Private Credit in the Retail Market

At a glance

One of the most notable trends in private credit over the past decade is the sector’s growing market size. As of the end of 2024, the private credit market exceeded USD1.6 trillion, up from an estimated USD1 trillion in 2020, and that growth shows no signs of slowing. That growth, and the investors that have funded it, was historically limited to institutional investors or high net worth individuals who could commit to large long(ish)-term investments with the private credit managers. Over the past few years, asset managers have found ways to access the retail market and allow everyday investors to invest in the asset class. Retail private credit assets under management (AUM) has been accelerating and, while still less than 20% of total private credit AUM as of the end of 2024, retail investments are growing more quickly than institutional investments. To access this newer base, private credit managers are coming to market with a variety of products to allow small retail investors to participate, including closed-end funds, business development companies (see ‘BDCs’ below), evergreen funds, interval funds and, most recently, exchange-traded funds (see ‘ETFs’ below).

Advantages to retail investors

Private credit funds provide investors with an opportunity to diversify their portfolios and potentially enhance returns by accessing the private credit market. There are several potential advantages for retail investors, many of whom have been hearing about this popular asset class for years without a way to invest directly.

• Attractive returns: Private credit funds typically target higher yields compared to traditional fixed-income investments, especially in low interest rate environments. Private credit funds often lend to borrowers who may not qualify for bank loans or public debt markets and therefore pay higher interest rates to the fund (and its investors).
• Floating rate exposure: Many private credit funds make floating-rate loans, which can help mitigate interest rate risk in a rising rate environment.
• Diversification: Private credit is an asset class with low correlation to public equity and bond markets, helping to diversify portfolio risk and act as a hedge against market volatility in those larger markets.
• Access to an institutional asset class: Retail investors typically do not have direct access to private capital markets, which are dominated by pension funds, insurance companies and other large institutional investors. The interest in private credit funds (and other private markets) is only expected to increase as the number of publicly traded companies decreases.
• Income generation: Many private credit funds distribute income regularly to investors, which can be particularly appealing for those seeking steady cash flow.
• Resilience and lower volatility: Private credit has demonstrated resilience in various market conditions, including periods of high interest rates and economic downturns, and has traditionally shown lower default rates and losses than the public debt markets.

Risks to retail investors

• Illiquidity: As discussed in more detail below, while the recently proposed exchange-traded funds are a liquid investment, open-end private credit funds may offer less liquidity, and closed-end funds are often illiquid as investors cannot easily sell their position before the investments mature. This offers investors fewer opportunities to trade out of private credit positions than some other more traditional investments, creating issues for those investors that desire easy access to cash.
• Interest rate risk: As noted above, many private credit funds make floating-rate loans, but if they don’t, the value of existing debt could decrease in a rising rate environment.
• Credit risk: The biggest risk to any private credit fund is the possibility that borrowers will default on their loans. Lending to non-public companies or start-ups inherently carries more risk compared to lending to established companies with proven track records.
• Manager risk: This risk goes hand in hand with the credit risk of a private credit fund. The manager of a private credit fund will be making decisions on what credit risk the fund will bear, and if the manager makes poor investment decisions or fails to assess credit risk adequately, investors could face substantial losses from borrower defaults.

• Concentration risk: Many private credit funds tend to invest in a limited number of deals, which could lead to a lack of diversification. If one of these deals goes sour, it can disproportionately affect the overall performance of the private credit fund.
• Operational risk: Private credit funds can have operational challenges, such as difficulties in sourcing good deals, executing investments or managing risks associated with borrowers. These risks are typically less transparent than in public markets, and as the market becomes more crowded, the ability to source good deals could get harder.
• Economic cycles: During times of economic stress or uncertainty, borrowers may struggle to repay the loans made by private credit funds, leading to defaults or reductions in the value of the private credit fund’s portfolio.
• Regulatory risk: Private credit funds operate with less regulatory oversight compared to public markets, potentially exposing investors to higher risk. In addition, as discussed below, as private credit markets grow and especially as they attract more retail investors, they may attract more regulatory scrutiny. Changes in regulations or tax laws could affect the performance of private credit funds and returns to their investors.
• Opaqueness: Evaluating and monitoring private credit loans requires specialised expertise. This may make it difficult for retail investors to fully understand the risks of private credit funds. This is further complicated by how the investments made by private credit funds are valued. Such valuations of private credit investments are often subjective, as there is a lack of market pricing to rely upon (private loans rarely trade), and little information is provided on how they are made. Investors may not always have a clear view of the true value of the assets in the fund, which could lead to mispricing and unexpected losses.

Many of these risks will likely lead investors to seek out experienced private credit managers furthering the fundraising success or the largest established private credit managers. The top 20 private credit managers have increased their fundraising share from approximately 35% of total capital raised in 2019 to 70% of total capital raised in 2024.

Types of Retail Private Credit Funds

Closed-end funds

Closed-end funds are investment companies registered under the Investment Company Act of 1940 that require investors to commit their capital for a specified period, often five to ten years. During this period, the fund invests in private credit instruments, and investors receive periodic distributions from the income generated by these private credit investments. At the end of the investment period, the fund is liquidated, and investors receive their principal, plus any profits. Closed-end funds typically invest in less liquid assets than open-end funds, but beyond that, the fund manager will largely decide what assets the closed-end fund invests in.

