ from NAV. These offer daily liquidity (you can buy and sell the shares at any time) but introduce an additional layer of risk: discount/premium to NAV can be volatile, and in stressed markets these trusts have traded at significant discounts.

Direct lending platforms: A number of platforms provide individual investors access to short-duration private credit (typically SME loans or real estate bridging loans) at lower minimums. These are higher risk than institutional direct lending funds — they typically lend to smaller, less creditworthy borrowers — and past loan defaults on some platforms have been material.

Within offshore bonds: Some private credit funds are accessible via major offshore investment bond platforms, allowing the investment to be held in a tax-deferred wrapper.

Practical Considerations for International Investors

Private credit returns are often quoted in USD or GBP, and the currency of the underlying loans matters. A European direct lending fund lending in euros delivers euro returns — a USD or GBP-based investor bears EUR/USD or EUR/GBP currency risk unless the fund hedges. Review the fund's currency exposure and hedging policy.

For investors with offshore bond wrappers or international investment platforms, availability of private credit funds varies by platform. Not all funds are available in all jurisdictions, and marketing restrictions (particularly for EU AIFMD purposes and UK FCA rules) mean some products can only be offered to certain categories of investor.

How Global Investments Can Help

Private credit is an asset class that rewards careful manager selection and thorough due diligence. Our investment advisers can help you assess whether private credit is appropriate for your portfolio, identify the funds and structures best suited to your risk tolerance and liquidity needs, and ensure your allocation is integrated into your broader wealth plan. Contact us to discuss private credit as part of your investment strategy.

This article is for general information only and does not constitute a recommendation to invest in any specific fund or asset class. Private credit funds carry significant risks including illiquidity, default risk, and valuation uncertainty. Investments can fall as well as rise in value. This content is intended for sophisticated investors only. Always seek professional financial advice before investing.