{"id":18354,"date":"2026-08-13T12:58:05","date_gmt":"2026-08-13T19:58:05","guid":{"rendered":"https:\/\/www.wealthfront.com/blog\/?p=18354"},"modified":"2026-08-13T12:58:09","modified_gmt":"2026-08-13T19:58:09","slug":"private-credit-concerns-fees-returns","status":"publish","type":"post","link":"https:\/\/www.wealthfront.com/blog\/private-credit-concerns-fees-returns\/","title":{"rendered":"What Investors Should Know About Private Credit, Wall Street\u2019s Favorite Thing to Argue About"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">Private credit has been a big topic in the financial press this year, inspiring headlines about \u201c<a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2026-04-07\/private-credit-worry-sparks-slide-in-booming-part-of-muni-market\">worry<\/a>,\u201d \u201c<a href=\"https:\/\/www.wsj.com\/finance\/investing\/two-big-loan-defaults-add-to-pain-in-private-credit-funds-b179351c?eafs_enabled=false\">pain<\/a>,\u201d <a href=\"https:\/\/www.oaktreecapital.com\/insights\/memo\/cockroaches-in-the-coal-mine\">cockroaches<\/a>, and <a href=\"https:\/\/www.cnbc.com\/2026\/06\/04\/blackstone-caps-withdrawals-private-credit.html\">investors asking for their money back<\/a>. You may have seen <a href=\"https:\/\/www.ft.com\/content\/6ee0ccdd-c836-4f8a-a02d-51248d6e12ac?syn-25a6b1a6=1\">discussions<\/a> of whether its problems could contaminate the rest of the financial system\u2014but also about whether more investors <a href=\"https:\/\/www.wsj.com\/finance\/investing\/blackstone-rolls-out-new-private-market-fundsthis-time-with-vanguard-09a981b0?eafs_enabled=false\">should have access to it<\/a>. This post will fill you in on what private credit actually is: Why it\u2019s useful, why some people are concerned about it, and whether you should be one of them.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Let\u2019s start with what it is: Loans. \u201cCredit\u201d means lending. When you make a purchase on your credit card, you\u2019re getting a loan, and you don\u2019t need to start paying it back until the next monthly statement comes (or later, if you want to run a balance, but we don\u2019t recommend that). In private credit, the borrowers are companies and the lenders are private credit funds.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The \u201cprivate\u201d part of private credit refers to the fact that the loans aren\u2019t traded publicly the way bonds or stocks are. While a lender can sell a loan to another party, the loans aren\u2019t listed on any sort of public exchange\u2014sales are negotiated privately. (If the idea of \u201cbuying a loan\u201d is confusing to you, think of it as buying the right to get paid back by the person doing the paying back.)<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">There are other ways for companies to borrow money. One is a traditional bank loan, and another is by issuing bonds. Companies may prefer borrowing from a private lender for a variety of reasons:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Working with a private credit lender can be faster than the alternatives<\/li>\n\n\n\n<li>Private credit lenders may allow \u201cbespoke\u201d terms that give borrowers flexibility over when they receive and pay back their loan<\/li>\n\n\n\n<li>Issuing bonds can be expensive, requiring issuers to pay fees to investment banks, attorneys, and ratings agencies<\/li>\n\n\n\n<li>Private credit managers may be willing to make loans to riskier companies than a bank is willing to lend to<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">The last point is important. The companies borrowing via private credit tend not to be household names. They are typically privately owned and less mature, and might not be rated as particularly creditworthy if they did decide to issue bonds.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A private credit fund can either be <em>traded<\/em> or <em>non-traded<\/em>. Traded funds have shares that are available on exchanges, like stocks or ETFs. (We realize we just said you can\u2019t buy private credit loans on an exchange, and that\u2019s true; what you can buy on an exchange are shares of&nbsp; funds that <em>issue<\/em> private loans.) Non-traded funds don\u2019t have this feature. If an investor in a non-traded fund wants their money back, they can\u2019t just sell their shares; they need to make a \u201credemption request\u201d to the fund manager. (This will come up again in a moment.)<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>The benefits of private credit (for investors)<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Private credit gives smaller, less established companies easier access to capital. And the source of funding for these kinds of loans\u2014where the lenders get the money they\u2019re lending\u2014is important.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To understand why, we first need to think about how traditional banks work, which is by taking <em>in<\/em> deposits and then lending that money <em>out<\/em> to borrowers. This creates what\u2019s called a maturity mismatch: You can withdraw your money from a bank whenever you want, but the loans that the bank makes with your money might not be paid back for five or ten years or even longer. If bank depositors all ask for their money back at once, the bank might not have enough cash on hand to satisfy all of the requests, and if bank depositors are concerned about a bank\u2019s health they may try to get their money out before other depositors can. That\u2019s what a \u201crun\u201d on a bank is, and banks have incentives to maintain depositor confidence, and keep a certain amount of cash on hand, in order to prevent one.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But unlike bank depositors, private credit investors can\u2019t just pull their money out at any time. If they\u2019re in a traded fund, they can sell their shares to someone else, but only if someone is willing to buy at the price they want. If they\u2019re in a non-traded fund, they have to make a redemption request, and fund managers typically only give out redemptions on a quarterly basis in limited amounts. A typical policy\u2014like the one used by the high-profile <a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2026-04-22\/blackstone-private-credit-fund-looks-to-sell-high-grade-bonds\">Blackstone Private Credit Fund<\/a>, for example\u2014allows up to 5% of a fund\u2019s assets to be withdrawn every quarter, which means it could take about five years for a single investor to get all of their money out.