Private Credit and Direct Lending: Alternatives to Bonds for HNW Investors

Private credit — also known as private debt or direct lending — has grown from a niche corner of the alternatives market to one of the largest and fastest-growing asset classes in global investment. Driven by banks' post-2008 retreat from leveraged lending, a sustained period of low public bond yields, and the growth of private equity buyout activity, private credit has attracted hundreds of billions of dollars from institutions seeking reliable income above what public bond markets offer. HNW individuals and family offices are increasingly accessing this space. This guide explains what private credit is, how it compares to traditional bonds, how to access it, and the risks involved, as of 2026.

What Is Private Credit?

Private credit refers to loans or debt instruments that are not publicly traded on a bond market. The borrower is typically a private company (often owned by a private equity sponsor), an infrastructure project, or a real estate operator. The lender — a private credit fund rather than a bank — provides capital directly, negotiating terms bilaterally rather than through a public market process.

Because private credit deals are negotiated rather than syndicated, lenders typically receive:

• Higher interest rates than comparable-risk public bonds, as compensation for illiquidity and the cost of negotiation and due diligence
• Stronger covenant packages — more lender-protective terms than public high-yield bonds, including financial maintenance covenants (minimum EBITDA, maximum leverage) and structural protections
• Direct relationship with the borrower, enabling better information flow and faster intervention if problems emerge

For investors in a low-yield environment (or seeking an alternative to public bonds that are sensitive to interest rate moves), private credit has offered an attractive combination of yield pickup and covenant protection.

Key Strategies Within Private Credit

Private credit is not a single strategy but a family of approaches:

Direct lending (senior secured): the most common and lowest-risk private credit strategy. Funds lend directly to mid-market companies, typically at first-lien (senior secured) ranking. In a default, the lender has first claim on the company's assets. Typical returns as of 2026: floating rate plus a spread, broadly equivalent to 8–12% total yield depending on market conditions.

Unitranche: a single loan that blends first-lien and second-lien economics. Unitranche financing simplified deal execution by replacing the multi-lender waterfall with a single bilateral structure. Returns are higher than pure senior lending but lower than pure subordinated debt.

Mezzanine / subordinated debt: debt that ranks below senior secured lenders in the capital structure. Higher yield (12–16% per annum historically) but higher risk — subordinated lenders absorb losses before senior lenders in a default.

Distressed debt: purchasing debt in companies already in or near default, at a discount to par. The investor profits from a recovery in value through restructuring. High return potential but requires specialist expertise and active involvement.

Special situations: opportunistic lending to companies in non-standard situations — refinancings, recapitalisations, bridge loans, and other time-sensitive needs where speed and flexibility command a premium.

Asset-backed lending: loans secured against specific assets — commercial real estate mortgages, trade receivables, equipment, and consumer loan portfolios. Returns vary by asset quality and seniority.

NAV lending: providing loans secured against a private equity fund's net asset value. A growing niche that provides liquidity to PE sponsors and offers secured debt exposure to lenders.

How Private Credit Compares to Public Bonds

The comparison with public bonds is the natural starting point for investors considering a switch or supplement:

Feature	Investment Grade Bonds	High Yield Bonds	Direct Lending
Yield (as of 2026 approx.)	4–5%	7–9%	9–12%
Liquidity	Daily (ETF/fund)	Daily to weekly	Quarterly or longer
Covenant protection	Minimal (incurrence only)	Moderate	Strong (maintenance)
Interest rate sensitivity	High (fixed rate, long duration)	Moderate	Low (floating rate)
Transparency	High (public issuers)	Moderate-high	Low (private companies)
Minimum investment	Very low (funds)	Low (funds)	High (direct or fund)

The floating rate nature of most private credit is a key differentiator. Public investment grade bonds carry significant duration risk — when interest rates rise, bond prices fall. Direct lending loans are typically priced at a floating rate (SONIA or SOFR plus a spread), meaning the coupon adjusts upward when rates rise rather than the price falling. In the rate rising environment of 2022–23, direct lending funds significantly outperformed public bond funds.

The trade-off is liquidity: private credit funds typically offer quarterly redemptions at best, with lock-up periods or gates. Daily liquidity public bond funds can be sold in minutes; private credit commitments may be locked for 3–7 years.

