Private Credit and Alternative Lending for International Investors

Private credit — lending to businesses and real estate borrowers outside the traditional banking system — has grown from a niche institutional strategy into one of the most significant asset classes in global capital markets. For internationally mobile HNW investors seeking income above bond market rates, private credit funds offer an attractive yield premium in exchange for accepting illiquidity.

This guide explains what private credit is, why it has grown so substantially, what returns to expect, the key risks, and how internationally mobile investors can access the asset class.

What Is Private Credit?

Private credit encompasses lending and credit investment strategies conducted outside public capital markets:

Direct Lending The most common strategy: a fund lends directly to private companies (typically mid-market businesses with revenues of £10m–£500m) that either cannot access bank lending or prefer the flexibility and certainty of non-bank financing. Loans are typically floating rate (benchmarked to SOFR, SONIA, or EURIBOR plus a spread), senior secured (first priority over company assets), and have terms of 3–7 years.

Mezzanine Finance Mezzanine debt sits between senior debt and equity in a company's capital structure. It is subordinated to senior lenders but ranks above equity. The higher risk of subordination commands higher returns — typically SOFR plus 8–15%, or combinations of cash interest and payment-in-kind (PIK) interest where part of the return accrues rather than paying in cash. Commonly used in private equity buyout financing.

Distressed Debt Investment in debt securities of companies in or near financial distress — either to generate a return through a restructuring, or to achieve ownership of the company's assets at a discount. This is a specialist, higher-risk strategy requiring deep credit and legal expertise.

Real Estate Debt Loans secured against real estate assets — mortgages, bridge loans, development finance. Real estate debt typically carries lower risk than unsecured corporate debt due to the physical collateral, though property values can fall materially in stressed markets.

Infrastructure Debt Loans to infrastructure projects (airports, toll roads, renewable energy assets, utilities) often with long maturities and contracted cash flows. Infrastructure debt tends to be lower-risk with stable, predictable returns — often used for liability-matching by pension funds and insurance companies.

Why Private Credit Grew Post-2008

Prior to the 2008 global financial crisis, mid-market lending was dominated by banks. Post-crisis regulatory changes — particularly Basel III/IV capital requirements — made bank lending to certain borrowers (leveraged buyouts, mid-market companies, real estate development) less economically attractive for banks. Banks pulled back, leaving a financing gap.

Non-bank lenders — initially primarily large US private equity firms and specialist asset managers — stepped in to fill this gap, providing the lending that banks were retreating from. Borrowers accepted the higher cost of non-bank lending in exchange for certainty of execution, flexibility in structuring, and fewer restrictive covenants than traditional bank lending.

The result: private credit AUM has grown from approximately USD 400 billion globally in 2010 to roughly USD 3 trillion by 2025 — industry estimates for 2024–25 range from around USD 2.3 trillion (Preqin) to USD 3.5 trillion (Alternative Credit Council / Houlihan Lokey), depending on scope (estimates vary; treat as directional). It is now a mature asset class with a wide range of fund managers, strategies, and access routes.

Returns Profile

Private credit returns are typically expressed as a spread above a floating benchmark:

Direct lending (senior secured): SOFR/SONIA + 4–8% (typical range in 2026 conditions) Mezzanine: SOFR + 8–15% or higher, depending on subordination and structure Real estate debt: Variable; senior real estate debt broadly in the 5–9% gross range Distressed debt: Target gross returns of 15–25%+ (reflecting materially higher risk)

In the interest rate environment of 2025–2026 (with SOFR around 3.5–3.75% following Federal Reserve rate cuts), senior direct lending is delivering gross returns broadly in the 8–12% range. After fund manager fees (typically 1–1.5% management fee plus 10–15% performance fee on returns above a hurdle), net investor returns are roughly 6–10% for direct lending strategies.

These returns are not guaranteed. They reflect the current lending environment and will change as interest rates, credit spreads, and default rates evolve.

Liquidity Constraints: The Key Trade-Off

The fundamental trade-off in private credit investing is: higher yield in exchange for illiquidity. Private credit funds are not daily-liquid — they are closed-end vehicles with defined terms:

Closed-end funds: Capital committed for the fund's life (typically 7–10 years). Investors receive distributions as loans are repaid and realised, but cannot redeem capital on demand.

Evergreen (open-ended) funds: Some private credit platforms offer quarterly or annual redemption windows, subject to gates. More flexible than closed-end funds but capital cannot be guaranteed available on demand.

BDCs and listed credit vehicles: Publicly traded vehicles (see FAQ above) offer daily liquidity through secondary market trading, but share prices fluctuate with market sentiment and may trade at a discount to the underlying portfolio value.

Investors should size private credit allocations as capital that genuinely can be locked up for 5–7 years without affecting their financial position.

Risk Factors

Credit defaults: Borrowers may default, particularly in economic downturns. Senior secured lenders typically have strong recovery rates, but recovery is not guaranteed and the enforcement process is time-consuming. Subordinated and unsecured lenders face materially higher loss severity in defaults.

Illiquidity: Private credit positions cannot be easily sold. In a financial crisis, investors may need liquidity but cannot access private credit capital without accepting substantial discounts (if a secondary buyer can be found at all).

Leverage within funds: Some private credit funds use leverage (borrowed money) to enhance returns. Leverage amplifies both returns and losses; a fund with 1.5× leverage experiences 1.5× the loss of an unlevered fund on a given credit loss.

Floating rate risk (borrower side): Direct lending is mostly floating rate — the borrower pays a spread over a benchmark that rises with interest rates. In a rapidly rising rate environment, borrowers may struggle to service increased interest costs, raising default risk. This was a concern during 2022–2023 as rates rose sharply.

Manager quality: Private credit is an information-intensive, relationship-driven business. Manager quality varies enormously. Strong managers with deep origination networks, experienced credit teams, and robust covenant monitoring significantly outperform weaker managers in loss prevention and recovery.

Access Routes

Institutional private credit funds: Top-tier direct lending and credit funds (such as those managed by major private equity firms — not named here to avoid the appearance of endorsement) typically require minimum commitments of USD 5–25 million.

Semi-liquid private credit funds: Several asset managers offer more accessible private credit products — particularly semi-liquid funds — with minimums of USD 100,000–250,000 and periodic redemption windows.

BDCs (US-listed): Listed US vehicles providing mid-market credit exposure, accessible through standard brokerage accounts. Dividend yields of 8–12% are common. Withholding tax applies for non-US investors.

UK-listed investment trusts: Some listed closed-end investment trusts focus on direct lending or real estate debt, offering more accessible entry points with the liquidity of daily share trading (subject to market risk on the share price).

Loan funds / mutual fund equivalents: UCITS-registered loan funds providing exposure to leveraged loans or corporate direct lending through a daily-liquid wrapper. Lower yields than closed-end private credit but with full liquidity.

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The information in this guide is for educational purposes only and does not constitute financial advice. Private credit investments are illiquid and carry credit risk including potential loss of capital. Investment values can fall as well as rise. Returns quoted are indicative and not guaranteed. Past performance is not a guide to future results. Seek independent professional advice before investing.

How Global Investments can help

Private credit is one of the most compelling yield-generating strategies available to internationally mobile HNW investors in the current rate environment. Global Investments has relationships with leading private credit fund managers and can facilitate access to institutional-quality direct lending and real estate debt funds — often at lower minimums than direct fund commitments.

We assess each fund's credit quality, manager track record, liquidity terms, and fee structure before considering whether it is appropriate for clients. Contact us to discuss how private credit might fit your income and portfolio objectives.