Private credit at scale: what a family should ask before they lend

A little over a decade ago, lending money to mid-sized companies was overwhelmingly the business of banks. Today a family office can do it directly, through funds that originate, structure and hold loans entirely outside the public markets. The asset class has a tidy name, private credit, and a less tidy reality: it has scaled faster than almost any allocation in modern finance, and much of that growth has happened during a long stretch of benign conditions that has not yet been seriously tested.

The numbers are striking. Preqin puts global private debt assets under management at roughly $1.5 trillion at the end of 2022, rising to nearly $1.7 trillion through 2023, and projects the figure will reach about $2.8 trillion by 2028. The International Monetary Fund, counting committed-but-undeployed capital alongside drawn loans, sized the market at around $2.1 trillion in early 2024. The precise total depends on what you count. The direction does not.

For a family weighing an allocation, the relevant work is not admiring the growth chart. It is asking the questions a good underwriter would ask before they themselves became the lender. The yield is the easy part to see. The terms on which that yield is earned, and the conditions under which it might not be, are the part that repays attention.

Private credit is, at its simplest, lending that does not pass through a bank or a public bond market. Its largest segment is direct lending: senior secured loans made to mostly mid-sized, often private-equity-owned companies, negotiated bilaterally between a fund and a borrower. Around that core sits a widening universe, including asset-backed finance, specialty lending, mezzanine debt and rescue financing. What unites them is that the loan is originated and held privately, marked infrequently, and rarely traded.

That structure is the source of both its appeal and its risks. Because the loans are privately negotiated, a fund can tailor covenants, charge for complexity, and lend to borrowers a public market would find too small or too bespoke. Because the loans are not traded, their value is not pushed around daily by sentiment, which flatters reported volatility. The smoothness is partly real and partly an artefact of how rarely the assets are repriced.

Three forces converged. First, banks retreated. After 2008, Basel III and Dodd-Frank raised the capital and liquidity cost of holding leveraged loans to smaller companies, and regulators leaned on banks to pull back from precisely the middle-market lending that private funds then absorbed. The collapse of Silicon Valley Bank in 2023 widened the gap again. Where banks once dominated lending to private-equity-backed firms, non-bank lenders now provide a large and growing share.

Second, investors wanted yield. Through years of low rates, an asset offering high single-digit to low double-digit returns, secured and senior in the capital structure, was genuinely scarce. Third, borrowers came to prefer it. A single private lender can offer speed, certainty of execution and confidentiality that a syndicated bank deal or a public bond cannot match, and many borrowers will pay a premium for that certainty. Supply, demand and regulation pointed the same way at once.

The first is about liquidity. Most private credit is locked up for years, with capital called and returned on the manager's schedule, not the investor's. Newer semi-liquid and evergreen structures offer periodic redemptions, but those windows can be gated precisely when an investor most wants out. A family should know not only the stated lock-up but what happens to redemptions in a stressed quarter, when many holders reach for the same exit at once.

The second is about rates. Almost all direct lending is floating-rate, priced as a spread over a base rate. That was a tailwind as rates rose: yields climbed mechanically, and investors enjoyed low double-digit returns. It cuts both ways. A floating coupon that lifts the lender's income also lifts the borrower's interest bill, and the IMF has noted that more than a third of private credit borrowers already have interest costs exceeding their earnings. Higher-for-longer rewards the lender on paper while quietly straining the borrower who must pay.

The third is about leverage and fees. Many funds borrow at the fund level to enhance returns, so the headline yield may sit atop a layer of debt that amplifies losses as readily as gains. Fees compound the point: a management fee on committed capital plus a performance share can absorb a meaningful slice of a high-single-digit gross return. A family should always ask what the net return looks like after fund-level leverage and the full fee load, not before.

Private credit is not an index. The gap between the best and worst managers is wide, and it widens further in difficult years, because returns depend on origination discipline, the quality of covenants, and how a workout is handled when a borrower stumbles. In public markets, a mediocre manager underperforms a benchmark. In private credit, weak underwriting can mean permanent loss of capital. Choosing the manager is most of the decision.

That brings us to the question hanging over the whole asset class: how does it behave in a real default cycle. The honest answer is that, at this size, no one fully knows. The market grew to nearly two trillion dollars without living through a deep, prolonged recession, and supervisors have flagged loosening covenants, valuations that may lag reality, and liquidity tools untested under stress. The first severe downturn will reveal which reported returns reflected sound lending and which reflected the absence of any event that forced a mark.

None of this argues against private credit. A senior secured loan to a sound business, made by a disciplined lender at a fair spread, is a perfectly respectable thing for a family to own, and the income it generates is real. The asset class earned its place through genuine structural change, not a fad. The case for caution is not a case for absence.

It is a case for entering with eyes open: sizing the allocation so that a lock-up is never inconvenient, diluting manager risk across more than one credible name, and reading past the gross yield to the net, leverage-adjusted return. The discipline a family brings to selecting a lender should mirror the discipline they would want that lender to bring to selecting a borrower. Where that mirror holds, the allocation tends to behave as intended. Where it does not, the smoothness in the returns was never the absence of risk, only the absence, so far, of a reason to look.

Sources: Preqin (2024); IMF Global Financial Stability Report (April 2024); Federal Reserve (2024). Figures are industry estimates and will be revised over time.