Jun 16, 2026
The Role of Private Credit in a High Net Worth Portfolio
Private credit has moved from a niche corner of institutional finance to one of the most discussed asset classes among high net worth investors. Global private credit assets reached over $1.7 trillion in 2024, and the market is expected to grow to nearly $2.8 trillion by 2028-with some projections placing it closer to $3 trillion globally by 2028. Private credit is projected to reach $3 trillion globally by 2028 as demand from both borrowers and investors continues to accelerate.
It plays a strategic role in high-net-worth portfolios as an alternative income source, complementing traditional fixed income investments with potentially higher yields and different risk characteristics.
At Third Act Retirement Planning, we serve as a fee-only, fiduciary wealth manager for individuals who have come into sudden wealth-whether through inheritance, business sale, legal settlement, or NIL income. Our clients want purpose-driven stewardship, not product sales. This article addresses the core question: what role should private credit realistically play in a high net worth portfolio, given its risks, historical default rates, and potential illiquidity premium? The focus here is on practical portfolio construction decisions for individual investors, not institutional allocations.
What Is Private Credit? A Practical Overview for Individual Investors
Private credit (also called private debt) is lending that takes place outside traditional banks and public bond markets. Here is what that means in practice:
Private credit typically involves non-bank lenders providing direct loans to borrowers-primarily middle market private companies that may not have easy access to the conventional banking system or publicly traded bonds.
The lenders in private credit markets are typically asset managers, private credit funds, and other non bank lenders. The borrowers are often companies with $50 million to $500 million or more in revenue that need capital for growth, acquisitions, or refinancing.
Direct lending provides senior debt financing to companies with $100 million to $2.5 billion enterprise value. A typical transaction might involve financing a mid-sized manufacturing firm, backing a healthcare roll-up, or providing private loans secured by receivables or equipment.
Asset-Based Finance is a growing segment of private credit strategies. It offers exposure to diverse underlying assets, ranging from equipment and inventory to receivables and intellectual property.
Most private credit loans use a floating rate structure, tied to a reference rate like SOFR plus a credit spread, with covenants, collateral, and defined maturities typically in the 3–7 year range.
Individual investors generally do not make single private credit loans directly. Instead, they access this asset class through private credit funds, interval funds, or business development companies (BDCs).
How Private Credit Works: Mechanics, Cash Flows, and Default Dynamics
Understanding how private credit investing works requires walking through the life cycle of a typical deal-from sourcing to repayment or default.
Deal sourcing and underwriting: Private credit managers identify borrowers, assess credit quality, and structure loans with covenants (financial tests the borrower must maintain), collateral packages (assets pledged against the loan), and defined seniority in the capital structure. Senior debt sits at the top of that structure, meaning it gets repaid first if something goes wrong.
Income generation: Private credit lenders receive regular interest payments-usually quarterly-and eventually the return of the principal amount at maturity. This contractual income stream is why private credit is usually categorized alongside fixed income investments, even though it has distinct risk features.
Floating versus fixed rates: Private credit often uses floating-rate structures to hedge against inflation and interest rate volatility. In the post-2022 environment of higher interest rates, floating-rate direct lending has benefited: as rates rose, so did the income generated by these loans, unlike traditional fixed income where rising rates pushed bond prices lower.
Default rates: Average default rates in private credit are lower than in high yield bonds. J.P. Morgan reports private credit defaults at roughly 2–2.5%, compared with public high-yield at around 2.1–3.5% and long-term high-yield averages closer to 4–5%. However, dispersion by manager and sector is wide, and some strategies can carry higher risk even when broad default averages look manageable.
Recovery rates: Private credit provides better recovery prospects in case of borrower defaults. When loans are senior and secured, recovery rates often range from 40% to 70%, depending on covenant strength and collateral quality. Private credit investments are usually secured by company assets, which supports recovery when defaults do occur.
Valuations: Unlike public markets, valuations of private loans are determined periodically by fund managers, typically quarterly, rather than marked to market daily. This is a meaningful difference from publicly traded bonds.
Private Credit as an Asset Class in Portfolio Construction
Private credit sits at the intersection of traditional fixed income and alternative investments. It offers income-focused returns like bonds but carries complexity and reduced liquidity more typical of private market investments. For high net worth investors, this hybrid nature is both its appeal and its challenge.
Within the broader landscape of alternative asset classes, private credit can diversify portfolios away from public markets. It has lower correlation with public equities and bonds, which means adding it to an investor's portfolio can smooth returns during periods of equity market stress. Private credit can enhance portfolio diversification with stable returns, and it offers exposure to different economic sectors and geographic regions that may not be well-represented in a typical stock-and-bond allocation.
For suitable high net worth investors, a strategic allocation generally falls in the range of 5% to 15% of total portfolio value. Investors should allocate 5% to 15% to private credit depending on their risk tolerance, time horizon, and liquidity needs. These are general ranges, not blanket recommendations-every investor's situation is different.
Private credit can provide a buffer against market volatility due to its income-oriented, less price-sensitive return profile.
It can enhance portfolio diversification and income generation when combined with existing stock and bond holdings.
