Private Credit and Direct Lending: A Guide for International Investors

The Rise of Private Credit

Private credit — encompassing direct lending, asset-backed lending, mezzanine financing, and related strategies — has grown from a niche institutional strategy into one of the most significant segments of the global investment market. Global private credit assets under management have grown from roughly $500 billion in 2015 to around $3 trillion by 2025–2026 (industry estimates range from approximately $2.3 trillion to $3.5 trillion depending on source and scope), a trajectory driven by two structural forces: bank retrenchment and investor demand for yield.

The bank retrenchment story: Following the 2008 financial crisis, new banking regulations (Basel III, CRD IV) significantly raised the capital requirements that banks must hold against commercial loans. Lending to mid-market companies — businesses too small for public bond markets but too large for simple overdraft facilities — became less economically attractive for banks, creating a structural gap that private credit managers stepped in to fill.

The investor demand story: A decade of near-zero interest rates pushed investors across the yield curve in search of income. Private credit, with its yield premium over public bonds (the illiquidity premium) and its predominantly floating rate structure, attracted significant capital from institutional investors.

For HNW international investors, private credit offers access to a return stream that is genuinely different from public market fixed income — higher yield, floating rate (benefiting from rising interest rates), senior secured structural protection, and low correlation with listed market volatility (private loans are not marked to market daily).

Main Private Credit Strategies

Direct Lending

Direct lending is the most mainstream private credit strategy. Funds lend directly to mid-market companies — typically businesses with annual revenues of £25m–£500m that need growth capital, acquisition financing, or refinancing.

Key characteristics:

• Senior secured: Loans are typically the most senior debt in the borrower's capital structure, secured against company assets.
• Floating rate: Unlike public bonds with fixed coupons, direct loans typically pay SOFR/SONIA/EURIBOR plus a spread. This means income rises when central bank rates rise — a significant advantage over fixed-rate bonds in rising rate environments.
• Covenants: Private loans include financial covenants (minimum interest coverage ratios, maximum leverage ratios) that give lenders early warning of deterioration and rights to intervene. Public bond markets have largely abandoned meaningful covenants.
• Bespoke terms: Each loan is individually negotiated, with terms tailored to the borrower's business and sector.

Target returns for senior secured direct lending to established mid-market borrowers have historically ranged from 7–11% net IRR, though outcomes vary by cycle and manager.

Mezzanine Financing

Mezzanine debt sits between senior secured debt and equity in the capital structure. It offers:

• Higher yields than senior debt (typically 10–15%+ target returns) to compensate for subordination.
• Equity participation through warrants or equity conversion features.
• Risk of full loss if the company goes through a severe restructuring — mezzanine lenders may be wiped out if asset values are insufficient to repay senior debt.

Mezzanine is typically used in leveraged buyout transactions, where private equity sponsors layer senior debt, mezzanine, and equity to finance acquisitions.

Special Situations and Distressed Debt

Special situations and distressed debt strategies target companies facing financial difficulty — where existing debt trades at a discount because the market believes default is likely. Skilled managers can identify situations where the underlying business is sound but the capital structure is unsustainable, providing capital at attractive prices and participating in value recovery.

These strategies require sophisticated credit analysis, restructuring expertise, and often active engagement with companies and existing creditors. Target returns are typically 12–20%+, but with meaningfully higher risk and higher volatility than senior direct lending.

Asset-Backed Lending

Rather than lending against a company's general cash flows, asset-backed lending is secured against specific assets:

• Real estate loans: Commercial property bridging loans, development finance, mezzanine property loans.
• Trade finance: Funding the purchase and sale of goods in international trade, with self-liquidating characteristics.
• Specialty finance: Consumer finance receivables, lease portfolios, royalty financing.

Asset-backed lending can offer strong recovery rates in default (the underlying asset can be seized and sold) but requires specialist expertise in asset valuation and legal enforcement across jurisdictions.

Why Private Credit Is Growing

Yield Premium (Illiquidity Premium)

Private credit consistently offers a higher yield than comparable-quality public bonds. This premium — often 150–300+ basis points over equivalent rated public bonds — compensates investors for illiquidity (you cannot sell the loan if you need cash), higher due diligence cost, and lower diversification compared with a public bond index.

For investors who do not need daily liquidity from all their assets — most long-term wealth management situations — this premium is genuine compensation rather than illusory complexity.

Floating Rate in a Rising Rate Environment

Fixed-rate bonds fell sharply in 2022 as central banks raised rates. Private credit loans, being predominantly floating rate, saw their income increase as base rates rose — senior secured direct loans that yielded 6% in 2021 were yielding 9–11% by 2023 as base rates rose. This was a significant structural advantage over fixed income.

Portfolio Diversification

Private credit's low correlation with listed markets (loans are valued infrequently and not subject to daily price discovery) means that reported portfolio values are smoother than publicly traded assets. This can reduce apparent portfolio volatility. However, investors should recognise that the underlying credit risk is real — it is simply priced less frequently.

