Covenant Lite #7: The Democratization of Private Credit
Retail gets in on the "Golden Age"
Welcome back to Covenant Lite for the 7th time! This go-around, I want to cover the trend of retail investors (aka non-institutional capital) coming into private credit. While retail investors have technically been able to access private credit (via BDCs) since 1980, the true democratization of private credit kicked off in earnest in the past 5-10 years and, today, there are many options for individual investors choose from.
In this article, I’ll cover the most common investment structures available to retail investors, the types of assets they invest in, key industry players, liquidity and tax considerations, as well as some overall data and historical context.
Let’s dive in.
Investment Structures for Retail Private Credit
Retail investors can access private credit through a few specialized fund structures. The main structures are Business Development Companies (BDCs) and interval funds. Each has distinct characteristics, advantages, and limitations.
Business Development Companies (BDCs)
BDCs are closed-end investment companies under the 1940 Act that primarily invest in private company debt and sometimes equity. They were created to channel capital to small and mid-sized U.S. businesses. Key features of BDCs include:
Access and Regulation: BDCs allow retail investors to access private loans to mid-market companies. They are regulated (must distribute ≥90% of taxable income to maintain pass-through tax status) and can be publicly listed or non-traded. Many BDCs are open to non-accredited investors with minimums around $5,000.
Structure: There are two types of BDCs: Publicly traded BDCs and non-traded BDCs.
Publicly traded BDCs list on stock exchanges, offering daily liquidity.
Non-traded BDCs do continuous fundraising but are not exchange-listed; they periodically offer share redemptions, but these are limited with the amount subject to the discretion of the investment manager.
Leverage: BDCs are permitted higher leverage than other fund types – up to a 2:1 debt-to-equity ratio (50% asset coverage). This leverage can boost yields but also magnifies losses in downturns.
Return Profile: BDCs typically target high current income, often yielding 7–10% annually to investors. They pay dividends mostly derived from interest on loans. Many BDCs have delivered returns in the high single digits over time through a combination of interest income and occasional equity upside.
Advantages: Daily liquidity (for listed BDCs), access to diversified private loan portfolios, and high income distributions. The pitch to retail investors is that BDCs give retail investors access to institutional-quality private investments with yields generally higher than traditional bonds.
Limitations: For publicly traded BDCs, market prices can be volatile and may trade at a discount or premium to net asset value (NAV). Non-traded BDCs offer limited liquidity – typically quarterly repurchase offers that can be suspended at the board’s discretion.
Fees: Fees are significant (management fees ~1–2% plus incentive fees ~15–20% of profits are common), and state suitability standards may apply for investors.
Interval Funds
Interval funds are a type of continuously offered, unlisted closed-end fund that periodically offers to repurchase a portion of shares. They have become a popular vehicle to “democratize” access to private credit:
Access and Regulation: Interval funds are open to all investors (not limited to accredited investors) and typically have low minimums. They avoid the complex subscription paperwork of private limited partnerships – investors can “buy with a click” and start earning dividends immediately. There are no capital calls; your money is invested and working right away, unlike private credit LP funds that draw capital over time.
Structure: Interval funds do not trade daily on an exchange. Instead, they offer mandatory periodic redemptions (tender offers), typically quarterly, for a set percentage of shares (often 5% of outstanding shares each quarter at NAV).
By regulation, they must offer between 5% and 25% of shares for repurchase at each interval, providing a degree of liquidity.
This is an assured liquidity window, unlike non-traded BDCs which may choose to allow redemptions and can halt them in a crisis.
Leverage: Because they are registered under the 1940 Act, interval funds must adhere to certain leverage limits. They generally can use debt financing up to ~33% of assets (0.5:1 debt-to-equity), compared to BDCs’ 200% allowable leverage. This lower leverage may result in slightly lower yields than a comparable BDC strategy, but also lower risk.
Return Profile: Like BDCs, interval funds typically target high current income, often yielding 7–10% annually to investors. They pay dividends mostly derived from interest on loans.
Advantages: Reduced volatility since NAV is not subject to market trading swings, and broader availability. Interval funds’ appeal is the combination of private credit’s return potential with some liquidity and accessibility.
Limitations: Liquidity is limited – if redemption requests exceed the quarterly limit (e.g. 5%), investors will be prorated and must wait additional quarters to fully exit. In extreme market stress, you are locked in for at least the next interval(s).
Fees: Interval funds typically charge management fees of ~1%–1.5%; many also charge a load for retail investors that can be as high as 4%-5% on subscription, which should be noted.
