How to Invest in Private Credit

By Matt Haycox, founder of Alternative Fortune, entrepreneur and investor. Last reviewed: July 2026. This is general information, not financial advice.

Key takeaways

• Private credit is lending to companies by investment funds rather than banks, a market that has grown to around US$3.5 trillion since post-crisis rules pushed lending out of banks.
• Its appeal is income: floating-rate, senior-secured loans that have paid a yield premium over public bonds, with a long-run record of steady returns.
• Most private investors get exposure through business development companies, listed or non-traded, with interval funds and private funds further along the ladder.
• A headline yield means little until read alongside price-to-net-asset-value and leverage; the highest yield often sits on the most distressed balance sheet.
• The category is under visible strain in 2026, with dividend cuts, NAV falls and redemption pressure, so the smooth historical record is not a guarantee.

What private credit is

Private credit is lending done outside the banking system. Instead of a bank writing a loan and holding it on a regulated balance sheet, an investment fund lends directly to a company and collects the interest. Over roughly fifteen years that quiet corner of finance has become one of the largest pools of capital in the world. Global private credit assets under management have reached around US$3.5 trillion, up from about $1 trillion in 2020, according to AIMA. Morgan Stanley expects the market to grow from roughly $3 trillion at the start of 2025 to about $5 trillion by 2029.

What pulled all that money in is the track record. The Cliffwater Direct Lending Index, the standard benchmark for US direct lending, has delivered a 20-year average annualised return of 9.5% with only one negative year, 2008, across two decades, per Cliffwater. That is the pitch: bond-like income, equity-adjacent returns, and, on paper, very few down years.

What private credit actually is, how it differs from private equity, the case for it as an asset class alongside the arguments against, the sub-strategies worth knowing, the ladder of vehicles you can use to get exposure, a comparison of the largest business development companies, the tax and structure questions to put to an adviser, the risks, and who the category suits are all worth taking in turn. Every figure links to its source. Private credit is having a stress year in 2026, and that shows up in the numbers below rather than being hidden behind them.

Why private credit is an asset class

The category exists because banks retreated from a large slice of lending and non-bank funds filled the gap.

After the 2008 crisis, Basel III and Dodd-Frank raised capital requirements and tightened risk-weighting, which made middle-market and leveraged loans more expensive for banks to hold, per the Federal Reserve. Non-bank lenders, the private credit funds, stepped into that space. That is not a marketing story; it is a regulatory one, documented by the Federal Reserve itself. The Deutsche Bank flow desk describes the same dynamic: capital that banks could no longer supply cheaply moved to funds that could.

The structural features that followed are what make the category attractive to income investors. Most direct loans are floating-rate, priced over a base rate, so income rises when rates rise rather than falling. Most are senior-secured, holding a first-lien claim on the borrower’s assets, which supports higher recoveries in a default. And the category has historically paid a yield premium over public credit, partly a genuine illiquidity premium and partly compensation for lending to smaller, unrated borrowers.

The long-run numbers back the case. Over fifteen years, private credit has returned an annualised 10.1%, against 8.6% for high-yield bonds and 1.8% for investment-grade bonds, per the Cliffwater Direct Lending Index. Credit losses have run around 0.75% annually, below the long-term average of about 1.01%, per J.P. Morgan. Stephen Nesbitt, the Cliffwater CEO who built the index, puts it plainly: “In this asset class, ‘boring’ is exactly what you want, steady, reliable performance.”

There is a counterpoint worth weighing. Much of private credit’s famed low volatility comes from infrequent valuation. Loans are marked to model on a quarterly basis rather than to market every second, so the smooth line is partly an artefact of how it is measured. The boring-is-good line is also being tested right now. In 2026 the category has shown genuine strain. One large business development company cut its dividend, another saw its net asset value fall almost 10% in a single quarter, and a flagship non-traded fund faced a surge of investors trying to get their money out. S&P Global has named the moment directly in its report “Beyond the Golden Age: Private Credit Confronts Growing Pains”, published by S&P Global. A twenty-year record with one bad year is real, but it does not guarantee anything about the next one.

