Private Credit Investing Guide

Private credit is lending by investment funds rather than banks, mostly to mid-sized companies that private equity firms own. The appeal for investors is a floating-rate yield that has been several points above public bonds and, historically, low losses. By late 2026 the risks were also easy to see: Fitch reported a record 6.3% trailing default rate for US private credit borrowers in August (Epoch Times, citing Fitch), and the largest non-traded funds had spent three quarters paying redeeming investors only part of what they asked for.

This guide is for investors deciding whether to own private credit and through which kind of fund. For the borrower's side, see our guides on mezzanine financing and leveraged buyouts. For how private credit fits among other alternatives, see our alternative investments guide.

What a direct loan looks like

Public filings of business development companies (BDCs) list every loan they hold, which makes the asset class easier to inspect than its reputation suggests. Blackstone Private Credit Fund (BCRED), one of the largest, reported these figures for June 30, 2026 in its 10-Q:

• Loans to 653 companies, with 91% of the portfolio in first lien debt.
• Typical terms of SOFR plus 4.25% to 5.25%, for all-in rates of roughly 7.9% to 9.0%, maturing in 2031 or 2032.
• A weighted average yield of 9.0% on performing debt at cost and an average loan-to-value ratio of 47.1%.
• Some loans paying part of their interest in kind: one listed at SOFR plus 5.25% (8.99% all-in) paid 2.88% of that as additional debt instead of cash.

Most of these are unitranche loans, where a single lender or club provides all the company's debt at one blended rate, often with maintenance covenants that test leverage or interest coverage every quarter. Because the rate floats, income rises when SOFR rises and falls when it drops. With the Fed's target range at 3.75% to 4.00% after the September 17, 2026 meeting and SOFR near 3.9%, a one-point cut would take roughly a point off gross loan yields.

New loans are also paying less than old ones. An LSTA summary of research from Raymond James found that first-lien origination spreads in the first quarter of 2026 trailed spreads on existing BDC portfolios by 55 to 60 basis points on average (LSTA). As older loans are repaid, portfolio yields drift down even if SOFR holds steady.

What the long-run record shows

The Cliffwater Direct Lending Index tracks more than 23,000 middle-market loans held by BDCs. As of June 30, 2026, it had averaged about 9.5% a year over almost 22 years, with one negative year (2008). It returned 3.0% in the first half of 2026 and 7.7% over the trailing year, after software loans were marked down about 3% in the first quarter. Realized losses were running at about half their long-term average of 1.0% a year (Cliffwater).

Three caveats go with those numbers. The index is unlevered and gross of fees, so no investor received it. Returns before its 2015 launch are reconstructed from filings. And private loans are valued by models and managers rather than by trades, which smooths reported returns relative to public bonds that fall on the day bad news arrives.

Why default rates disagree

Headlines in 2026 quoted private credit default rates anywhere from under 1% to over 6%. They measure different things:

Most of the defaults Fitch counted were amendments rather than missed payments. A lender that lets a struggling borrower pay interest in more debt, or pushes out a maturity, avoids a loss today and may take a larger one later. That is why the share of income paid in kind is worth watching. In BCRED's case, payment-in-kind income was 5.6% of total investment income in the second quarter of 2026, non-accruals were 2.2% of the portfolio at cost and 1.1% at fair value, and the weakest 5% of its private loans were marked at 63.4 cents on the dollar (BCRED Q3 letter).

What a BDC keeps from a 9% loan yield

BDCs add borrowing and fees on top of the loans. An illustration using hypothetical numbers loosely based on the disclosed terms above: a fund with $100 of investor equity borrows $80 (0.8 times equity, close to BCRED's reported debt-to-equity ratio) and holds $180 of loans yielding 9.0%. It borrows at SOFR (3.88%) plus an assumed 2.0%, pays a 1.25% base fee on net assets and an assumed 0.5% in other expenses, and pays the manager 12.5% of income above a 5% annual hurdle with a catch-up, the structure described in BCRED's filing.