Return History and Expectations

Private credit (particularly senior direct lending) has historically delivered:

• Returns of 1–3% per annum above comparable public high yield bonds
• Lower default rates than public high yield in many cycles (driven by stronger covenant packages and relationship-based monitoring)
• Higher recovery rates in default events compared to public bonds (again, driven by covenant protection and earlier intervention)

As of 2026, senior direct lending funds targeting mid-market companies have been generating yields of approximately 9–12% per annum gross, with net-of-fee returns in the 7–10% range for well-run vehicles. These figures reflect market conditions that continue to evolve; investors should obtain current yield and fee data from specific managers.

Access Routes for HNW Investors

Private credit has become more accessible to HNW investors through several channels:

Closed-end private credit funds: similar to PE funds, with capital commitments drawn over an investment period and distributions as loans mature or are repaid. Typical life of 5–7 years. Minimums of £250,000–£5 million direct, lower through platform aggregation.

Business Development Companies (BDCs) — US-listed: BDCs are publicly listed vehicles that invest in private credit. They offer daily liquidity (being listed) and relatively low minimums, but their price can be volatile. BDC structures are specific to the US; non-US investors should consider tax implications.

Evergreen or semi-liquid private credit funds: open-ended (or periodically open) structures offering quarterly liquidity windows. These have become popular with HNW investors wanting private credit returns without permanent capital lockup. Liquidity can be limited or suspended in stressed conditions (as experienced by some real estate credit funds in 2022–23).

LTAF / ELTIF structures: new regulatory frameworks in the UK and EU are creating more liquid private markets access vehicles including private credit. Minimums and access are improving.

Private bank and wealth manager programmes: many private banks curate access to institutional private credit managers for HNW clients, aggregating commitments to meet minimums.

Risk Factors

Credit risk: the fundamental risk is that borrowers default. Private credit defaults were historically low during strong economic conditions but rise in recessions. The covenant protection that private credit offers helps managers identify problems early, but cannot eliminate losses in a severe downturn.

Liquidity risk: private credit is inherently illiquid. Funds that offer quarterly liquidity may still gate redemptions in stressed conditions. Investors must be comfortable that they will not need the capital during the fund's life.

Concentration risk: some private credit funds have concentrated loan books. A fund of 20–30 loans has a much less diversified risk profile than one holding 100+.

Manager selection risk: underwriting quality varies significantly across managers. Funds that stretch to riskier credits to hit yield targets may suffer disproportionate default rates in a downturn.

PIK (payment-in-kind) risk: some private credit loans include PIK interest — where interest rolls up and compounds rather than being paid in cash. PIK loans can create an illusion of return that is only realised if the underlying borrower can ultimately repay. High PIK content in a portfolio can be a warning sign.

Leverage within the fund: some private credit funds use borrowing at fund level to enhance returns. This amplifies both gains and losses and increases sensitivity to market-wide liquidity events.

Tax Considerations

Private credit returns are typically received as:

• Interest income: taxable as income in most jurisdictions
• Capital gains on realisation of loan positions bought at a discount (less common in buy-and-hold direct lending strategies)

For UK investors, interest income from private credit funds held through offshore structures may be subject to offshore fund regime rules. Proper structuring and professional advice are important.

For investors in low-tax jurisdictions (UAE, Singapore, Cayman Islands resident family offices), interest income from well-structured private credit funds may attract little or no personal tax, significantly improving net returns compared to UK-taxed investors.

Practical Considerations for Portfolio Allocation

Private credit is most naturally positioned as a replacement for, or complement to, bonds in a diversified portfolio. Investors with a traditional 60/40 equity/bond allocation might consider whether some of the bond allocation — say, 10–15% of total portfolio — could be migrated to private credit to capture the yield premium while accepting the liquidity trade-off.

The floating rate nature also serves investors who are concerned about inflation or rising interest rates — private credit incomes rise with rates rather than falling in value.

Investors should not allocate more to private credit than they can afford to lock up for the fund's expected life. Liquidity needs should be modelled carefully before any commitment is made.

How Global Investments Can Help

Global Investments helps HNW clients assess the role of private credit in their overall investment strategy. We introduce clients to institutional-quality direct lending managers across strategies (senior secured, unitranche, infrastructure debt, real estate credit) and help evaluate fee structures, portfolio diversification, and liquidity terms.

For internationally mobile clients, we ensure that private credit fund structures are appropriate for the investor's jurisdiction of residence and coordinate with tax advisers on income treatment. We incorporate private credit within holistic portfolio construction — ensuring that yield, risk, liquidity, and tax efficiency are assessed together rather than in isolation.

This guide is for general information only and does not constitute financial or investment advice. Private credit investments are illiquid and involve credit risk; capital can be lost. Returns quoted reflect market conditions as of 2026 and will vary. Always seek professional advice tailored to your circumstances.