Even the size of the market is disputed, which is a sign that the definition itself is still unsettled. Apollo’s Marc Rowan has said that if private credit means direct lending and below-investment-grade leveraged lending, it is roughly a $1.5 trillion market, but if you include investment-grade and low-investment-grade credit, it is closer to $40 trillion, as reported by CNBC. When an asset class can be measured at figures that far apart, it pays to be precise about what you are actually buying.

Private credit vs private equity, and the sub-strategies that matter

The most common confusion is private credit vs private equity. They live in the same private-markets world and are often run by the same managers, but they sit on opposite sides of a company’s balance sheet. Private equity buys the business and profits if its value rises. Private credit lends to the business and profits from the interest, ranking ahead of the equity if things go wrong. Equity is the upside bet; credit is the income claim with the senior seat. In a buyout, private equity funds provide the ownership capital and private credit funds increasingly provide the debt. Same deal, two different risk profiles.

Within private credit, direct lending is the single largest strategy, per McKinsey: funds lending directly to mid-sized companies, usually senior-secured and floating-rate. The category runs well beyond corporate loans, though, and the sub-strategies each earn their yield from a different source. Brookfield describes private credit as far broader than direct lending, spanning direct lending, mezzanine, opportunistic lending, distressed debt and asset-based finance among others.

If you want the full arc of how bank retreat created the opening and where the money flows, the private credit deep dive traces it end to end.

Direct lending is the core: senior-secured, floating-rate loans to mid-sized companies, often the ones private equity is buying. Mezzanine and junior debt sit below the senior loans in the capital structure, taking more risk in exchange for higher coupons and sometimes an equity kicker. Distressed and special-situations credit buys or lends into troubled companies, betting on a workout, a restructuring, or a recovery the market has under-priced. Opportunistic credit roves across the field, moving to wherever a market dislocation is throwing off excess return rather than committing to one lane.

Then there is the asset-based half of the category, where repayment leans on a pool of assets or a defined cash-flow stream rather than a company’s operating profit. Asset-based finance lends against receivables, equipment, aircraft, autos, consumer loans and other contractual cash flows. Real estate credit lends against commercial and residential property, and infrastructure debt funds long-dated, contracted assets such as power, transport and digital infrastructure, both prized for stable, long-duration income. Venture debt lends to venture-backed startups that are too early or too cash-burning for a traditional bank loan; Hercules Capital in the comparison table below is a listed example.

A set of more specialised, genuinely uncorrelated strategies sit at the edge of the category, where the risk being priced has little to do with corporate defaults at all. Litigation finance funds lawsuits and is repaid out of the legal outcome, while catastrophe bonds price the risk of a hurricane or earthquake rather than a borrower going under.

Music royalties lend against a predictable stream of streaming and publishing payments, a form of asset-based finance. Each of these behaves differently from vanilla corporate lending, which is the reason they belong in a category defined by lending outside the banking system.

How to invest in private credit: the vehicle ladder

Access to private credit has widened enormously, but the same trade-off runs the length of the ladder. The more liquid and accessible the vehicle, the less you resemble the institutional lender and the more you resemble a shareholder in a lending business.

At the top of the ladder sit publicly traded business development companies (BDCs), listed vehicles that lend to private companies and trade on an exchange like any share. You can buy a single share through any brokerage, sell it the same day, and collect the dividends. That daily liquidity cuts both ways, because the share price swings with the market and can trade above or below the value of the underlying loans. VanEck describes listed BDCs as the liquid alternative to private credit for exactly this reason. The BDC is a US wrapper, but the ladder has close cousins elsewhere: listed investment trusts and the EU’s ELTIF and LTAF structures give retail investors regulated access to the same underlying loans.

Next are non-traded and evergreen BDCs, sold through wealth channels and often limited to accredited investors, with minimums typically in the tens of thousands. These transact at net asset value rather than a market price, and offer limited liquidity, usually a quarterly tender for around 5% of assets. Interval funds open the door wider: they don’t require accreditation and offer periodic repurchase windows, per Dechert, trading some liquidity for broader access.

Further down, you reach the institutional end: private direct-lending funds with multi-year lock-ups and high minimums; middle-market collateralised loan obligations (CLOs), which bundle loans into structured tranches; and separately managed accounts and asset-based finance facilities, negotiated one-to-one. S&P Global maps this full range of investor vehicles, and Creative Planning walks the same ladder from listed BDCs down to private funds.

