Private credit was historically available only to large institutional investors, but new vehicles have opened access to a broader range of investors.
Investment Vehicles
1. Private Credit Funds (Closed-End)
Structure: Limited partnership with 5-10 year life
Minimum Investment: Typically $5-25 million
Investor Type: Institutional investors, pensions, endowments
Liquidity: Illiquid until fund liquidation
Advantages:
– Access to best managers and terms
– Alignment through management fees and carried interest
– Diversified portfolio construction
Considerations:
– High minimums exclude most investors
– Capital called and returned over time (J-curve effect)
– Limited visibility into underlying positions
2. Business Development Companies (BDCs)
Structure: Publicly traded closed-end funds
Minimum Investment: Cost of single share (~$10-20)
Investor Type: Retail and institutional
Liquidity: Daily trading on exchanges
Advantages:
– Accessible to retail investors
– Quarterly dividends (often 8-12% yields)
– Transparent pricing and reporting
Considerations:
– Share prices can trade at discounts to NAV
– Market volatility affects share prices
– Leverage restrictions and RIC tax requirements
3. Interval Funds
Structure: Semi-liquid closed-end funds
Minimum Investment: $10,000-$100,000
Investor Type: High-net-worth individuals
Liquidity: Quarterly repurchase offers (typically 5-25% of fund)
Advantages:
– Lower minimums than private funds
– NAV-based pricing (no market volatility)
– Professional management and diversification
Considerations:
– Limited liquidity windows
– Potential for repurchase gates
– Higher fees than mutual funds
4. Private Credit ETFs
Structure: Exchange-traded funds holding BDCs or private credit strategies
Minimum Investment: Cost of single share
Investor Type: All investors
Liquidity: Daily trading
Advantages:
– Maximum accessibility
– Instant diversification
– Low expense ratios
Considerations:
– Often invest in BDCs (indirect exposure)
– Market pricing disconnects
– Less control over underlying strategy
Due Diligence Considerations
When selecting a private credit investment:
1. Manager Experience: Track record through credit cycles
2. Portfolio Composition: Industry, geography, loan types
3. Fee Structure: Management fees, incentive fees, expenses
4. Historical Performance: Returns, defaults, recoveries
5. Investment Process: Underwriting, monitoring, workout capabilities
Tax Considerations
- Private Funds: Pass-through taxation on interest income
- BDCs: Dividends taxed as ordinary income
- Interval Funds: Interest income and potential capital gains
Getting Started
For most individual investors, BDCs and interval funds offer the best balance of access, liquidity, and professional management. Start with smaller allocations (5-15% of fixed income) and increase as you understand the asset class.
Consult with a financial advisor to determine appropriate allocation based on your liquidity needs, risk tolerance, and investment timeline.