Private credit keeps coming up in conversations around me.

Funds are raising billions. Wealth managers are increasingly offering access to private credit strategies. Institutional investors have been allocating more capital to the space. And recently, a friend who is building a private credit fund explained to me that many of the loans they make are backed by assets.

That immediately raised a question for me.

If the loans are secured by assets, the lender earns an attractive interest rate, and the loan eventually gets repaid, where exactly is the risk?

The more I looked into it, the more I realised that this is precisely the question investors should be asking.

Private credit can be a genuinely useful asset class. It can offer attractive income, diversification and exposure to investments that are unavailable in public bond markets.

But the higher yield is not free.

And one of the biggest dangers may be that some of the risks are simply less visible than they are in public markets.

First: what actually is private credit?

At its simplest, private credit is lending that happens outside the traditional public bond market and, often, outside traditional bank lending.

Instead of a company issuing a bond that can be bought and sold by thousands of investors on an exchange or through institutional markets, a private credit fund lends money directly to a borrower.

The fund raises capital from investors and uses that money to originate or purchase loans.

The borrower might be a middle-market company, a real-estate developer, an infrastructure project, a private-equity-owned business or even a pool of assets such as mortgages, equipment leases or receivables.

Globally, private credit has grown into a market of more than $2 trillion, according to BIS research.

But “private credit” is not one homogeneous investment.

It includes several very different strategies.

Direct lending is probably the best known. A fund lends directly to companies, frequently businesses owned by private-equity sponsors.

Asset-backed lending involves loans secured against identifiable assets or pools of cash-generating assets.

Real-estate debt finances buildings, developments and property portfolios.

Infrastructure debt finances assets such as energy, transport and digital infrastructure.

Mezzanine debt sits lower in a company's capital structure, taking more risk in exchange for higher returns.

And distressed or special-situations credit deliberately lends to companies facing financial difficulties or complex situations.

The expected return and risk can therefore be very different depending on which version of private credit we are talking about.

Why would a company borrow privately?

This was my second question.

If banks and bond markets exist, why would a company pay a private credit fund a potentially higher interest rate?

Because private credit can offer something traditional financing cannot always provide: flexibility and certainty.

A private lender can structure a bespoke loan around the borrower.

It can lend to companies that are too small to efficiently access the bond market.

It can execute financing much faster than a syndicated bank process.

It can finance acquisitions.

And it can lend to businesses whose leverage, ownership structure or cash flows do not fit traditional bank underwriting criteria.

From the borrower's perspective, paying a higher interest rate can therefore be worth it.

From the investor's perspective, that higher rate creates the attraction.

But it also tells us something important.

The borrower is generally not paying 9%, 10% or 12% when safer financing was equally available at 4%.

The additional return exists for a reason.

Where does the return come from?

Private-credit returns can be thought of as compensation for several things.

There is conventional credit risk: the possibility that the borrower cannot repay.

There is an illiquidity premium because these loans cannot usually be sold as easily as publicly traded bonds.

There can be a complexity premium because every transaction must be analysed and structured individually.

There can be an origination premium because the manager has sourced an investment unavailable in public markets.

And there may be higher fees or contractual protections negotiated into the loan.

This means private credit can genuinely offer better risk-adjusted opportunities than public credit.

But it does not mean that every extra percentage point of yield is an arbitrage.

Sometimes higher yield simply means higher risk.

“But the loan is asset-backed.”

This is perhaps the most interesting part.

Being asset-backed absolutely matters.

Imagine I lend €10 million to a company and the loan is secured against assets worth €15 million.

If the company fails to repay me, I may have the legal right to seize and sell those assets.

That provides a layer of protection that an unsecured lender does not have.

But several questions immediately follow.

What are the assets actually worth?

An asset valued at €15 million in normal conditions may not fetch €15 million when the borrower is distressed and the lender needs to sell.

How easy are they to sell?

A portfolio of liquid securities is very different from specialised industrial equipment, unfinished property or loans to other borrowers.

Who has the first claim?

“Asset-backed” does not automatically mean that my loan has the most senior claim on those assets.

How leveraged is the borrower?

A company with €100 million of assets and €90 million of liabilities has a very different margin of safety from one with €100 million of assets and €40 million of liabilities.

How much did I lend relative to the asset value?

A €50 loan against a €100 asset is fundamentally different from a €90 loan against that same asset.

And finally:

What happens legally when things go wrong?

Recovering collateral can involve negotiations, restructuring, litigation and time.

So I now think about collateral differently.

It does not make the loan risk-free.

It affects what I may recover after the borrower fails.

That is valuable protection, but it is not the same thing as eliminating the possibility of failure.

The strange thing about private credit: it often looks less volatile

If I own a public bond, its price changes every day.

Interest rates rise? The bond price reacts.

Investors become worried about the company? The bond price reacts.

Liquidity disappears? The price reacts.