For most readers using a brokerage, the practical entry point is the listed BDC, so it is worth comparing the largest ones directly.

The best private credit funds and BDCs, compared

Picking the best private credit funds is not a matter of finding the highest yield, because a BDC’s headline yield can be flattering, misleading, or a distress signal depending on what sits behind it. The table below is compiled by Alternative Fortune from filings and market data so you can read yield alongside the numbers that give it context: price versus net asset value, and leverage.

Compiled by Alternative Fortune from filings and market data, as at July 2026. BDC net asset values are from Q1 2026 filings (quarter ended 31 March 2026); prices, market caps and yields are delayed quotes from bdcinvestor.com cross-checked against SEC 8-Ks. Prices move, so re-check before acting. BCRED is non-traded: its figure is April net asset value, not a market price.

The table shows how differently the same headline yield can read. Ares Capital is the blue-chip, trading near net asset value at 0.96x, carrying the lowest leverage at 1.10:1, and paying a roughly 10% yield that the balance sheet can support. Hercules trades at a 1.34x premium because venture debt is scarce and its coverage has held, so investors are willing to pay up for it. FS KKR trades at just 0.55x net asset value with the highest leverage on the list at 1.33:1, and that steep discount is a restructuring signal rather than a bargain, coming after a near-10% NAV drop. Blue Owl’s eye-catching 13.68% yield is partly an artefact of its 0.75x discount, and it has just cut its base dividend, so the headline overstates the income you would actually receive going forward. BCRED, being non-traded, transacts at net asset value with no discount to exploit, but its liquidity is gated to roughly 5% quarterly tenders and it saw a redemption surge in Q1 2026. Notice that the highest yield on the page belongs to the most distressed balance sheet on it. A yield tells you very little until you set price-to-NAV and leverage beside it.

The numbers on private credit returns

The case for the category rests on the long arc rather than any single year, so it is worth setting the current-year strain aside and reading the sourced private credit returns against public credit benchmarks.

On the growth side, the estimates converge on a large and still-expanding market even as they differ on the exact number. Preqin puts private debt AUM at about $2.28 trillion in 2025 and projects the market toward $4.5 trillion by 2030, driven largely by direct lending. Geographically, North America still leads global private capital fundraising, with the US market alone around $1.3 trillion, per Creative Planning, while Europe has grown to a meaningful minority share.

One caveat outweighs the rest. These are historical returns for the index, not a forecast for any single fund, and the 2026 dividend cuts and NAV falls in the comparison table show why that distinction matters.

Tax and structure: what to ask your adviser

This is general information, not tax advice. Tax depends on your country of residence, the vehicle’s home country, and the treaty between them, so take specific advice before acting.

The structural fact worth understanding is how a BDC is taxed at the fund level, because it shapes what lands in your hands. Most BDCs elect Regulated Investment Company (RIC) status, per Blue Owl, which makes them broadly pass-through, with no entity-level corporate tax on income they distribute, in a structure similar to a REIT. To keep that status, a BDC must distribute at least 90% of its taxable income to shareholders, with a further excise-tax backstop requiring distribution of at least 98% of ordinary income and 98.2% of net capital gains.

For you as the investor, one point holds regardless of jurisdiction. Because the underlying income is interest, most BDC distributions are taxed as ordinary income rather than as qualified dividends, per DividendRanks. The tax burden sits at the investor level, not the fund level.

So the questions to put to an adviser are structural, not country-specific. How does the vehicle’s home country tax its distributions before they leave, is there withholding at source, and does a treaty with your country reduce it? Is the income treated as interest (typically ordinary-rate) or as a capital gain in your hands? Does holding a foreign lending vehicle create reporting obligations where you live? And for non-traded and interval structures, how are gated redemptions and any return-of-capital distributions treated? None of these have a universal answer; they turn on where you and the vehicle each sit. That is exactly why they are questions for an adviser rather than assumptions to make.

The risks of private credit investment

The risks are real and, in 2026, visible.

Credit and default risk. These are loans to smaller, often unrated companies. Losses have historically run under 1% a year, but a weaker economy raises defaults, and the senior-secured seat limits losses without eliminating them.

