The Ins and Outs of Private Credit: What Investors Need to Know

When considering private credit investments, understanding both opportunities and challenges defines your success in this rapidly expanding market. McKinsey’s analysis projects growth from $1.5 trillion to $2.8 trillion by 2028 – but market size alone doesn’t guarantee returns. Your success depends on navigating this evolving landscape with clear strategy and careful execution.

Understanding Today’s Private Credit Market

Private credit represents direct lending that operates outside traditional banking channels. As an investor in private credit, you effectively step into the bank’s role for growing businesses seeking capital. Moody’s research shows these loans primarily support middle-market companies – businesses that have outgrown small business loans but aren’t yet ready for public markets.

This growth comes from both supply and demand dynamics. Banks face increasingly strict lending requirements, creating natural openings for private lenders. Meanwhile, businesses need flexible capital solutions to grow. For accredited investors – those with $1 million in net worth or $200,000 in annual income – this creates opportunities to join over 13.6 million qualified investors already active in this space.

Watch how capital flows: pension funds moving away from low-yield bonds, family offices pursuing direct investments, and individual investors seeking portfolio diversification. These varied capital sources create a dynamic market with multiple investment approaches.

Real Benefits and Trade-offs

Private credit investments typically outperform traditional fixed income substantially. T.Rowe Price data shows yields running 3-4% higher than public markets. While public bonds might yield 5%, comparable private credit investments often deliver 8-9% or higher.

Your private credit investments typically offer:

• Interest rates that reset every 30-90 days, providing inflation protection
• Loan terms of 3-5 years, reducing duration risk
• Strong structural protection through covenants and collateral
• Direct monitoring of borrower performance

How to Invest in Private Credit

Success in private credit demands systematic preparation and careful execution in the following areas.

Portfolio Planning

Start with fundamentals that protect your investment:

• Map your liquidity needs across the next 5-10 years
• Diversify across vintage years to capture different market cycles
• Build sector exposure methodically across industries and loan types
• Maintain strategic reserves – market dislocations often present prime lending opportunities

Due Diligence Priorities

Your investigation should cover:

• Manager track records through complete credit cycles
• Actual loan documentation to understand your protections
• Real examples of workout experience – how managers handle troubled credits
• Reporting quality and frequency – ensure you’ll receive actionable portfolio updates

Risk Management Framework

Private credit success requires understanding and actively managing key risks:

• Limited liquidity: Most investments require 5-7 year commitments with restricted early exit options
• Complex structures: Deals involve detailed covenants and monitoring that demand specialized expertise
• Information gaps: Private companies provide less standardized reporting than public markets, requiring strong relationships and industry knowledge
• Market correlation: While less tied to public markets, private credit still responds to broader economic shifts

Considerations in Commercial Real Estate Bridge and Construction Portfolio Investing

Important specifics to successful Private CRE investing include:

• Hard Asset collateral/developer equity: Loan to value ratio
• Developer and guarantors financial standing/liquidity:  Access to supplementary funding
• Owner/developer/general contractor domain experience and prior success
• Branding, location and local market expertise
• Rigorous oversight and portfolio management

Building Long-Term Value

Private credit success stems from aligning strategy with objectives. Unlike public markets where positions adjust quickly, private credit rewards thorough preparation and disciplined execution. Your focus should center on how these investments enhance your broader portfolio while maintaining appropriate risk controls.

At AVANA Companies, we specialize in connecting investors with opportunities in growing businesses. Through investment opportunities offered by AVANA Capital, we combine rigorous credit analysis with deep market knowledge, helping capture private credit benefits while supporting community development. For more information, visit avanacompanies.com or connect with AVANA Companies on LinkedIn.