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In exchange for keeping their money locked up, though, investors usually get higher returns from private credit funds than they could get from similar but more liquid investments. This is called an \u201cilliquidity premium.\u201d (<a href=\"https:\/\/uncipc.com\/publication\/benchmarking-private-credit\/\">Estimates<\/a> typically put that illiquidity \u201cspread\u201d in the 2-3% range.) In theory, you can see how this works out for everyone: The investors can get a good return, and the private credit fund can make longer-term loans to up-and-coming companies that wouldn\u2019t otherwise be able to borrow.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">One more thing: Private credit funds can use leverage, meaning that they can borrow some of the money that they then loan out to individual companies. The maximum leverage allowed under US law is $2 per every dollar invested, though funds don\u2019t typically use this much\u2014leverage of around $1 is more common, meaning that for every dollar the fund gets from investors, it borrows one additional dollar from someone else\u2014like a bank\u2014to make loans.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">As with every other use of leverage for investing, this can enhance returns but also creates more risk. As an example: let\u2019s assume that a fund can borrow money at a 4% interest rate, and make loans at an average rate of 6%. By taking an additional dollar of leverage for each dollar invested in the fund, returns increase from 6% to 8% (6% earned on each dollar from investors, and an additional 2% on the borrowed dollars). Of course, this creates more risk as well. If the fund has $2 in loans for every $1 invested, then a decrease of 10% in the value of the loans causes a 20% drop in the value of the fund.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>The drawbacks of investing in private credit<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">There are a few reasons why an investor might decide that a particular private credit fund\u2014or private credit in general\u2014is not the right use of their money. These can be grouped into a few categories.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>High fees. <\/strong>Fees in private credit tend to be significantly higher than what you\u2019d pay to invest in, for example, a corporate-bond ETF. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the iShares Broad USD High Yield Corporate Bond ETF (USHY), for instance, respectively have expense ratios of 0.14% and 0.08%, as of publication. Private credit managers, by contrast, typically charge management fees that run from 1% to 2% of assets, as well as incentive fees that kick in if a fund performs at an agreed-upon level or better\u2014called a hurdle<em>\u2014<\/em>in a given period. (Think of private credit performance this way: If a fund does a good job picking companies to make loans to, and they all pay their loans back, its returns are good; if it does a bad job and a bunch of those companies go out of business and default on their loans, its returns are poor.)&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Some funds also issue catch-up fees to their managers. (These function to ensure that the fund gets a cut of all returns during periods in which it reaches the hurdle rather than just a cut of the returns over and above the hurdle. If that sounds a bit convoluted to you, the point is: It\u2019s another fee.) Funds can also charge servicing fees to offset transaction costs and sales fees for the privilege of making an initial investment into the fund.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To see how much fees can eat into returns, let\u2019s assume an investor makes a one-time deposit of $100,000 into a fund that charges the following fees, which are all in the range you might see in the industry:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>1.25% management fee<\/li>\n\n\n\n<li>12.5% incentive fee with annual hurdle of 5%, plus a catch-up provision<\/li>\n\n\n\n<li>0.75% servicing fee<\/li>\n\n\n\n<li>2% sales fee<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">To keep things relatively simple, we\u2019ll assume the fund\u2019s investments earn a 10% return each calendar year.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Right off the bat, we need to deduct the sales fee from the invested total. This means the investor only really invests $98,000. The annual investment return of 10% becomes 8% after deducting the 1.25% management fee and 0.75% servicing fee, and that 8% return exceeds the hurdle rate, so the manager earns incentive fees. The exact incentive fee in this example, accounting for the catch-up provision, would be 1% (12.5% * (8% &#8211; 5.71%) + 0.71%)), which reduces investor return down to 7%. Assuming a 10-year investment, the investor ends with a total value of $192,780.80. This is equivalent to a 6.78% return earned each year, meaning fees have reduced the return by more than 3.2% annually.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This example was simple but realistic. Some managers\u2019 overall fees may be lower, but some may be higher.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Illiquidity. <\/strong>Illiquidity can be a good thing, preventing panic runs on funds that might ultimately deliver good returns. It can also be associated with the aforementioned liquidity premium\u2014but keep in mind that this is not a free lunch. Investors need liquidity sometimes for good reasons.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Deceptive marketing. <\/strong>The final caveat we want to make is related to the marketing of private credit funds\u2014and illiquid investments in general. Because the individual loans made by private credit funds don\u2019t trade, they don\u2019t have easy-to-view prices the same way stocks or bonds do. Traded funds have a market price that changes every day, but the managers of these funds don\u2019t officially assess the values of each of their loans nearly that frequently. This can make the returns of private credit funds look remarkably, and deceptively, smooth. It can also make correlations between private credit and other asset classes look deceptively low. This has led some funds to market private credit as \u201clow volatility\u201d or \u201clow correlation,\u201d or to say that it \u201cholds up well in times of stress.