Question 1

What is private credit and what yields does it offer?

Accepted Answer

Private credit encompasses direct lending, mezzanine financing, distressed debt, and specialty finance outside public bond markets. Direct lending to middle-market companies typically yields SOFR + 500–700 basis points (approximately 10–12% total in a 4.5% SOFR environment). Mezzanine debt yields 12–16%. Subordinated/second-lien debt yields 10–14%. The illiquidity premium over comparable public bonds is typically 150–300 basis points, compensating investors for limited secondary market trading. The private credit market has grown to approximately $1.7 trillion in assets under management as of 2024.

Question 2

What are BDCs and how do they provide private credit exposure?

Accepted Answer

Business Development Companies (BDCs) are publicly traded vehicles that provide retail and institutional investors access to private credit. BDCs must distribute 90% of income as dividends, resulting in high yields of 8–12%. Publicly traded BDCs (like Ares Capital, Blue Owl Capital, FS KKR) trade on stock exchanges with daily liquidity. Non-traded BDCs offer less liquidity but potentially better execution. BDCs typically trade at or near NAV during favorable periods and at discounts during stress. They provide diversified private credit exposure with lower minimums ($1,000–$10,000) than direct funds ($1M+).

Question 3

What are the risks of private credit investing?

Accepted Answer

Private credit risks include: default risk (middle-market companies have higher default rates than investment-grade public companies — typically 3–5% annually in normal environments); illiquidity (most private credit funds have 5–10 year lock-ups); leverage risk (BDCs and private funds use leverage of 1–2x NAV to boost returns); valuation opacity (private loans are marked to model, not market); manager concentration risk; and interest rate risk for fixed-rate portions. Recoveries on defaulted senior secured loans average 60–75%, meaning net losses even on secured loans.

Question 4

How does private credit compare to high-yield bonds?

Accepted Answer

Private credit (direct lending) offers advantages over high-yield bonds: higher yields (150–250bps premium for illiquidity), floating rates (most private loans are SOFR-based, protecting against rate rises), stronger covenants (more lender protections than public high-yield), and senior secured priority. Disadvantages: zero liquidity during fund lock-up periods, less diversification, higher minimum investments, and more concentrated exposure. For HNW investors with a 5–10 year horizon who don't need liquidity, private credit's risk-adjusted returns historically outperform high-yield bonds.

Question 5

What is a carried interest and management fee structure in private credit?

Accepted Answer

Private credit funds typically charge: management fee of 1.0–1.5% of committed or invested capital, and carried interest (performance fee) of 10–20% above a preferred return hurdle of 6–8%. For example: a fund earning 11% gross yield paying a 1.25% management fee and 15% carry above an 8% hurdle would net investors approximately 9.5–10% net-of-fees. BDCs have simpler structures with advisory fees of 1.0–1.75% of assets plus incentive fees of 15–20% of income above minimum returns.

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