Valuation and transparency risk. The smooth returns owe something to quarterly mark-to-model valuation rather than continuous market pricing. FS KKR’s 9.9% single-quarter NAV drop is a reminder that stability can move sharply when the model catches up with reality.

Liquidity risk. Non-traded and interval vehicles gate withdrawals, typically a quarterly tender of around 5% of assets. When many investors want out at once, as BCRED saw in its Q1 2026 redemption surge, you may not get your money when you want it.

Dividend risk. A headline yield is a promise, not a fact. Blue Owl cut its base dividend by roughly 16%, per Investing.com; a distribution can be reduced, and a very high one is sometimes a warning rather than a reward.

Market-price risk for listed vehicles. A listed BDC can trade well below the value of its loans, as FSK’s 0.55x price-to-NAV shows. That discount can persist or widen regardless of how the underlying loans perform.

S&P has framed the category’s current phase as “growing pains” beyond a golden age, rapid growth meeting a harder credit environment. The 20-year record deserves to be taken seriously, and so does what is happening in the current year.

Common mistakes investors make

• Chasing the headline yield. The highest number in the table, FSK’s 18.41%, is attached to the most distressed balance sheet in it. A yield read on its own, without price-to-NAV and leverage beside it, says little about the risk you are taking.
• Ignoring the discount or premium. A 0.75x price-to-NAV can flatter a yield; a 1.34x premium means you are paying up. The relationship to net asset value changes what the yield actually means.
• Confusing infrequent valuation with low risk. Quarterly marks make the ride look smoother than the underlying loans are. A near-10% NAV drop in one quarter shows how fast a smooth line can break.
• Underrating liquidity gates. Treating a non-traded or interval fund as if it were a share you can sell any day, then discovering redemptions are capped at ~5% a quarter when you need the cash.
• Treating the 20-year record as a forecast. One negative year in 20 is a genuine track record, not a promise about the next one, and 2026’s cuts and NAV falls are the proof.

Who this suits

Private credit tends to suit investors who want income above what public bonds pay and can accept the trade-offs that come with it: credit risk to smaller borrowers, valuations that update quarterly rather than continuously, and, in the non-traded vehicles, capital that is gated rather than freely withdrawable. A listed BDC bought through a brokerage keeps daily liquidity but adds share-price swings and discounts to net asset value. The non-traded and private structures remove the daily swing but lock the money up and lean on model-based valuations.

It fits less well for anyone who needs their capital available at short notice, who reads a double-digit yield as a safe number rather than a risk signal, or who wants the transparency of a continuously priced market. The category rewards investors who read yield alongside leverage and price-to-NAV, and who size their commitment to the liquidity the vehicle actually offers.

Frequently asked questions

What is private credit? Private credit is lending to companies by investment funds rather than banks, with the fund collecting the interest. Global assets in the category have reached around $3.5 trillion, up from roughly $1 trillion in 2020, after post-crisis rules pushed lending out of banks and into funds.

What is the difference between private credit vs private equity? Private equity buys ownership of a company and profits if its value rises; private credit lends to the company and profits from interest, ranking ahead of the equity if the business fails. In a buyout the two often appear in the same deal: equity provides the ownership capital, and direct lending increasingly provides the debt.

What are private credit returns historically? The Cliffwater Direct Lending Index shows a 20-year average annualised return of 9.5% with just one negative year, and a 15-year annualised 10.1% against 8.6% for high-yield and 1.8% for investment-grade bonds, per Cliffwater. These are historical index figures, not a forecast; several vehicles cut distributions or saw NAV falls in 2026.

How do you choose the best private credit funds or BDCs? Read the yield alongside price-to-NAV and leverage rather than on its own. In our comparison, Ares Capital trades near net asset value with the lowest leverage, while FS KKR’s far higher headline yield sits on a deep discount and a near-10% NAV drop. The same signal reads very differently once you add context.

Is private credit a good investment? It has delivered strong, steady income historically, with credit losses around 0.75% a year against a ~1.01% long-run average, per J.P. Morgan. But 2026’s dividend cuts, NAV falls and redemption pressure, plus S&P’s “growing pains” framing, show the smooth record is not a guarantee. Whether it suits you depends on your income need, liquidity need and tolerance for credit risk.