Pulling Back the Curtain on Private Credit

With relaxed accreditation requirements¹ and the rise of semiliquid evergreen funds, private credit is becoming increasingly accessible to advisors and retail investors. The sector now boasts nearly $2 trillion in verified assets—surpassing the size of the US public high yield bond market. Its growth potential remains significant, as private credit primarily targets middle market companies, which represent about one-third of private sector GDP.  The Gold Rush in Private Credit

Given this explosive growth, Fund companies and Private Credit sponsors are rapidly launching new investment vehicles to capitalize on this trend—and their new target market is the retail investor. The semiliquid evergreen fund market has expanded fivefold to over 250 vehicles. In the past two years alone, 38 new funds have launched with 67 more awaiting approval.²  

However, this rapid expansion brings risks. Many funds lack a long operational history and are much less transparent than their public counterparts. Investors should exercise caution, as the sector’s diversity and complexity can obscure the underlying risks.

Diversity of Private Credit Strategies

Often lost in the discussion around private credit is that it encompasses at least ten distinct lending and investing strategies. The main categories include:

• Corporate – Direct lending and securitized credit, including distressed.
• Asset-Based (Cash Flow) – Loans secured by company/personal assets or cash flows.
• Infrastructure – Lending to projects and assets in energy, utilities and transportation.

Each sector has unique characteristics and requires specialized expertise. Many strategies have not been tested through any sort of meaningful default cycle, such as during the Global Financial Crisis in 2008-2009. 

Basic Credit and Liquidity Framework

Since private credit is a form of fixed income, investors must apply rigorous due diligence when selecting managers, models and funds. The asymmetric downside risk means that a single bad year can erase years of income. While reduced liquidity is accepted in exchange for potentially higher returns, this trade-off is not always favorable. Unlike public markets, some private credit vehicles rarely allow for dollar-cost averaging.  

Before investing in private credit, consider these basic key due diligence questions:

• Valuation Policies – How are assets valued? Is there third-party verification, and how frequently is it conducted?
• Redemption Fulfillment and Gating – What are the policies for redemptions? Even in stable markets, gating (limiting withdrawals) can occur.
• Deal Sourcing and Underwriting – How does the fund source deals? What is the underwriting process, and how does it compare to other managed funds?
• Portfolio Team – What are the backgrounds and roles of the key team members? Are they experienced banking professionals? Have them explain a recent distressed deal workout.
• Fund Leverage and Risk Management – What is the leverage policy and triggers? What are the risk management and operational practices in place?
• Ownership Structure – Is the sponsor structure straightforward, or is it tied to a complex web of private equity or secondary funds?

Additionally, a liquidity matrix should be established that balances the liquidity needs of the investor, all with context of their income, return and risk parameters. Combining private funds with different strategies together with public markets may be a way to reduce adverse selection risk in this space. 

Conclusion  

Private Credit is here to stay, and the “democratization of credit” could be a positive shift from traditional bank-based lending models, which often have concentrated risk with very high leverage. However, not every investor in private credit will benefit equally. As with any rapidly growing industry, there will be both winners and losers.

We feel success in private credit will favor those who offer transparency and demonstrate proven expertise and economies of scale. Fundamental analysis and robust portfolio and model construction remain irreplaceable tools for those navigating this evolving landscape.

Important Disclosures & Definitions

1 SEC issued new guidance on Rule 506(c) which lets companies publicly market their offerings to investors. SEC, as of 03/12/2025

2 SEC, as of 04/30/2025

Dry Powder: the amount of committed, but unallocated capital a firm has on hand. In other words, it’s an unspent cash reserve that’s waiting to be invested.

AAI000965  07/15/2026