At Third Act Retirement Planning, we integrate private credit within a goals-based framework, where income needs, retirement timing, legacy objectives, and charitable plans all influence the decision of how much-if any-to allocate.
Benefits of Private Credit for High Net Worth Portfolios
Private credit offers several potential benefits that explain its rapid growth among sophisticated investors and high net worth individuals, and private credit extends beyond yield into strategies that can support diversification and inflation resilience.
Yield and income: Private credit strategies can offer yields in the high-single digits to low-double digits. Direct lending strategies target net annual returns in high-single to low-double digits, well above what investment-grade bonds have typically offered over the past decade. Private credit offers yields above 10-year averages in many segments. High-net-worth individuals often use private credit for consistent income generation, and private credit can offer higher distribution rates than traditional fixed income.
Illiquidity premium: Private credit investments generally provide higher potential returns due to illiquidity premiums. Investors expect higher returns for reduced liquidity in private credit-empirically, this premium runs roughly 150–300 basis points gross over comparable public credit. That spread compensates for locking up capital for several years.
Capital preservation and seniority: Senior secured private credit loans sit at the top of the capital structure with collateral and covenants providing downside protection compared to equity investments. Private credit typically offers higher interest rates than traditional bonds while still targeting capital preservation through structural safeguards.
Inflation and rate resilience: The floating interest rates embedded in most direct lending structures mean income adjusts upward when rates rise-a meaningful advantage in the higher-for-longer rate environment that has persisted since 2022.
Diversification of fixed income: Adding private credit to a portfolio reduces reliance on traditional investments like government and corporate bonds, offering differentiated income streams and portfolio diversification.
Historical performance: Private credit has historically delivered stable returns across varying environments. Direct lending has generated 90% of equity returns with less volatility since 2005, and direct lending has historically outperformed stocks during market corrections-making it an appealing complement for retirees or those approaching retirement. Private credit capital deployment reached $592.8 billion in 2024, up 78% from the prior year, reflecting strong investor conviction.
Multi-generational planning: Stable, contractual income streams from private credit can support retirement distributions, family trusts, and structured charitable giving strategies over many years.
Risks, Default Rates, and the Trade-Offs Behind the Illiquidity Premium
A fiduciary perspective demands balanced analysis. Private credit requires careful navigation due to liquidity and transparency risks, and the potential benefits come with real trade-offs.
Illiquidity risk: Private credit investments are typically locked up for several years. Most private credit funds have multi-year lockups or limited redemption windows, making them unsuitable for emergency cash or near-term spending needs. This reduced liquidity is the price of the premium. Private credit loans are typically less liquid than publicly traded bonds.
Credit and default risk: Economic downturns can stress the cash flows of highly leveraged borrowers. Private credit investments involve market, credit, and operational risks. While default rates have been manageable, Moody's estimated 2025 private credit defaults between 1.6% and 4.7% depending on how distressed exchanges are counted. The private credit space has not been fully tested in a deep, prolonged recession since the global financial crisis.
Manager and strategy risk: Return dispersion across private credit managers is wide. Underwriting standards, deal selection, covenant discipline, and portfolio construction dramatically affect outcomes. A well-managed fund and a poorly managed fund investing in the same sector can produce very different results.
Valuation and transparency: Private credit investments may offer limited transparency due to lack of regulation compared to public credit. Without daily pricing, investors depend on manager marks, which may lag reality. This is a fundamentally different experience than holding publicly traded bonds.
Concentration and complexity: Over-concentrating in a single fund, strategy, or sponsor amplifies risk. Structures like mezzanine, special situations, or PIK (payment-in-kind) deals add layers of complexity. Private credit typically requires higher tolerance for complexity and longer lock-up periods.
Regulatory and structural risk: The covenant-lite trend is real-rising from about 4% of private credit deals in 2023 to roughly 21% in 2025-though many still include springing covenants and other protections. Evolving regulation around leverage, redemptions, and loan origination could also affect the market.
Comparing Private Credit to Other Fixed Income and Alternatives
High net worth investors frequently ask how does private credit compare to other options in the fixed income and alternative investment landscape. Here is a practical comparison.
Private credit versus public bonds: Public bonds offer daily liquidity, pricing transparency, and regulatory oversight. Private credit offers potentially higher yields and an illiquidity premium but with lower liquidity and less frequent valuations. Private credit can provide a buffer against market volatility that traditional bonds may not deliver during periods of rising rates.
Private credit versus bank loan markets: Since the global financial crisis, traditional banks have pulled back from certain lending areas-particularly leveraged and middle market lending. Private lenders and non-bank lenders filled that gap, and traditional bank lending now coexists with a large private credit market. This shift from the conventional banking system has been one of the defining trends of the past decade.
Private credit versus private equity: Private equity firms aim for capital appreciation with higher long-term return potential but significantly more volatility and equity risk. Private credit focuses on contractual income and capital preservation, sitting senior in the capital structure. For investors seeking attractive risk adjusted returns with less downside exposure, private credit often fits better than private equity.