Types of Private Credit Assets Invested in by Retail Structures
BDCs and Interval Funds can (and typically do) invest across several sub-categories of private credit assets, including the 3 major food groups below:
Cash Flow Loans (corporate direct lending in the middle market)
Asset-Based Loans (loans backed by specific collateral such as real estate, receivables, or equipment)
Niche/Specialty Credit Investments (esoteric or specialty finance segments: litigation finance, royalties, trade finance, etc.)
That being said, from what I have seen, the vast majority of exposure tends to be in cash flow loans to sponsor-backed companies since these tend to be the easiest to originate and scale. This is evolving over time, however, with groups like Cliffwater having success fundraising for their Cliffwater Enhanced Lending Fund (CELFX), which focuses on niche lending strategies like asset-based lending, specialty finance and mezzanine lending.
Major Players and Offerings in Retail Private Credit
The rapid growth of private credit has attracted many asset managers, including alternative investment giants and specialized credit firms. In the retail-focused segment (BDCs, interval funds, etc.), a handful of leading firms dominate in terms of assets and fundraising.
As you can see, Ares has the largest traded BDC by a significant margin. Ares is one of the largest global alternative asset managers, and a pioneer in private credit:
Offerings: The flagship retail offering is Ares Capital Corporation (NASDAQ: ARCC), the largest publicly traded BDC. ARCC has been operating since 2004 and is focused on senior and subordinated loans to U.S. middle-market companies (sponsor-backed and non-sponsor). Ares also manages other credit funds; for retail, it has some interval-style funds (e.g., Ares Private Credit Solutions or other private wealth initiatives) and traditional closed-end funds that invest in liquid credit (like Ares Dynamic Credit Allocation Fund (ARDC), which holds loans, CLOs, etc.). But ARCC remains the marquee retail-facing vehicle for direct lending.
AUM: ARCC’s portfolio was around $21.5 billion at fair value as of 2024, making it the largest BDC. Ares as a platform manages over $200 billion in credit strategies globally (including private direct lending, liquid loans, high yield, structured credit, etc.).
Strategy: Ares Capital (ARCC) invests across the capital structure: primarily first lien senior loans (~45% of portfolio), as well as second lien, mezzanine, and equity co-investments. It focuses on upper middle-market companies, often in sponsor buyouts led by major PE firms. ARCC has significant scale, enabling it to lead large club deals, and it has a reputation for supporting its portfolio companies with follow-on capital as needed. The portfolio is diversified by industry (healthcare, business services, software, etc. are common sectors).
The world of non-traded BDCs is also dominated by a single player, but this time Blackstone — not Ares. Blackstone has leveraged its brand to dominate the non-traded space:
Offerings: Blackstone Private Credit Fund (BCRED) is a non-traded BDC launched in 2021 that has quickly become the largest private credit fund. BCRED continuously offers shares to investors (mainly through advisors) and provides periodic liquidity (monthly tenders up to a limit). Blackstone also manages a publicly traded BDC (Blackstone Secured Lending, BXSL), but BCRED is its primary retail vehicle (analogous to how Blackstone’s BREIT is for real estate).
AUM: BCRED’s growth has been remarkable. By Q3 2024, BCRED reached $68.4 billion in investments at fair value. It has become the largest BDC (non-traded) by far, raising tens of billions. In 2024 alone, Blackstone gathered $6.4 billion of non-traded BDC inflows (30%+ market share of flows)
Strategy: BCRED focuses on upper middle-market direct lending. Its portfolio is 96% senior secured loans, 97% floating-rate. Blackstone leverages its deal network to lend to larger companies (often companies with $75m+ EBITDA, a segment between traditional middle-market and broadly syndicated loans). They emphasize loans to “high quality companies in historically resilient sectors,” with top industries including software, professional services, healthcare, insurance, etc.
Like the other two retail asset classes, interval fund AUM is also dominated by one group: this time, Cliffwater, which has 2 of the top 5 interval funds by AUM (with a combined 44% of total assets). Cliffwater LLC is known both for its research in private credit and for managing funds that give investors access to diversified private credit portfolios:
Offerings: Cliffwater manages the Cliffwater Corporate Lending Fund (CCLFX), an interval fund launched in 2019 that invests in a broad portfolio of middle-market direct loans. It also offers the Cliffwater Enhanced Lending Fund (CELFX), which has a broader investment remit that includes niche asset classes like asset-based lending, specialty finance, legal assets and other things.