To attract additional investors to closed-end funds, private credit managers have offered interval funds and tender funds, which allow investors certain opportunities to redeem their investments before the final liquidation, subject to specified annual caps. Interval funds allow investors to purchase shares at any time but only permit redemptions at specified intervals, such as quarterly or annually. Similar to interval funds, tender funds allow investors to redeem shares at specific intervals, but the repurchase offers are made at the discretion of the private credit fund’s management, giving them greater control of the liquidity of the fund by not requiring redemptions.

Both listed and non-listed closed-end funds continue to be popular with asset managers and investors. As reported by Kroll, as of 31 October 2024, there were 257 closed-end funds (including interval funds and tender funds), with total assets of USD208 billion in the market across asset classes (not just private credit). The number of closed-end funds increased during 2024, and, as of 31 October 2024, there were still 21 private credit closed-end funds in the registration process with the Securities and Exchange Commission (see ‘Regulation’ below).

BDCs

Publicly traded business development companies (BDCs) are also closed-end funds that are investment companies registered under the Investment Company Act of 1940, but, unlike other closed-end funds, BDCs are subject to certain investment restrictions, primarily that BDCs must have at least 70% of their investments in “qualifying assets”, which are limited to private or public US companies with market capitalisation of less than USD250 million.

As of the end of 2023, there were approximately 50 publicly traded BDCs with over USD130 billion in assets under management in the aggregate, according to the LSEG’s BDC Collateral. This number has only grown over 2024 as more asset managers have either completed or commenced the process of listing a new BDC. These types of BDCs are a relatively liquid investment.

In addition to publicly traded BDCs, there are non-traded BDCs, which have similar assets under management. Non-traded BDCs conduct continuous public offerings, but are not listed on an exchange and therefore have limited liquidity for investors unless a liquidity event, such as an initial public offering, occurs. Liquidity events are generally scheduled to occur five to seven years after launch; however, the last few years have seen a significant increase in the number of “perpetual life” or “evergreen” non-traded BDCs, which have an indefinite duration. This allows the fund managers to reduce the risk to investors that they will need to liquidate the BDC assets during market downturns, resulting in lower returns for the investors. Since they are not publicly traded, non-traded BDCs allow certain investors to access the private credit market, but still have limited redemptions more similar to non-BDC closed-end funds.

Because private credit assets can be hard to trade, ie, illiquid, interval funds, tender funds and BDCs that limit redemptions are often used by private credit managers to have greater control over their liquidity. Open redemptions could create runs on the funds if investors exit en masse and fund managers can’t sell their investments fast enough to pay out redemptions.

Open-end funds

In an open-end structure, investors can buy or sell shares in the fund at any time, and the private credit manager adjusts the investment portfolio as needed. These funds may offer more liquidity compared to closed-end funds, but they also have certain restrictions on trading, such as redemption fees or limits on withdrawal amounts.

ETFs

In early 2025, the first private credit focused exchange-traded funds (ETFs) started to publicly trade with additional asset managers filing to register similar products. ETFs were historically not used for private credit funds as ETFs are required to invest in liquid assets, to allow for frequent trades and flexibility by investors, but that has changed in recent months. ETFs can either invest in other listed instruments that focus on private credit, like BDCs or collateralised loan obligations, or, as has started to happen more recently, hold the private credit investments directly. For the latter, recent filings have proposed that asset managers will offer the assets to the ETF and also agree to buy them back at the request of the ETF. Concerns have been raised overwhether these assets are truly liquid and how retail investors can easily withdraw funds from an ETF with a large concentration of illiquid assets. There is not yet enough information to determine how the liquidity question will play out as the ETF matures. These structures have also raised additional concerns over the valuation risk referenced above and the risk to investors of holding an ETF with private credit assets that are not easily valued.

Regulation

The Securities and Exchange Commission (SEC) already plays a key role in regulating private credit through its oversight of private funds and the implementation of rules surrounding investor protections, transparency and disclosure. The SEC’s rules require private credit funds to register as investment advisers under the Investment Advisers Act of 1940 if they manage more than USD100 million in assets. This registration mandates certain reporting and disclosure requirements, which help increase transparency and provide investors with greater insight into the fund’s activities. The Federal Reserve and the Department of the Treasury also monitor the potential systemic risks posed by the private credit market, especially in times of economic stress.

However, private credit funds are subject to significantly less regulation than traditional banks that make loans and there have been rumours of additional regulation being applied to private credit funds to protect investors in the asset class. As private credit funds increase the number of retail dollars under management, regulators may take a closer look at regulations designed to protect less sophisticated investors in the asset class. Potential changes are the imposition of more comprehensive disclosure by private credit funds, including detailed information about their portfolios, risk exposures and investment strategies, as well as more details on valuation of their assets. There has also been talk of limiting excess leverage and requiring sufficient capital buffers, similar to what is currently required by traditional banks. It is unclear whether any of these types of regulations will actually be implemented, as regulators want to protect investors and protect financial stability, but they don’t want to limit innovation or the growth of the market.