Private credit versus real estate and real assets: Real estate debt is more tied to property cycles; infrastructure credit carries construction and regulatory risk. Private credit provides more diversified exposure to operating cash flows across sectors.
At Third Act Retirement Planning, we evaluate these comparisons through a stewardship and risk management lens, prioritizing each client's investment objectives over chasing the highest yields.
How High Net Worth Investors Access Private Credit in Practice
Knowing what to invest in private credit is only half the challenge. Understanding the vehicles and minimums is equally important.
Direct lending and private credit funds: Closed-end fund structures involve capital calls, multi-year deployment periods, and distributions as loans mature. Typical minimum investments start at $250,000 or more for accredited investors. These are the core vehicles for serious private market exposure.
Interval funds and tender-offer funds: These semi-liquid structures allow periodic redemptions-often quarterly-while investing in private debt. As of early 2026, private credit strategies represented roughly $116.7 billion within the broader interval and tender-offer fund universe. Minimums can be as low as $25,000 to $100,000, making them accessible to a broader range of individual investors.
Business development companies (BDCs): About 191 BDCs were tracked as of April 2026, with gross assets near $500 billion. Public BDCs trade on exchanges with no minimum beyond the share price; non-traded and private BDCs have different liquidity profiles and fee structures. BDCs offer portfolio diversification and access to middle market direct lending.
Separately managed accounts and co-investments: These are primarily for ultra-high net worth or family office investors due to very high minimums and bespoke structuring.
A fee-only financial advisor like Third Act Retirement Planning plays a critical role in screening private credit managers, evaluating fee structures, and ensuring any vehicle fits within a client's broader investment strategy and advisory services framework.
Fitting Private Credit Into a Purpose-Driven, Biblically Informed Financial Plan
At Third Act Retirement Planning, we view every investment decision-including whether to invest in private credit-through the lens of stewardship and purpose. For clients navigating sudden wealth, the question is never simply "will this earn more?" but rather "does this serve my family's goals, my generosity, and my long-term calling?"
Private credit income can support planned retirement spending, funding for heirs, and structured charitable giving through vehicles like donor-advised funds or charitable trusts.
Investors may choose to align private credit exposure with personal convictions-working with managers who avoid certain industries or who demonstrate transparent, covenant-strong underwriting.
For clients experiencing sudden wealth from an inheritance, business sale, legal settlement, or NIL income, illiquid private credit allocations should generally come only after establishing adequate liquid reserves, paying down high-cost debt, and building a diversified portfolio of public markets holdings.
Any private credit allocation should be guided by a comprehensive, written financial plan with ongoing monitoring-not ad hoc product selection. Evergreen funds or interval funds may seem simple, but they still require the same level of scrutiny within a holistic plan.
Due Diligence Checklist: Evaluating Private Credit Opportunities
Before committing capital to any private credit opportunity, institutional investors and sophisticated investors alike should work through a structured due diligence process. Here is a high-level checklist:
Manager track record: How has the fund performed across multiple credit cycles? What are realized default rates, recovery rates, and net returns after fees? Past performance is never a guarantee, but consistency across cycles matters.
Strategy clarity: Does the fund focus on direct lending, mezzanine, special situations, or asset-based finance? How does that align with your risk profile and investment objectives?
Portfolio construction: Is the portfolio diversified across sectors, borrowers, sponsors, and geographies? What are typical loan sizes and target leverage levels?
Risk management: How strong is covenant discipline? What is the collateral quality? Does the manager stress-test portfolios and actively manage deteriorating credits?
Fee structure and liquidity terms: What are the management and performance fees, hurdle rates, preferred returns, lockup periods, and redemption mechanics? Hidden costs like origination fees and legal expenses can erode returns.
Operational robustness: Is there independent fund governance, regular third-party audits, transparent reporting, and meaningful manager co-investment (alignment of interests)?
Is Private Credit Right for Your Portfolio? Next Steps with Third Act Retirement Planning
Private credit occupies a distinct place in the investment landscape: it is an income-oriented, less liquid asset class with potential benefits including yield, portfolio diversification, and an illiquidity premium. It also carries real risks-defaults, illiquidity, manager selection challenges, and valuation opacity.
Private credit is generally most appropriate for high net worth investors with long time horizons, stable liquidity elsewhere in their portfolio, and a willingness to accept complexity and periodic valuation uncertainty. It is not a replacement for traditional fixed income investments but a complement that can preserve capital and generate differentiated income when used thoughtfully.
At Third Act Retirement Planning, we help clients evaluate private credit through a disciplined process: a discovery call, full balance-sheet review, a written retirement and legacy plan, and then careful portfolio construction that integrates private credit only where it genuinely serves the client's goals.
If you have experienced a recent windfall-whether through inheritance, business sale, settlement, or NIL income-we invite you to schedule a discovery call to discuss whether and how private credit fits within a biblically informed, purpose-driven financial plan.
All investments, including private credit, involve risk of loss. Nothing in this article constitutes a specific investment recommendation. Individual circumstances vary, and any allocation to private credit or other alternative asset classes should be made only after comprehensive, individualized financial planning with a qualified financial advisor.