AUM: Cliffwater’s Corporate Lending Fund has grown enormously, reflecting demand for private credit. As of mid-2024, CCLFX had over $21.2 billion in net assets and about $26.3 billion in total assets (with leverage).
Strategy: CCLFX invests in 3,800+ underlying loans, primarily 95% first-lien senior loans with an average loan-to-value of ~41%. This suggests a very diversified book with conservative underwriting. The fund effectively mirrors the broad direct lending market (Cliffwater maintains the Cliffwater Direct Lending Index, and the fund’s portfolio is often aligned with that index’s constituents). The focus is core middle-market cash flow loans, with broad industry diversification. While they don’t advertise this, more than half of the investment capital is invested as LP interests in a variety of funds, making it effectively a large fund of funds. Though this is changing over time as they move to more of a direct invest / coinvest model.
Liquidity and Tax Considerations
An essential consideration for retail investors in private credit is liquidity – the ease of getting money in and out. Private credit by nature involves illiquid loans, but the fund structures offer varying liquidity profiles:
Publicly Traded BDCs: Offer daily liquidity through exchange trading. Investors can buy or sell shares any time the market is open. This is the most liquid option structurally. However, actual liquidity depends on trading volume, and prices can be volatile. If many investors rush to exit, the share price can drop (possibly to a discount to NAV). During market stress (e.g., March 2020), BDC prices fell sharply, even if underlying NAVs declined only modestly. So, while you can liquidate, you might have to accept a depressed price. Nonetheless, for someone who values flexibility, publicly listed funds are the only avenue to exit private credit on short notice.
Non-Traded BDCs: These funds do not trade on an exchange. Instead, they typically offer periodic share repurchase programs. A common format is quarterly redemption opportunities for up to 5% of NAV (some may allow more frequent or higher amounts). However, these redemptions are not guaranteed. The BDC’s board can suspend redemptions in adverse conditions (they usually reserve the right to do so). For example, if liquidity dries up or the fund can’t sell assets easily, it may gate (stop) withdrawals – similar to what some non-traded REITs did in late 2022. Investors should view non-traded BDCs as semi-liquid: in normal times, you can likely redeem gradually, but in a crisis you could be stuck until conditions improve. Also, some non-traded BDCs impose an initial lock-up period or redemption fee if you exit within the first year of investment (to discourage short-term flipping).
Interval Funds: These have a mandated liquidity mechanism. By law, an interval fund must offer to repurchase a certain percentage (min 5%) of shares at regular intervals (usually quarterly). This provides a more reliable liquidity schedule for investors. For instance, a typical interval fund will offer 5% of outstanding shares for repurchase every quarter at NAV. If requests exceed that (say 8% want out but only 5% can be redeemed), each investor gets ~62.5% of their request filled and would need to try again next quarter for the remainder. Thus, liquidity is rationed but recurring. Investors can plan on at least an annual liquidity of ~20% of their holdings (5% each quarter) if needed. Importantly, this is not at the discretion of the manager – it’s a structural commitment. Interval fund investors therefore can have more confidence in eventual exit, albeit over a series of quarters. Of course, if the fund faces sustained high outflows, it could take time (multiple quarters) to fully exit a large position.
On the tax side, both BDCs and interval funds typically qualify as regulated investment companies (RICs) for tax purposes. This means they generally do not pay corporate income tax at the fund level (if they distribute required income); instead, income is passed through to investors. For the investor, distributions from these funds are usually taxed as ordinary income to the extent they come from interest or short-term gains.
All the retail structures mentioned (BDCs, interval funds, closed-end funds) issue 1099s at tax time, not K-1s. This simplifies tax filing. Private partnership funds often issue K-1s (sometimes late in the spring), which can be cumbersome. The funds we discuss are SEC-registered vehicles that aim to avoid K-1s, making them retail-friendly.
Closing Thoughts
In summary, retail investors now have multiple avenues to tap into private credit’s attractive yield and diversification benefits. BDCs (public or non-traded) and interval funds are the primary structures, each with trade-offs in liquidity and leverage. They invest across cash-flow lending, asset-based finance, and niche credit, providing exposure to the middle-market economy and specialized income streams.
Leading managers like Blackstone, Ares, Apollo, Golub, Cliffwater, and others have established products with large AUM and solid performance records, though fees are significant. Private credit offers generally higher yields than comparable public funds (leveraged loan or high-yield funds), with historically lower volatility – a result of both structural factors and an illiquidity premium of a few hundred basis points