Risks in Private Credit

Credit Risk and Default

Mid-market companies have a higher default probability than investment-grade corporates. In a severe economic downturn, default rates in private credit can rise meaningfully. However, the senior secured nature of most direct lending, combined with active covenant monitoring and relationship-based lending, has historically resulted in recovery rates that limit losses even when defaults occur.

Illiquidity

Private credit fund investments are illiquid. Most closed-ended private credit funds have lives of 5–10 years, with capital committed at the outset and returned as loans are repaid. Unlike listed bonds or equities, there is no meaningful secondary market for most private credit positions. Investors must be genuinely comfortable with this lock-up and should not commit capital they may need at short notice.

Valuation Risk

Because private loans are not publicly traded, valuations are based on models — typically discounted cash flow or yield-based models applied periodically (often quarterly). These valuations are subject to manager discretion and may lag reality in rapidly changing market conditions. The "smoothness" of private credit returns partly reflects less frequent valuation rather than true stability.

Leverage

Many private credit funds use leverage (borrowing at a fund level) to amplify returns. A fund that lends at 9% and borrows at 5% earns a 4% spread — leverage amplifies this. But leverage also amplifies losses: in a default cycle, leveraged losses can exceed unlevered ones significantly.

Manager Selection Risk

Private credit is not commoditised — the quality of underwriting, deal sourcing, covenant monitoring, and workout management varies enormously across managers. Poor managers who accept lower credit quality, looser covenants, or excessive leverage may report attractive historical returns while building a fragile portfolio. Rigorous manager due diligence is essential.

Access for HNW International Investors

Traditional Closed-Ended Private Credit Funds

Minimum commitment typically $250,000–$1 million+. 5–10 year lock-up. Capital called as investment opportunities arise. Periodic income distributions as loans repay. Appropriate for investors with a long time horizon and genuine excess capital above immediate needs.

Semi-Liquid / Evergreen Funds

A growing number of private credit managers offer semi-liquid structures with lower minimums (£25,000–£100,000) and quarterly or bi-annual liquidity windows. These are appropriate for HNW investors who want private credit exposure but need the option of partial liquidity. In severe market stress, these funds may gate (suspend redemptions), as occurred with some property funds in 2019-20.

Listed Vehicles

Listed closed-ended investment trusts and BDCs (in the US) provide daily liquidity to private credit-like portfolios. The share price may trade at a premium or discount to NAV, introducing an additional return component. UK-listed examples include credit-focused investment trusts such as TwentyFour Income Fund and Sequoia Economic Infrastructure Income Fund, alongside various specialist income trusts; in the US, Business Development Companies (BDCs) such as Ares Capital Corporation play a similar role. For professionally managed international private credit, direct access to fund structures is generally preferable.

UCITS Private Credit Alternatives

Some UCITS funds invest in liquid proxies for private credit — leveraged loans (syndicated loans that trade, unlike bilateral private loans), CLO tranches, and high yield bonds. These offer daily liquidity but do not fully replicate private credit characteristics — the illiquidity premium is largely absent.

Platforms and Access Routes

Traditional private credit has been confined to institutional investors and ultra-HNW individuals through private fund structures. A small number of platforms — Yieldstreet (US-focused, limited accessibility outside the US), some European alternatives, and specialist fund distributors — have expanded access to lower minimum investments.

For internationally mobile investors based in Cyprus, the UK, UAE, or Southeast Asia, access to private credit is most reliably achieved through working with an investment manager who has established relationships with leading private credit general partners. Global Investments' relationships across European and global private credit managers allow clients to access institutional-quality mandates that would not otherwise be accessible.

Positioning in an International Portfolio

Private credit typically features as part of a broader alternatives allocation — alongside private equity, real assets, and hedge funds — for investors with sufficient net worth to accept illiquidity. An indicative allocation might be:

• Large portfolio (£5m+): Up to 10–20% in illiquid alternatives, of which private credit could represent 5–10% of total portfolio.
• Mid-sized portfolio (£1–5m): Private credit exposure via semi-liquid funds or listed vehicles may be more appropriate than closed-ended commitments.
• Smaller portfolio (under £1m): UCITS leveraged loan/high yield exposure provides some of the income characteristics without illiquidity.

How Global Investments Can Help

Global Investments gives internationally mobile clients access to private credit strategies across senior direct lending, mezzanine, and asset-backed lending — through manager selection, due diligence, and ongoing portfolio monitoring.

We assess the appropriate private credit allocation within a broader portfolio context, taking account of the investor's total liquidity profile, income needs, tax position, and investment time horizon. We do not recommend private credit to investors who may need to access all their capital at short notice.

To discuss private credit as part of an income-oriented or diversified international portfolio, contact our advisory team.

Capital is at risk. Private credit investments may be illiquid and difficult to value. Target returns are not guaranteed — actual returns may be lower and investors may lose some or all of their investment. Past performance is not a reliable indicator of future results. Private credit investments are typically only appropriate for sophisticated or professional investors. Tax treatment depends on individual circumstances and may change. This article is for information purposes only and does not constitute personalised financial advice.