How to Invest in Private Credit Funds for Retail Investors

Private credit has traditionally been an asset class only available to institutions and the ultra wealthy. However, thanks in part to the rise of digital investment platforms, that is rapidly changing.

Given the expanded access to private credit, retail investors should consider their options when it comes to investing in private credit funds.

This article will demystify private credit funds by explaining what they are, exploring their benefits and risks, and examining how accredited retail investors can access private credit investments through digital platforms like Heron Finance.

Key Highlights

• Private credit funds provide access to an asset class that has historically been dominated by institutional investors like pension funds and endowments.
• Private credit funds offer the potential for higher yields compared to traditional fixed-income investments, as they lend to borrowers who may not qualify for bank loans or public debt markets. However, they are generally less liquid than publicly traded securities, with limited redemption periods and potential lock-up periods.
• Accredited investors can access private credit deals through Heron Finance, a digital platform that builds diversified portfolios of private credit deals for users.

What are Private Credit Funds for Retail Investors?

Private credit funds are investment vehicles that allow investors to gain exposure to private credit deals. These funds invest in loans or debt instruments issued by private companies, typically small to mid-sized businesses that are unable to access traditional bank lending or public debt markets.

A combination of regulatory barriers, high investment minimums, illiquidity risks, complexity of the asset class, and lack of transparency has historically made private credit funds unsuitable for most retail investors from a regulatory standpoint. In other words, this sector of the market has typically only been accessible to institutions and the ultra wealthy.

Yet these barriers are being broken, as both credit funds and digital platforms are courting individual retail investors with regulated vehicles designed to provide access to private credit, coupled with education around the asset class to broaden retail access in a responsible manner.

One key point to note is that individual retail investors need to be accredited in order to invest in private credit, which means they must meet certain qualifications before they are allowed to invest. Click here to learn more about becoming an accredited investor.

The Advantages of Investing in Private Credit Funds

Private credit funds provide investors with an opportunity to diversify their portfolios and potentially enhance returns by accessing the private credit market. There are several potential advantages for retail investors:

• Higher yield potential: Private credit funds typically target higher yields compared to traditional fixed-income investments by lending to borrowers who may not qualify for bank loans or public debt markets.^[1] This allows retail investors to potentially enhance their portfolio returns.
• Floating rate exposure: Many private credit funds invest in floating-rate loans, which can help mitigate interest rate risk in a rising rate environment.^[2] The term ‘floating-rate’ implies that the interest rate on the loan increases or decreases in tandem with the benchmark interest rate.
• Lower volatility: Private credit investments have historically exhibited lower volatility and default rates compared to public high-yield debt markets, providing potential downside protection.^[3]
• Portfolio diversification: Private credit is an asset class with low correlation to public equity and bond markets, helping to diversify portfolio risk.
• Access to an institutional asset class: Private credit funds allow retail investors to gain exposure to an asset class that was previously dominated by institutional investors like pension funds and endowments.

The Risks of Investing in Private Credit Funds

While private credit can offer the potential for yield enhancement, retail investors may lack the tools and knowledge to properly evaluate and manage the unique risks involved. Careful due diligence on fund strategies, managers, and risk disclosures is crucial.

Below are some of the key risks that investment in private credit poses:

• Illiquidity risk: Private credit funds are illiquid investments with limited redemption periods and potential lock-up periods.^[4] Investors may not be able to access their capital for an extended time.
• Complexity and opaqueness: Evaluating and monitoring private debt investments requires specialized expertise. Retail investors may not fully understand the risks they are taking on due to the opaque nature of these investments.
• Credit risk: Private credit funds lend to borrowers who may be unable to access traditional financing, increasing the risk of defaults or missed payments.
• Interest rate risk: Rising interest rates can negatively impact the value of fixed-rate loans held by private credit funds.
• Lack of regulation: Private credit funds operate with less regulatory oversight compared to public markets, potentially exposing investors to higher risks.^[5]
• Valuation risk: Valuing private credit holdings can be challenging due to lack of market pricing, raising concerns about accurate performance reporting.

How Accredited Investors Can Invest in Private Credit with Heron Finance

Individual investors who don’t feel equipped to perform the necessary due diligence on private credit funds can instead opt to diversify their investment across funds.

One way of accomplishing this is through an investment on Heron Finance. Our platform builds diversified portfolios of private credit deals for accredited investors. Investors on Heron Finance achieve instant portfolio diversification by investing in a broad range of deals, diversified across fund type, borrower type, geography, loan duration, etc.

For more information on our curated investment strategy, click here.

To learn more about investing in private credit, including the historical performance of this asset class compared to traditional stock and bond performance, read our deep dive on private credit investment.

And if you’re an accredited investor, you can start investing in private credit today by clicking the button below and setting up a Heron Finance account.