Investing in Private Credit: A Guide for Individual Investors
If investing private credit individual is on your radar, this short guide cuts through the noise. Here is what is worth knowing, and how to put it to work today.
Key Takeaways
- Share Some of the links on our website are sponsored, and we may earn money when you make a purchase or sign-up after clicking.
- We are promotional partners of Fundrise, but not investing clients.
- We receive compensation when you open a Fundrise account through a link on our site.
Private credit is a form of lending in which investors provide capital directly to borrowers (who are most frequently businesses). This alternative asset class offers the allure of high yields and low correlation with traditional markets, but comes with challenges such as illiquidity and default risk.
This article provides comprehensive guidance on how individual investors can invest in private credit effectively and responsibly.
Table of Contents
ToggleWhy Invest In Private Credit?
Once strictly the domain of institutional investors, private credit has recently become more accessible to individual investors. Regulatory changes and the emergence of crowdsourced platforms like Percent, Yieldstreet and Fundrise have broadened the audience for this investment avenue.
The shift towards private credit is part of a larger trend in the investment world.
According to a 2019 BlackRock report:
“Over the past 25 years or so, alternatives have evolved from a small part of the portfolios of the world’s largest investors into a core holding. As the graphic below shows, alternative investments , which include non-traditional asset classes such as private equity, private credit, real estate, infrastructure and more , represented just 5 percent of global pension portfolios in 1996. In 2019, they accounted for more than 25 percent.”
The photo above, courtesy of Blackrock, shows the growth in alternative assets as a percent of global pension portfolios.Private credit’s allure lies in its potential for high yields, especially in the current economic climate, which is marked by rapid interest rate changes and a decline in traditional bank lending.
This decline means that traditional lenders frequently turn down numerous businesses, even those with solid credentials. As a result, those businesses turn to the private credit market.
Interestingly, while yields on private debt have risen, the relative risk hasn’t increased proportionately. In fact, in some cases, the risk profile has even improved. Numerous businesses that would have previously been approved by banks are now available as opportunities in the private credit market, suggesting that the market is capturing not just higher-risk borrowers but also those that are relatively stable.
That said, investing in private credit presents a series of unique hurdles.
Traditional lending institutions, after thorough underwriting, have likely declined numerous private borrowers because of their risk. So there must be a high level of diligence performed when making such an investment, especially when it comes to understanding the legalities and options available when a borrower defaults.
Ways to Invest In Private Credit
Here’s a closer look at some of the more popular ways to invest in private credit.
#1. Investment Platforms
Investment platforms , mainly platforms geared towards accredited investors , have played a significant role in opening private credit investments to individual investors, providing access to opportunities once exclusively reserved for institutional investors.
Depending on the platform and the investment opportunity, you may have the option to invest directly in specific loans or projects or, alternatively, in a diversified fund composed of various private credit investments.
Pros:
- Accessible to a broad range of investors.
- Clear information about investment opportunities.
- Ability to invest in different types of loans with funds.
Cons:
- Platforms may charge significant fees.
- Dependence on the platform’s stability and reliability. (One popular company in the past, PeerStreet, filed for bankruptcy in 2023.)
Examples of private credit investment platforms include:
- Percent. This is the one platform that exclusively specializes in private credit. Percent offers opportunities to invest in asset-based notes, merchant cash advances and more. It’s open to accredited investors only, with minimums as low as $500. Read our full Percent review.
- YieldStreet. Provides alternative investment opportunities in multiple asset classes, including private credit. On their platform, they offer a private credit fund to accredited investors composed of portfolios of 200+ senior secured corporate loans. Read our full YieldStreet review to learn more.
- Fundrise. Focusing on real estate investments, Fundrise specializes in different types of real estate debt, including senior and mezzanine debt, and is open to non-accredited investors. Read our full Fundrise review.
#2. Publicly Traded Business Development Companies
Publicly traded business development companies, or BDCs, are investment vehicles that provide capital to small and mid-sized businesses. These are open funds available to the public and are regulated by the U.S. Securities and Exchange Commission (SEC). BDCs are traded on various stock exchanges.
Pros:
- BDCs frequently have low minimum investment requirements, and since you’re investing in a share, you can frequently purchase fractional shares, making them highly accessible.
- As publicly traded securities, you can sell your shares at any time.
Final Thoughts
Before you check out, double-check investing private credit individual against current offers and any coupons you can stack. Small habits like this add up to real savings over a year.
Originally published at thewaystowealth.com.
R.J. Weiss
Our editorial team researches and verifies every money-saving guide before publishing. Editorial policy · About us
