Private Credit

What Private Credit Is

Private credit refers to loans and other debt instruments originated outside the public bond markets and the traditional banking system. Instead of buying a bond on an exchange or depositing money in a bank that then lends it out, the lender — in this context, a family office or a fund it invests in — extends credit directly to a borrower and earns interest over the life of the loan. The borrower is typically a mid-sized business, a real estate developer, or a specialty finance company that cannot access public debt markets easily or prefers the flexibility of a private arrangement.

Private credit is often described alongside private equity, and the two do share structural similarities — both involve illiquid, privately negotiated transactions. The key difference is the position in the capital structure: private credit investors are lenders, not owners, so they are generally repaid before equity holders if something goes wrong. That seniority is one reason families find the asset class appealing, though it does not eliminate risk.

The Four Major Strategies

Private credit is not a single thing. It is an umbrella covering several distinct strategies, each with its own risk profile and role in a portfolio.

Direct Lending

Direct lending is the most straightforward strategy: the investor makes a senior secured loan to a company, usually a small or mid-sized business, and earns a floating or fixed interest rate. "Senior secured" means the loan sits at the top of the borrower's debt stack and is backed by collateral — assets the lender can claim if the borrower defaults. Families and funds commonly use direct lending as the core of a private credit allocation because it tends to be the most predictable of the strategies.

Mezzanine Debt

Mezzanine debt sits below senior loans but above equity in a company's capital structure. Because it is riskier than senior debt — lenders get paid last among creditors — mezzanine financing typically carries a higher interest rate and sometimes includes warrants, which are rights to purchase a small equity stake. A family looking for higher income than direct lending offers, while still maintaining a debt position rather than becoming an owner, might consider mezzanine as part of a broader private credit sleeve.

Specialty Finance

Specialty finance covers lending in specific niches: consumer loans, equipment financing, trade receivables, royalty financing, and similar assets. These strategies often rely on securitization or asset-backed structures, meaning the loans are pooled and the cash flows are used to repay investors. Families with experience in a particular industry sometimes find specialty finance attractive because operational knowledge gives them an edge in evaluating the underlying collateral.

Real Estate Debt

Real estate debt — sometimes called private real estate credit — involves lending to property owners, developers, or sponsors rather than taking equity in the property itself. Common forms include bridge loans (short-term financing to "bridge" a gap before permanent financing is arranged) and construction loans. Families that are comfortable with real estate as an asset class but want the seniority of a lender's position often allocate to this strategy alongside or instead of direct equity real estate.

Why Family Offices Allocate to Private Credit

Families commonly turn to private credit for several reasons that fit the broader logic of family office investing — patient capital, income generation, and diversification.

• Income generation. Private credit loans pay regular interest, creating a cash flow stream that families can use to fund operations, philanthropy, or living expenses without selling assets.
• Illiquidity premium. The illiquidity premium is the additional return an investor earns for accepting that capital cannot be withdrawn on short notice. Because private loans are not traded on exchanges, borrowers pay higher rates than they would in public markets.
• Lower mark-to-market volatility. Private loans are not priced daily like publicly traded bonds, which means the reported value of the portfolio does not swing with daily market sentiment — though the underlying credit risk is still real.
• Seniority and collateral. Senior secured positions give lenders a legal claim on assets, providing a layer of downside protection that equity does not.

That said, private credit is not without risk. Borrower defaults, covenant erosion (the weakening of the contractual protections written into a loan agreement), and illiquidity during a downturn are all genuine concerns. Families typically approach this asset class as part of a broader asset allocation strategy rather than in isolation.

Income Versus Illiquidity: The Core Trade-Off

Liquidity — the ability to convert an investment to cash quickly — is the central trade-off in private credit. A family that commits capital to a private credit fund typically cannot access that money for three to seven years, depending on the strategy and structure. Understanding how much of the family's total capital can be locked up — and for how long — is a foundational question before any allocation.

A founder who sold her logistics company might receive a large lump sum and have no immediate income need, making a multi-year lock-up manageable. A family with ongoing business capital calls or significant philanthropy commitments may need to keep a larger portion of the portfolio in liquid assets.

Families typically map out their liquidity needs before committing to illiquid strategies, ensuring they hold enough in liquid assets to meet obligations without being forced to sell private positions at inopportune times.

How Families Access Private Credit

There are several structural paths into private credit, each with different minimums, control, and complexity.

Families that pursue direct investing in private credit — making loans themselves rather than through a fund — take on the full burden of origination, underwriting, and ongoing monitoring. This requires either an in-house credit team or very close relationships with advisors who specialize in the space.

The Underwriting Questions Families Ask

Whether a family is evaluating a fund manager or underwriting a direct loan, a consistent set of questions guides the process. Thorough due diligence is especially important in private credit because there is no public market to provide an ongoing second opinion on value.

Borrower and Deal Questions

• What is the borrower's ability to service the debt — does cash flow comfortably cover interest payments, and by how wide a margin?
• What collateral secures the loan, and how reliably could that collateral be sold in a stress scenario?
• What covenants (contractual limits on borrower behavior, such as restrictions on taking on more debt) protect the lender, and how tight are they?
• What is the loan-to-value ratio — the loan amount compared to the value of the collateral?
• How does the loan structure handle a default: what are the remedies and how quickly can the lender act?

Manager and Fund Questions

• What is the manager's track record across a full credit cycle, including a downturn?
• How does the team source deals, and is the pipeline proprietary or highly competitive?
• What is the default and recovery history on prior vintages? (A vintage year refers to the year a fund made its first investments, useful for comparing performance across market cycles.)
• How are fees structured — management fees, performance fees, and the distribution waterfall that determines how returns are split between the manager and investors?
• What are the capital call mechanics and the expected pace of deployment?

Families commonly use the metrics of internal rate of return and multiple on invested capital to evaluate private credit performance over time, though income-oriented strategies are also assessed on yield and loss rates.

Where Private Credit Fits in the Family Office

Private credit occupies a distinct space in the family office investment framework — between the stability of public bonds and the growth potential of private equity. It is neither a replacement for either nor a standalone solution; families typically treat it as one component of a broader alternative investments allocation.

The organizational infrastructure required to manage private credit well — tracking committed capital, monitoring loan covenants, processing distributions, and maintaining consolidated reporting across positions — is part of what a family office is built to handle. Attorneys and CPAs must be involved in structuring any direct lending arrangement, particularly around the tax treatment of interest income and the entity structures used to hold the positions, as rules vary by jurisdiction and change over time.