Private debt funds and their distribution to retail markets

Overview of private debt 

Private debt, broadly defined as credit extended outside traditional public markets and the banking system, has become a central pillar of global finance. Although the term itself has gained prominence only in the past decade, the underlying concept is far from new. Its modern foundations can be traced back to the US Securities Act of 1933, which reshaped capital formation in the aftermath of the 1929 crash and facilitated the rise of non-bank lenders providing financing directly to companies.

Even earlier, real-economy precedents illustrated the power of non-bank credit. General Motors’ creation of GMAC in 1919 demonstrated how alternative sources of financing could support growth when banks were reluctant or unable to lend. By financing automobile purchases through installment credit, GMAC is effectively establishing one of the first large-scale private credit platforms. Over time, these initially sector-specific solutions evolved into a broad, diverse and increasingly sophisticated asset class now commonly referred to as alternative credit. 

Source: Preqin

The alternative credit landscape

Alternative credit encompasses lending strategies that sit outside traditional fixed income, such as government bonds or publicly issued corporate debt. Private debt funds held approximately USD 1.7 trillion in assets at the start of 2025, up from roughly USD 1.1 trillion in 2020, and industry estimates project growth to around USD 4.5 trillion by 2030. Within this broad universe, several segments play distinct roles, each with differentiated risk, return, and liquidity characteristics.

• Direct lending
  Direct lending funds provide bespoke loans to small and mid-sized companies that lack efficient access to syndicated loan markets or traditional bank financing. These investments typically feature floating-rate interest, seniority in the capital structure, and collateral backing, offering investors an attractive combination of yield, downside protection, and inflation sensitivity.
• Collateralized loan obligations (CLOs)
  CLOs are special purpose vehicles (SPVs) that hold diversified pools of senior secured corporate loans and issue tranche-based securities. Senior tranches benefit from substantial credit enhancement and offer lower yields, while subordinated tranches absorb greater risk in exchange for higher return potential.
• Infrastructure debt
  Infrastructure debt finances assets such as transportation networks, renewable energy projects, utilities, and social infrastructure. These investments are often supported by long-term contracts or regulated revenues, resulting in stable cash flows and relatively high recovery rates, making them appealing to income-oriented investors.
• Non-performing loan (NPL) strategies
  NPL funds acquire impaired or defaulted loans at a discount and seek to generate value through restructuring, collections, and collateral sales. Cash flows are derived from reperforming loans, borrower repayments, negotiated settlements, and asset disposals.
• Venture debt
  Venture debt provides growth-stage companies with financing that is less dilutive than equity and typically complements venture capital funding. Structures often involve floating‑rate loans; allowing yields to increase in higher interest rate environments, alongside potential equity participation through warrants.
• Commercial real estate (CRE) debt
  CRE debt funds finance a range of property types and lifecycle stages through instruments such as senior mortgages, bridge loans, and construction financing, giving investors the ability to target sepcific risk-return profiles across geographies, asset classes and market cycles.

Why investors are increasing their allocations to private debt

Private debt has been gaining popularity as investors seek attractive risk–return profiles in today’s market. Its key benefits include:

• Higher yields than comparable public bonds.
• Lower observed volatility, since assets are not marked-to-market daily.
• Stronger downside protection through secured and covenanted loans.
• Diversification benefits relative to public fixed income.
• Resilience in inflationary or rising-rate environments, often achieved via floating-rate structures.

However, investors should also weigh important risks:

• Illiquidity and infrequent valuation.
• Structural and subordination risks in certain strategies.
• Prepayment risk, which can reduce expected returns.
• Concentration risk by sector, sponsor, or geography.

Historically dominated by institutional investors, private debt is now increasingly accessible to retail investors due to regulatory changes and innovative fund structures. Policymakers are encouraging the channeling of retail capital into long-term investments, while asset managers are introducing vehicles that provide periodic liquidity alongside private credit exposure.

For individuals, the main attractions are:

• Higher income and diversification relative to traditional bonds.
• More stable and predictable cash flows compared with private equity.
• Lower entry ticket sizes, making exposure more achievable.

