Private credit—often pitched as a high-yield, low-volatility alternative—has experienced explosive growth. But beneath the glossy surface lies complexity and risk that consumers should understand—particularly if they’ve been pushed into such investments without adequate explanation or disclosure.
Rarely is private credit suitable for the portfolio of a retail investor. The investor must accept that a high proportion of private credit investments will fail, that an advisor cannot Know the Product, and that there is unlikely to be any compensation for the illiquidity risk (the long term tying up of your money).
What Is Private Credit?
Private credit refers to privately originated loans made by non-bank entities—such as private credit funds or business development companies (BDCs)—to borrowers who typically can't access traditional bank financing. These loans often include features resembling equity, like warrants, and generally carry higher interest rates due to their increased risk.
Key investor promise: high floating yields, low correlation, and steady returns.
Why the Hype?
- Floating-Rate Appeal – Theoretically, during rising interest rate environments, floating-rate private loans can protect you from rate risk.
- Bank Disintermediation – Tighter banking regulations and higher capital charges have shifted mid-size lending to private credit providers. Thus making more high risk loans are available for the gambling of retail investors.
- Smooth Valuations – Without market pricing, private credit valuations tend to be sticky, though often unrelated to actual value and unable to be independently verified—showing the appearance, but rarely the fact, of stability even during downturns.
The Hidden Risks
1. Opaque Valuation Practices
- Private credit lacks daily, liquid market pricing. Valuations are often derived internally or through estimators, which can be delayed or overly optimistic.
- Case in point: publicly traded BDCs often trade at material discounts to their reported net asset values, exposing the discrepancy between valuation and market reality.
2. Equity-like Risk in Loan Garb
- Although sold as conservative debt, many private loans take on characteristics akin to equity investments—yet without the corresponding return transparency.
- Some research shows these funds outperform public benchmarks on paper by ~2.7% annually—but real-world returns show wider discounts and hidden volatility. [
3. High Fees & Performance Incentives
- Investors typically pay 1.25–1.5% in management fees, plus 15–20% performance fees on gains—easily pushing all-in costs to 3–4%.
- These layers of fees are woven into the loans and bloat yields, masking actual investor take-home returns.
4. Illiquidity & Timing Risk
- Without active public markets, selling private loans can be time-consuming and expensive. - lack of Liquidity can create a false sense of investment stability, while executions during downturns are unpredictable.
How This Leads to Legal Complaints
1. Suitability & Misrepresentation
If an advisor positions private credit as low-risk or a safe “fixed-income” alternative without explaining valuation opacity, illiquidity, or fee drag, they risk breaching their suitability duties.
2. Negligent KYP/KYC
Recommending private credit without thoroughly investigating product structure, fee arrangements, and valuation mechanisms—especially when misaligned with investor goals or risk profiles—can trigger negligence claims.
3. Hidden Conflicts
Performance-based fees and associated kickbacks may incentivize advisors to promote these products without disclosing conflicts to clients.
What Consumers Should Do If They’ve Invested in Private Credit
- Request full loan-by-loan disclosures, annual audited valuations, and fee allocations.
- Obtain documentation on internal valuation policies, including who performs valuations and how often.
- Compare reported returns to actual realized returns, including secondary-market discounts.
- Evaluate whether your risk profile was properly assessed—especially if you were told the asset was "safe" or "low risk."
- If concerns arise—particularly after a drop in reported net asset value—contact us to explore legal recourse.
