Money For the Rest of Us – Episode 509

How to Invest in Private Credit / Direct Lending

Host: J. David Stein
Air Date: January 29, 2025

Overview

In this episode, host J. David Stein delivers a comprehensive, plain-language exploration of private credit—also known as direct lending—and how individual investors can participate in this rapidly growing asset class. He outlines the fundamental differences between private credit and traditional syndicated bank loans, discusses the reasons for its increased popularity, highlights investment vehicles and associated risks, and offers practical guidance on entering the private credit market.

Key Discussion Points & Insights

1. Understanding Private Credit / Direct Lending

[02:00–08:40]

• Definition & Contrast to Syndicated Loans:

  • Private credit, or direct lending, is when a lender provides a loan directly to a private company, rather than participating in a syndicated loan with multiple lenders or packaging loans into collateralized loan obligations (CLOs).
  • “A lender lends to a private company and there’s just one lender...the loan is not parceled out, not packaged into CLOs.” – David Stein [07:20]

• Market Evolution:

  • The number of publicly traded US companies has been halved since 1996, but there are more private companies now.
  • Historically, the loan market shifted from traditional bank loans to syndicated, tradeable debt.

• Bank Loans vs. Private Credit:

  • Bank/Syndicated loans: Liquid/semi-liquid, often packaged into CLOs, rated, traded, and regulated.
  • Private credit: Illiquid, not rated or regulated, customized terms, strong lender-borrower relationships.

2. Why Borrowers and Lenders Like Direct Lending

[08:40–14:15]

• Flexibility and Confidentiality:

  • Borrowers appreciate customized terms and quicker access to capital.
  • Direct lenders gain high yields (interest rates 3–6% higher than syndicated loans) in exchange for illiquidity and involvement.

  “The borrowers like it…they appreciate the confidentiality and the ability to just deal with one lender that can help structure terms that meet both the lender's need as well as the borrower's need.” – David Stein [11:10]

• Lender Involvement:

  • Direct lenders act as business partners, often adding covenants and oversight.

• Fewer Creditor Disputes in Bankruptcy:

  • Fewer lenders means less conflict if a company defaults.

3. Growth and Attractiveness of Private Credit

[14:15–18:45]

• Market Growth:

  • Private credit market has swelled from $3 billion in 2010 to $1.6 trillion in 2025, surpassing the leveraged loan market.

  “The attractiveness of direct lending has led to accelerated growth.” – David Stein [15:45]

• Returns and Volatility:

  • “Investors that invest in these private credit funds get those higher returns...and they also like the appearance or even the experience of less volatility.” [17:10]

• Economic Productivity:

  • Private credit can lead to more productive capital allocation due to deeper involvement and risk-sharing with borrowers.

• Potential Downsides:

  • Reduced transparency compared to public markets.
  • Potential for less diversity in funded company types.
  • Focused on returns, potentially at the expense of other stakeholders.

4. How to Invest in Private Credit / Direct Lending

[18:45–33:30]

J. David Stein walks through the primary investment vehicles for accessing private credit:

a) Business Development Companies (BDCs) and BDC ETFs

• BDCs are publicly traded vehicles that lend to small and midsize private companies.
• Accessible via ETFs – e.g., VanEck BDC Income ETF (BIZD)
  • “Its return annualized return over the past decade through the end of 2024 has been 9.7% annualized.” [24:10]
• Provides daily liquidity and low fees.

b) Closed-End Funds

• Example: Barings Corporate Investors Fund (MCI), in existence since the 1970s.
  • “If we look at the return on a net asset value basis for the past 10 years…9.3% annualized, about the same as the BDC ETF.” [26:20]
• Traded on exchanges; can trade at a discount or premium to net asset value.

c) Private Credit Funds / Institutional & Interval Funds

• Less liquid; often require higher minimums and/or an institutional relationship.
• Example: Cliffwater Enhanced Lending Fund (advisor-only access, 2.25% fees).
• BlackRock Private Credit Fund (BDEBT): Minimum $2,500, returns 10.2% annualized since inception (Jun 2022).
  • “With the BlackRock fund…the minimum is $2,500 [but watch for] a placement fee of 3.5%.” [31:40]
• Interval funds have quarterly redemption windows with limits on withdrawals.

d) Private Credit CLO ETFs

• Newer option: ETFs investing in ‘private credit CLOs’—debts packaged into tranches, sometimes to private companies.
• Examples: BondBloxx Private Credit CLO ETF (PCMM) and Virtus SGA AAA Private Credit CLO ETF (PCLO).
  • “I hadn’t heard of the term private credit CLO…now they’re using the terms where it typically would not have been used.” [34:30]

5. Risks and Considerations

[33:30–40:00]

• Liquidity Constraints:

  • Many private credit vehicles (especially funds) are less liquid—investors may wait several years to fully redeem their investment.
  • Interval and closed-end funds mitigate fire-sale risks by limiting redemptions.

• Volatility & Valuation:

  • Private fund valuations are smoothed (infrequent marking to market), creating an appearance of stable returns.
  • Public vehicles (closed-end funds, ETFs) reflect market volatility.

• Fee Structures:

  • Some vehicles charge high management fees, incentive fees (“carry”), and placement fees.
  • Important to assess ongoing and performance-linked costs.

• Interest Rate Risk:

  • Most private credit loans are floating rate; as short-term rates decline, so may future returns.
    • “Lower short term rates means lower potential returns on direct lending.” [38:00]

• Default Risks & Transparency:

  • Lack of long-term data on defaults in private credit.
  • Opacity of private loans compared to public debt.

• Suitability & Liquidity Needs:

  • “If you want daily liquidity, then you use an ETF or a closed end fund. If you prefer a less liquid vehicle, then there are private funds for that…” [39:35]

Notable Quotes & Memorable Moments

• On Market Growth:

  “This private credit lending, direct lending, it’s bigger than the leveraged loan market now, about $1.6 trillion. That’s up from $3 billion in 2010.” – David Stein [15:30]

• On Risk and Involvement:

  “The mitigating factors is, the direct lenders are very involved with these companies. They have skin in the game, their underlying investors have skin in the game.” – David Stein [36:50]

• On Investment Vehicle Choice:

  “Overall, this is an attractive area to invest to allocate some capital. It’s one that I’ve successfully invested in for almost 15 years now.” – David Stein [40:20]

Segment Timestamps

| Topic | Timestamp | |------------------------------------------|--------------| | What is Private Credit? | 02:00–08:40 | | Borrowers’ & Lenders’ Motivations | 08:40–14:15 | | Market Size, Growth, and Benefits | 14:15–18:45 | | How to Invest – BDCs, ETFs, Closed-End | 18:45–33:30 | | Private Fund, Institutional, Interval | 27:30–33:30 | | New ETF Structures and confusion | 33:30–36:00 | | Risks: Leverage, Rates, Liquidity | 36:00–40:00 | | Practical Considerations & Conclusions | 39:00–41:00 |

Summary

Stein’s thorough breakdown demystifies private credit, explaining its rapid growth, why both borrowers and lenders find it appealing, and ways for individuals to gain exposure using varying degrees of liquidity and risk. From BDC ETFs to closed-end funds, institutional-style private placements, and new ETF products, listeners gain practical guidance to invest in private credit, along with a balanced assessment of the risks and challenges associated with this illiquid, but potentially lucrative, asset class.

End of Summary