USA – ILLINOIS Trends and Developments Contributed by: Beth Vogel, Mayer Brown
Private Credit in the Retail Market At a glance
funds often lend to borrowers who may not qualify for bank loans or public debt markets and therefore pay higher interest rates to the fund (and its investors). • Floating rate exposure: Many private credit funds make floating-rate loans, which can help mitigate interest rate risk in a rising rate environment. • Diversification: Private credit is an asset class with low correlation to public equity and bond markets, helping to diversify portfolio risk and act as a hedge against market volatility in those larger markets. • Access to an institutional asset class: Retail investors typically do not have direct access to private capital markets, which are domi - nated by pension funds, insurance compa - nies and other large institutional investors. The interest in private credit funds (and other private markets) is only expected to increase as the number of publicly traded companies decreases. • Income generation: Many private credit funds distribute income regularly to investors, which can be particularly appealing for those seek - ing steady cash flow. • Resilience and lower volatility: Private credit has demonstrated resilience in various market conditions, including periods of high inter - est rates and economic downturns, and has traditionally shown lower default rates and losses than the public debt markets. Risks to retail investors • Illiquidity: As discussed in more detail below, while the recently proposed exchange-traded funds are a liquid investment, open-end pri - vate credit funds may offer less liquidity, and closed-end funds are often illiquid as inves - tors cannot easily sell their position before the investments mature. This offers investors few - er opportunities to trade out of private credit
One of the most notable trends in private credit over the past decade is the sector’s growing market size. As of the end of 2024, the private credit market exceeded USD1.6 trillion, up from an estimated USD1 trillion in 2020, and that growth shows no signs of slowing. That growth, and the investors that have funded it, was his- torically limited to institutional investors or high net worth individuals who could commit to large long(ish)-term investments with the private credit managers. Over the past few years, asset managers have found ways to access the retail market and allow everyday investors to invest in the asset class. Retail private credit assets under management (AUM) has been accelerat - ing and, while still less than 20% of total private credit AUM as of the end of 2024, retail invest - ments are growing more quickly than institu - tional investments. To access this newer base, private credit managers are coming to market with a variety of products to allow small retail investors to participate, including closed-end funds, business development companies (see ‘BDCs’ below), evergreen funds, interval funds and, most recently, exchange-traded funds (see ‘ETFs’ below). Advantages to retail investors Private credit funds provide investors with an opportunity to diversify their portfolios and potentially enhance returns by accessing the private credit market. There are several potential advantages for retail investors, many of whom have been hearing about this popular asset class for years without a way to invest directly. • Attractive returns: Private credit funds typi - cally target higher yields compared to tradi - tional fixed-income investments, especially in low interest rate environments. Private credit
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