Private loans do not trade constantly.

Instead, managers periodically estimate what those loans are worth.

The result is often a smoother return series.

At first sight, this can make a private credit fund look safer than a comparable public-credit investment.

But part of that stability is real and part of it may simply come from the absence of continuous market pricing.

An asset does not become less risky because nobody has marked its price at 11:37 this morning.

This is an important distinction for portfolio construction.

Price volatility and economic risk are not the same thing.

In fact, recent BIS work has highlighted concerns around valuations, asset quality and liquidity in parts of the private-credit market.

And then there is liquidity

This is probably where I become most cautious.

A private loan may take years to mature.

It may be difficult or expensive to sell early.

That is perfectly acceptable if the investor funding it understands that the capital is locked up.

Problems appear when a fundamentally illiquid asset is placed inside an investment structure offering investors relatively frequent opportunities to withdraw their money.

If everyone is patient, the structure works.

If investors suddenly want their money back at the same time, the fund may need liquidity that the underlying loans cannot provide.

The IMF's October 2026 Global Financial Stability Report specifically highlighted higher borrower leverage and growing contingent liquidity risks in private direct lending funds, warning that these pressures could sharply restrict credit when financial conditions tighten.

That doesn't mean private credit is about to collapse.

It means the sector has grown dramatically during a period in which it has not yet experienced every possible form of stress at its current scale.

So is private credit attractive?

Potentially, yes.

I can see a strong investment case when four things are true:

The manager has genuine underwriting expertise.

The underlying loans offer sufficient yield relative to their risk.

The structure does not create an uncomfortable mismatch between investor liquidity and asset liquidity.

And the investor can genuinely leave the capital invested for the required period.

The manager matters enormously here.

An S&P 500 ETF is deliberately commoditised. Two funds tracking the same index should produce broadly similar economic exposure.

Private credit is almost the opposite.

The underwriting decision, covenants, collateral, loan-to-value ratio, sector selection, seniority and restructuring capability of the manager can substantially determine the outcome.

That makes manager selection much more important.

Would I put it in our portfolios?

This is where the theory has to become a portfolio decision.

Capital Preservation Portfolio

Probably not.

The objective here is preserving capital, maintaining liquidity and limiting drawdowns.

Private credit could increase income, but the illiquidity and difficulty of observing changing credit risk work against the portfolio's primary purpose.

For this investor, liquidity itself has value.

I would rather accept a lower return from high-quality liquid fixed income than chase additional yield by giving up access to capital.

Early-Career Growth Portfolio

Again, probably not, but for a different reason.

A young investor with a long time horizon technically has the capacity to accept illiquidity.

But private credit solves a problem this portfolio does not really have.

The objective is long-term capital growth.

Public equities offer liquidity, transparency, low costs and extraordinary long-term compounding potential.

Adding a complex, fee-heavy private credit allocation for a young investor with relatively limited capital does not strike me as necessary.

Balanced Entrepreneur Portfolio

Here it becomes more interesting.

This investor may eventually benefit from private credit as part of a diversified income allocation.

But this portfolio already has something crucial to protect: liquidity for entrepreneurial opportunities and the planned venture reserve.

I would therefore only consider private credit with capital clearly separated from anything the entrepreneur could need for future business opportunities.

Family Stewardship Portfolio

This is where I see the strongest potential fit.

The family has a long investment horizon, significant assets, multiple liquidity buckets and enough capital to access institutional-quality managers.

A carefully selected allocation to senior private credit, infrastructure debt or asset-backed lending could potentially contribute income and diversification.

But it should sit inside the portfolio's illiquid allocation, not masquerade as a replacement for liquid bonds or cash.

And I would want to understand exactly what the fund owns, its leverage, its redemption terms and how its loans are valued.

My conclusion

I started looking into private credit with a relatively simple question:

If the loans are backed by assets, why are they risky?

I now think that question reveals something broader about investing.

There is almost always a trade-off behind an attractive return.

Private credit can provide valuable access to contractual cash flows, strong lender protections and potentially attractive yields.

But investors are being compensated for something: credit risk, complexity, illiquidity, leverage, opacity, or usually some combination of them.

The lesson is not that private credit is dangerous.

And it certainly isn't that it should be avoided.

The lesson is that a smooth valuation and a piece of collateral should not be confused with safety.

For the right investor, with the right manager, at the right price and inside the right liquidity bucket, private credit can absolutely make sense.

But before asking “What yield can I earn?”, I think the more important question is:

“What exactly am I being paid to give up?”

That is the question I would want answered before allocating a single euro.

1. Bank for International Settlements, Private credit's software lending meets AI disruption, BIS Quarterly Review, March 2026.
2. Bank for International Settlements, Retail investors in private credit, BIS Bulletin No. 106, 2025.
3. International Monetary Fund, Global Financial Stability Report: Resilience, Risk, and Transformation, October 2026.