\u201d&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">These are claims that we don\u2019t believe are true. The true market values of private credit funds\u2019 investments change frequently whether or not managers choose to assess them. Infrequent price updates make investments look less volatile, and less responsive to the movements of other assets, than they really are. (Critics call this \u201cvolatility laundering.\u201d) Funds are also sometimes accused of a related practice called \u201c<a href=\"https:\/\/www.wsj.com\/finance\/investing\/hamilton-lane-private-assets-alternative-funds-8862f32e\">NAV squeezing<\/a>,\u201d which refers to buying a group of assets at a discount to its most recent official \u201cnet asset value,\u201d then immediately declaring that the assets are now worth that previously reported NAV. In other words, it creates an on-paper gain\u2014which can be touted in marketing materials\u2014without any actual change to the conditions of the assets in question.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>The broader concern, for investors and everyone else<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">We mentioned recent headlines about private credit, some related to major firms like Blue Owl that have <a href=\"https:\/\/www.wsj.com\/finance\/investing\/blue-owl-fund-private-credit-d896719f?eafs_enabled=false\">marked down the value of their funds<\/a> under pressure. These concerns aren\u2019t just about the plight of investors in specific funds, though. Rather, the worry is that failures in private credit could have significant repercussions across the broader economy, especially at a time when they are <a href=\"https:\/\/www.nytimes.com\/2026\/04\/23\/your-money\/401ks-and-similar-plans\/401k-private-credit-crypto.html?eafs_enabled=false\">increasingly being advertised to individual investors<\/a>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">One reason for this is that private credit firms have done a lot of lending to software companies, and some observers fear (or postulate) that AI coding agents will make developing software so easy that it will put some software companies out of business. The worst-case scenario here is that the private credit sector could experience a crash if enough software companies stop paying back their loans, which would then threaten major traditional banks (because, as we mentioned above, those banks often lend to private credit firms).<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">While it\u2019s certainly possible AI could diminish the prospects of some younger software companies, we don\u2019t think that this issue is existential to private credit. Private credit funds tend to be well-diversified within and across industries. The amount of losses that it would take for a fund to need to close down (or \u201cblow up\u201d) is quite large.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Another, more technical concern is that the return premium associated with the industry may be lower going forward than it was historically. Illiquidity used to command a premium because all things equal, being \u201clocked in\u201d to an investment was unattractive. Now, however, the market\u2019s posture towards illiquidity has changed somewhat. The ability to point to a private investment whose price hasn\u2019t changed in a period where prices of other assets have declined is attractive to some investors, even if the prices aren\u2019t real (in the sense that the private credit manager couldn\u2019t actually sell the loans at the prices they claim). That is, the illiquidity becomes a feature rather than a bug. One implication of this is that some investors may be willing to invest in private credit even if the expected returns aren\u2019t any better than more-liquid ones. If illiquidity is no longer a negative that investors have to tolerate, but instead a positive that they actively seek out, then the return premium associated with it may diminish or disappear.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>How to decide if private credit is right for your portfolio<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Private credit is an enormous asset class. We advise anyone considering an investment in it (or in private assets generally) to understand the impact fees could have on their returns, and the potential consequences of illiquidity in an emergency. Moreover, we encourage investors to ignore marketing and form reasonable estimates of true volatility and correlations when evaluating a private credit in the context of a broader portfolio. You should consider investing in it if you are comfortable with the illiquidity and potential volatility, and you believe that it will benefit your portfolio, even after all the fees. And of course, there are many historically high-quality investment options\u2014like the products we offer\u2014that provide liquidity and what we believe can be compelling after-tax returns at a lower annual cost.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Private credit has been a big topic in the financial press this year, inspiring headlines about \u201cworry,\u201d \u201cpain,\u201d cockroaches, and investors asking for their money back. You may have seen discussions of whether its problems could contaminate the rest of the financial system\u2014but also about whether more investors should have access to it. This post [&hellip;]<\/p>\n","protected":false},"author":10038,"featured_media":18357,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1272],"tags":[],"coauthors":[1270],"class_list":["post-18354","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-misc"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.7 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What Investors Should Know About Private Credit, Wall Street\u2019s Favorite Thing to Argue About | What Private Credit Is\u2014And How to Decide if You\u2019re Concerned About It<\/title>\n<meta name=\"description\" content=\"Private credit has become one of the biggest topics in finance. Learn why everyone\u2019s talking about it and what potential investors should know before deciding whether to get involved.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.wealthfront.com/blog\/private-credit-concerns-fees-returns\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What Investors Should Know About Private Credit, Wall Street\u2019s Favorite Thing to Argue About | What Private Credit Is\u2014And How to Decide if You\u2019re Concerned About It\" \/>\n<meta property=\"og:description\" content=\"Private credit has become one of the biggest topics in finance. 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