Key access routes for retail investors include:

• Business development companies (BDCs): Publicly traded or closed-end vehicles, primarily in the US, that provide liquid exposure to private loans along with regular income distributions.
• ELTIFs and European private credit funds: Especially under ELTIF 2.0 (2024), these vehicles offer lower minimum investment thresholds, greater structural flexibility, and semi-liquid features designed to make private credit more accessible to retail investors.

Key considerations for fund managers entering retail private debt 

Managers seeking to distribute private debt strategies to retail investors face several implementation challenges:

• Operational and regulatory complexity: Serving a broader, more granular investor base requires enhanced systems, processes, and compliance frameworks.
• Liquidity risk management: In semi-liquid structures, where redemptions may be quarterly or constrained by underlying portfolio liquidity, careful planning is required.
• Valuation of illiquid loans: Typically conducted quarterly using internal models, borrower financials, and comparable transactions. Robust governance is essential to support fair value, often involving independent valuation firms or third-party appraisers, internal oversight teams, and dedicated valuation committees.
• Enhanced transparency and reporting: Standardized pre-contractual disclosures help investors compare products and build confidence in the strategy.

PRIIPs requirements for direct lending funds

As direct lending funds are increasingly distributed to EU retail investors, they fall under the PRIIPs regulation, which mandates a standardized KID summarizing risk, performance scenarios, costs, and liquidity. A similar framework applies in the UK under the FCA.

PRIIPs categorization 

Direct lending funds are typically classified into two categories, which determine how risk, performance, and costs are calculated and disclosed:

• Category 1 (Cat 1): Illiquid funds with NAV and asset valuations less frequent than monthly (most traditional private credit funds).
• Category 2 (Cat 2): Funds with at least monthly NAV and liquidity aligned to redemption terms.

The frequency of asset valuation or the proxy selected can influence the assigned category.

Risk metrics under PRIIPs 

• Cat 1: Standard risk indicator (SRI) of 6 (on a 1–7 scale), reflecting illiquidity and limited price observability.
• Cat 2: SRI is derived from:
  • Market risk measure (MRM): Based on historical data or proxies.
  • Credit risk measure (CRM): Based on portfolio concentration and borrower quality, monitored and updated over time.

Performance scenarios 

• Cat 1: Model-based scenarios appropriate for illiquid assets with limited historical data.
• Cat 2: Data-driven scenarios requiring long time series and robust proxy selection.

Cost disclosure 

Private debt funds must disclose one-off, ongoing, transaction, and incidental costs in the KID. Methodologies vary depending on Cat 1 or 2 classification and the recommended holding period.

ELTIF funds must additionally publish an annual overall cost ratio in the prospectus, linked to costs reported in the PRIIPs KID.

Market implications 

• Category 1

Advantages: Accurately reflects true illiquidity and applies conservative risk assumptions.

Disadvantages: The high SRI of 6 may reduce appeal for retail investors.

• Category 2

Advantages: Risk metrics can better capture portfolio dynamics and may result in a lower SRI.

Disadvantages: Heavy reliance on data proxies and regulatory assumptions can introduce uncertainty.

To address these challenges, many ELTIF managers are launching semi-liquid direct lending strategies, holding a portion of their assets in liquid instruments to accommodate redemptions and support Category 2 classification. This approach illustrates the close interplay between regulatory categorization, product design, and investor expectations in the ongoing retail expansion of private credit.

Conclusion

Private credit’s rapid expansion is reshaping capital markets, with direct lending at the center of this evolution. Once a niche, institutional-focused strategy, it is increasingly being adapted for retail distribution through vehicles such as ELTIFs. As this trend toward retailization continues, regulatory frameworks like PRIIPs play a critical role in standardizing how risk, return, and costs are communicated to non-professional investors.

Within this context, data constraints—particularly the scarcity of robust benchmarks—make the design of proxies and analytics a core element of product manufacturing. Proxy choices directly influence fund categorization, SRIs, and performance scenarios, shaping how private credit is perceived and understood by retail investors. As the retail footprint of private credit grows, the quality and integrity of these disclosures will become as important to the asset class’s development as the ongoing momentum of fundraising itself.