Private credit

Not a bond fund and not a bond

A bond is a standardized, publicly listed debt security whose price updates continuously. Private credit, by contrast, is a directly negotiated loan that a private lender grants directly to a company, without a traditional bank or a public listing. The terms, collateral, covenants and maturity are tailored between the parties.

The key consequence: the investor can't sell the loan on an exchange. Liquidity is limited to the terms of the fund structure, and these terms can tighten exactly when the investor would need them most. Don't ask “does this return more than a bond?” Ask instead: what risks are being carried here, how is the loan structured, and what happens if the market weakens?

Where the asset class came from

Its growth is a direct result of the bank regulation that followed the financial crisis. Basel III and capital requirements limited banks' ability to lend to riskier companies. Companies looked for financing elsewhere, and alternative fund managers stepped into the gap. At the same time, institutional investors were looking for yield on their fixed income investments in a zero-interest environment: borrowers paid a premium for flexibility, and lenders earned a premium for illiquidity.

This origin also explains the nature of the asset class today. Because private credit grew to fill the gap left by banks, its loans typically go to mid-sized companies that find stock market or bank financing difficult. That is exactly why the return is higher, but the credit risk is also more real. When interest rates rose from zero, the whole ecosystem faced its first real stress test: the asset class had grown mostly during the era of cheap money, and it had not been properly seen in a tightening environment before 2024–2025.

Where the return really comes from

• Liquidity premium: the investor gives up the option to sell quickly and in return receives a higher interest rate than on a public bond with the same rating.
• Credit risk and covenant protection: loans are typically granted to companies below investment grade. Negotiated covenants give the lender the right to act before a crisis. Covenant protection is better than in listed leveraged loans.
• Floating-rate structure: most loans are tied to SOFR or Euribor plus a margin. When interest rates rise, the return rises automatically (in periods of rising rates, direct lending returned an average of 11.6%).

The key point is that none of these sources is free. The liquidity premium is compensation for not being able to get out. Covenant protection only works if the manager monitors it and uses it. And the floating rate, which raises the return when rates rise, turns into a risk for the borrower at the same time. Return and risk are therefore two sides of the same structure. A higher coupon is not the manager's magic but the price of the credit and liquidity risk being carried.

Where it sits on the risk map

Private credit sits between listed fixed income and equity. A typical positioning (J.P. Morgan / Proskauer, 2/2026, annualized):

• Investment grade (BBB+, fixed, daily): ~2.4%
• High yield (BB−, fixed, daily): ~5.2%
• Leveraged loans (BB−, floating, daily): ~5.5%
• Direct lending (B–BB, floating, illiquid): ~9.0% net
• Mezzanine (B−, floating/PIK, illiquid): ~11.4% gross

The scale also shows why the point of comparison matters. Direct lending's ~9% net sounds attractive next to stocks, but the right comparison is the listed alternative with the same risk: high yield and leveraged loans at around 5%. The difference from these, not from stocks, shows the real added value, and that difference narrows once fees and illiquidity are taken into account.

The real return gap: gross vs. net

The gross gap between direct lending and high yield has historically been about 2–4 percentage points. But that is the figure before fees. Once management and performance fees are taken into account, the net excess return left for the investor is typically only 0.5–1.5 percentage points a year. That is a reasonable extra in return for giving up liquidity, not “much more”. As competition has intensified, the premium has in some segments even narrowed to a level that no longer fully compensates for locked-up capital.

This is the asset class's most uncomfortable truth: marketing shows the gross return, but the investor's experience is determined by the net return. When capital is locked up for five years, a net extra of half a percentage point is not the same thing as the return on liquid high yield. It lacks the option to react, rebalance or sell. The liquidity premium would need to be clearly larger than it often is for locked-up capital to be genuinely compensated.

Interest rate risk and the lesson of 2024–2026

The floating-rate structure is an advantage when rates rise, but it turns into a risk when rates stay high for a long time: the borrower's cash flow can't withstand rising interest costs. This was the most important structural cause of the default wave of 2024–2025. Fitch reported that the US default rate rose to 9.2% in 2025 (below 2% in 2022). Defaults were concentrated among the smallest borrowers (under $25M EBITDA: 15.8%), while among large companies the rate stayed at 4%. For first-lien secured lenders, losses remained manageable, and by February 2026 the measure had already fallen to 5.4%.

The default wave of 2024–2025 mattered because it was not an exception but the asset class's first real cyclical test. It showed that credit risk is real and concentrates in the weakest borrowers: small, highly indebted companies failed first when their interest costs exceeded their cash flow. The lesson for investors is that a floating rate doesn't remove risk but shifts it. The benefit of rising rates for the lender turns into a loss if the borrower can't withstand the same rate.

Fund structure: this is where the most important risk lies

A closed-ended fund is the traditional form: a commitment period of 5–7 years, with liquidity that matches the nature of the underlying assets. It is an honest structure. A semi-liquid structure offers a quarterly redemption window (at most ~5% at a time), but the underlying loans are long contracts. In a stress situation, the fund has to restrict redemptions.

Redemption restrictions apply above all to semi-liquid retail structures, not to closed-ended institutional funds, where no redemptions are promised during the commitment period. So the risk doesn't describe the whole asset class. The problem lies in the structure and in liquidity promises that are too generous.

Valuation and strategies

The value of a loan is based on the manager's own model (mark-to-model), not daily market pricing, and it is typically updated only quarterly. The portfolio can look stable even though the quality of the loan book has already deteriorated. The strategy matters more than the name of the asset class: direct lending (~60% of fundraising), mezzanine (between senior debt and equity), distressed debt (companies in difficulty, wide dispersion) and asset-backed finance (secured, a different risk profile).

The delay in valuation is the single most dangerous feature of private credit, because it creates the same illusion as other illiquid investments: a smooth line is read as low risk, even though it is just infrequent valuation. The quality of the loan book can deteriorate for months before it shows up in the reported value. That is why a calm-looking portfolio is not proof of safety. It may be proof that the risk hasn't been priced yet.

How a Finnish investor can get access

• Under €500,000: the most practical route is a listed BDC on a stock exchange, or an ELTIF 2.0 structure if one is available.
• €500,000–1,000,000: a justified satellite weight. The key question: on what terms can I get out, and what if many others want out at the same time?
• Over €1 million: a closed-ended institutional fund is a more honest structure than a semi-liquid one.

The choice of route also determines what risk you are really carrying. A listed BDC is liquid, but its share price swings with stock market sentiment, not just with the loan book. ELTIF 2.0 lowers the threshold but doesn't make the product liquid. And a semi-liquid retail fund gives a redemption promise that can fail exactly under stress. The most important question is not how you get in but on what terms you get out, and what happens if many others want out at the same time.

How to evaluate private credit: a checklist

Evaluating private credit comes down to a few questions that marketing often skips:

• Net return: how much is left after fees? Does it exceed high yield by enough (typically only 0.5–1.5 pp)?
• Strategy: direct lending, mezzanine, distressed or asset-backed. Each carries a different risk.
• Structure: closed-ended (honest) or semi-liquid (redemption risk under stress)?
• Credit quality: what kind of companies are being lent to, and what is the collateral position?
• Valuation: mark-to-model, updated infrequently. A smooth line doesn't mean low risk.
• Exit: on what terms, and what if many investors redeem at the same time?

The asset class is real and growing, but its added value is thinner and its risk more real than marketing suggests. The structure and the net return are what matter, not the name of the asset class.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.