Understanding Private Credit Investing Strategies and Risks

In today’s volatile fixed-income environment, private credit investing has emerged as a compelling alternative for wealthy individuals and families seeking portfolio diversification beyond traditional markets. Private credit investing can offer potentially higher yields and unique investment structures, unlocking potential for your portfolio inaccessible to most retail investors.

As institutional capital continues flowing into this space, ultra-high-net-worth (UHNW) investors increasingly wonder, “Is investing in private credit a good idea?” “How do I use private credit allocations to enhance returns while managing risk?” 

Admittedly, most of the answers to these questions aren’t clear cut. Navigating these alternative investment opportunities requires understanding their distinctive characteristics, investment approaches, and inherent challenges before committing capital. 

 At Avidian Wealth Solutions, we provide qualified investors with access to select private credit opportunities that may not be widely available through traditional investment platforms. Our team can help you evaluate whether these types of strategies align with your overall investment goals and risk tolerance. Schedule a conversation with us today to explore how our tailored private credit strategies can complement your investment portfolio. 

What is private credit investing?

Private credit investing refers to non-bank lending, in which capital is offered to businesses or individuals outside of traditional financial institutions. These loans can range from direct lending to structured credit and distressed debt structures. Private credit investors earn returns through interest payments and potential appreciation of debt instruments.

Unlike public bonds, private credit investments are often negotiated directly between lenders and borrowers, leading to customized terms and structures. This flexibility allows for tailored risk-reward dynamics but also requires diligent due diligence and monitoring.

Real-world applications of private credit investing

Private credit investing is not just a theoretical strategy — it plays a crucial role in real-world financial markets, supporting businesses and offering investors with unique opportunities. Here are some common applications where private credit is making an impact:

1. Middle-market business expansion: Many privately held companies lack access to traditional bank loans or prefer more flexible financing solutions. Private credit can help these businesses secure capital for expansion, acquisitions, or operational improvements while offering attractive yields for investors.
2. Real estate infrastructure and development: Private credit is frequently used to fund large-scale real estate projects, such as commercial developments, multifamily housing, and infrastructure upgrades. Asset-backed lending within this sector can offer stable, collateralized returns.
3. Corporate debt refinancing: Companies with existing high-interest debt may seek private credit solutions to refinance at more favorable terms. This strategy can reduce default risk and improve borrower creditworthiness.
4. Venture debt for startups: Fast-growing startups often require additional capital beyond equity financing. Venture debt allows them to maintain control while securing funds, giving investors exposure to high-growth sectors without direct equity risks.

Private credit vs private equity investing

While the terms “private credit investing” and “private equity investing” sound similar (and can often be mistaken for one another), they are distinct investing strategies with their own unique goals and challenges. Both private credit and private equity involve private market investments, but they serve different purposes and carry distinct risk profiles:

	Private credit investing	Private equity investing
Investment type	Loans to businesses/individuals	Ownership stakes in companies
Risk level	Lower (secured by assets or structured terms)	Higher (dependent on company performance)
Return profile	Predictable income from interest payments	Potential for high long-term gains
Liquidity	Low (long-term lockups)	Very low (capital tied up for years)
Investor involvement	Limited; focus on risk assessment and loan terms	High; often requires active management and operational expertise
Market exposure	More stable, less correlated with public markets	Highly sensitive to economic cycles and market trends

What are the “best” private credit investing strategies?

There is no universal “best” approach to private credit investing. Instead, strategies should align with an investor’s risk tolerance, liquidity needs, and return expectations. However, some widely used private credit strategies include:

• Direct lending: This involves making loans directly to middle-market companies, often with structured terms and collateral backing. Direct lending can offer attractive yields but requires careful risk management.
• Distressed debt: Investors purchase debt from financially troubled companies at a discount, with the potential for significant upside if the business recovers. This strategy carries higher risks but can offer compelling returns.
• Mezzanine financing: A hybrid of debt and equity, mezzanine loans offer subordinated debt with higher yields, often including equity kickers such as warrants or convertible options.
• Asset-based lending (ABL): Loans backed by tangible assets such as real estate, equipment, or receivables can mitigate some credit risks while offering stable returns.
• Special situations lending: This strategy focuses on unique opportunities, such as bridge loans, litigation finance, or niche sectors where traditional banks may not operate.

At Avidian, investors benefit from a tailored approach, gaining access to private credit strategies that align with their financial goals and risk tolerance.

What are the risks in private credit investing?

Can you make money as a private lender? You can; but like any investment, private credit carries inherent risks that must be carefully assessed. Some key risks include:

• Borrowers may fail to repay loans, leading to potential losses. Mitigating this risk requires thorough due diligence and strong underwriting standards.
• Private credit investments are often illiquid, meaning investors may not be able to exit their positions quickly if needed.
• Changes in interest rates can affect the pricing and returns of private credit instruments, particularly those with floating-rate structures.
• Private credit markets can be impacted by regulatory changes, economic downturns, and shifts in borrower creditworthiness.

A structured approach to portfolio construction and risk management can help investors navigate these challenges effectively.

How professional investment management can help

For UHNW investors interested in private credit, professional investment management offers significant advantages. Avidian Wealth Solutions offers access to private credit opportunities with lower buy-in minimums compared to large national firms. This allows investors to choose to participate in diversified private credit portfolios without committing excessive capital upfront.

Working with an investment management firm also offers rigorous due diligence, with a thorough vetting process to help assess borrower creditworthiness and structure optimal lending terms.

Additionally, an investment risk management firm like Avidian offers portfolio diversification, and access to a range of private credit investments across industries and risk profiles to help balance risk vs reward in investing. 

Lastly, a trusted wealth advisor can conduct ongoing monitoring of your investments’ performance. That means active oversight and risk management to adapt to market conditions and borrower performance.

Explore private credit investing opportunities with Avidian

Private credit investing presents a compelling opportunity for UHNW individuals seeking to diversify their portfolios and enhance income potential. However, navigating this complex space requires careful strategy selection and risk assessment.

Avidian Wealth Solutions offers UHNW investors access to private credit investments at competitive entry points, making private market opportunities more attainable. By leveraging Avidian’s experience and structured investment approach, qualified investors can explore private credit strategies tailored to their financial objectives.

Ready to elevate your investment strategy? Let’s talk! To learn more about how private credit investing can fit into your portfolio, reach out to us at one of our offices in Austin, Houston, Sugar Land, or The Woodlands today.

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