Then subtract credit losses, which fall on all $180 of loans:

Two things stand out. Borrowing multiplies losses: a 2.5% loss rate costs the fund's investors 4.5 points, not 2.5. And in this structure the income incentive fee is calculated before credit losses, so the manager collects the same $2.47 in base and incentive fees in the bad year as in the good one. Some funds include a total-return lookback that reduces the incentive fee after losses; ask whether yours does. If SOFR falls one point, net investment income in this example drops from $8.53 to $7.65.

Getting in and getting out

Individual investors have four main routes:

• Listed BDCs trade on an exchange every day. You can sell whenever you want, but at a market price that can sit well below net asset value in a sell-off. A listed BDC paying 10% of NAV and trading at 85% of NAV yields 11.8% on its price, and that discount is the market's estimate that the NAV is too high.
• Non-traded BDCs are bought at NAV and usually offer to repurchase up to about 5% of shares each quarter. The board can reduce or suspend that.
• Interval funds must offer to repurchase 5% to 25% of shares at set intervals and often hold a mix of private and traded loans.
• Private drawdown funds, for accredited investors or qualified purchasers, call capital over several years and return it as loans are repaid, with no redemption right. Our private equity for individuals guide covers how these structures work.

The quarterly limits on non-traded BDCs were tested in 2026. In the first quarter, BCRED raised its offer to 7% and Blackstone and its employees invested about $400 million so it could meet every request (March 2026 tender filing). In the second quarter, it received about $4.5 billion of requests, around 10% of shares, and repurchased about half. Third-quarter requests were about $4.3 billion, again roughly 10%, and it again bought back 5%. Blackstone estimated that investors who asked in both quarters would receive about 75% of what they requested within about 90 days (BCRED Q2 letter, Q3 letter). Meanwhile its NAV per share fell from $24.79 at the end of 2025 to $23.65 at June 30, 2026, a 4.6% decline while distributions continued.

The gate worked as designed: investors who stayed were not forced to sell loans at a discount to pay those who left. It also means money in a non-traded BDC should be money you will not need on short notice. Our alternatives guide covers the first-quarter requests across the largest funds.

Taxes

A BDC's income is mostly interest, so its dividends are generally taxed as ordinary income and do not qualify for the lower rates on qualified dividends. For an investor in the 32% federal bracket, a 9% distribution keeps about 6.1% after federal tax, before any state tax. That is the main reason many investors hold BDCs and private credit interval funds in an IRA or 401(k); see our tax-efficient investing guide for placement rules. BDCs send a Form 1099-DIV. Private credit partnerships issue a Schedule K-1, often after the regular filing deadline, which can mean filing an extension.

Questions to ask before investing

The fund's filings answer most of these. For a private fund, ask the manager for the same data. Our private equity due diligence guide covers manager evaluation in more depth.

1. What were realized losses by vintage year, including loans made before 2008 and 2020? Default counts alone are not enough.
2. What share of income is paid in kind, and how many loans were amended or extended in the last year?
3. What are non-accruals at cost and at fair value, and where are the weakest loans marked?
4. How concentrated is the portfolio by sector and by private equity sponsor? Software exposure drew particular scrutiny in 2026.
5. How much does the fund borrow, at what rate, and how close is it to its legal asset coverage minimum (150% for most BDCs, meaning debt of up to twice equity)?
6. Is the base fee charged on net assets or gross assets, what is the hurdle, and is there a lookback on the incentive fee?
7. Who values the loans, how often, and has an independent firm reviewed the marks?
8. What are the repurchase terms, and how often have they been limited?

Who it suits

Private credit can make sense for an investor who wants floating-rate income above what public loans and bonds pay, can leave the money in place for years, and holds it in a tax-advantaged account. It fits poorly as a substitute for cash or high-quality bonds. The loans are to highly indebted companies, and in a recession the losses, marks, and redemption limits tend to arrive together. If you already own high-yield bonds or CLOs, much of the credit risk overlaps. Size the position so that a year in which you cannot sell it, and its NAV falls 10%, would not change your plans; our portfolio rebalancing guide covers how to keep it at that size.

This guide is for general information and is not investment or tax advice. Private credit funds carry credit, borrowing, valuation, and liquidity risk, and non-traded funds may limit or suspend repurchases. Fund figures are from the filings cited and change quarterly; the fee and loss illustration uses hypothetical numbers. Read the prospectus and consult a qualified adviser before investing.