THE PROS AND CONS OF PRIVATE DEBT

Acting as banker to nonpublic companies can be lucrative for intrepid investors.

- KIM CLARK

FOR decades, only financial institutions, such as banks and insurance companies, and wealthy investors got to collect the doubledigit interest rates on loans made to small and midsize private companies.

Now, however, a growing number of investment firms and entrepreneurs are working to help regular investors gain access to those attractive yields.

At least six new publicly traded funds specializing in private credit launched in the first 11 months of 2024, gathering about $8 billion in assets. In all, publicly traded funds giving investors access to private credit now hold more than $355 billion, up from $190 billion in 2019, according to research firm CFRA. And investors can expect more opportunities. Early December saw the launch of two exchange-traded funds specializing in private collateralized loan obligations, or securitized pools of private loans.

And several major fund companies have applied to the Securities and Exchange Commission for permission to launch other funds in 2025 that attempt to offer more private investments to the general investing public.

The democratization of private credit opportunities "represents a ton of potential for investors," says Elliot Dole, a certified financial planner in St. Louis. "There are very compelling reasons to invest in them," he says. For example, the values of private investments don't necessarily follow the same daily up-and-down patterns of publicly traded stocks and bonds, so these alternative investments can diversify portfolios.

And the returns are attractive, adds Dole, especially compared with other income options. Many private-credit funds were boasting yields in excess of 10% at the end of November. And they notched an average one-year total return of 10.9% for the 12 months ending June 30 (the most recent date for which private return data was available), according to data firm Pitchbook.