# Private Credit Explained for Individual Investors (2026)

> Private credit is the fastest-growing asset class almost nobody can define. What it is, why it grew, and what individual investors can actually access.

Canonical: https://matadornotefund.com/blog/private-credit-explained-individual-investors
Author: Apurva Sanghavi
Published: 2026-10-02T17:57:53.560Z
Tags: Debt Fund, Private credit, Private Lending, Real Estate Investing

## The one-sentence definition

Private credit is lending done by someone other than a bank or the bond market.

That is the whole definition. A fund, a specialty finance company or a family office negotiates a loan directly with a borrower, funds it, holds it, and collects interest until it is repaid. The loan is not listed, not traded on an exchange, and usually has no daily price. The lender's return is the interest rate, plus fees, minus losses.

Everything else you read about private credit is a description of which borrowers, which collateral and which structure. The economics are the same ones a bank has run for centuries: lend at a rate, get repaid, lose less than the spread you charged.

## Why it exists at this size

Three forces, in order of importance.

Banks withdrew from parts of the lending market after the 2008 financial crisis, and capital rules kept them out. Post-crisis regulation, including the Basel III framework and its later revisions, raised the capital a bank must hold against certain loans, particularly loans to leveraged companies and loans against transitional or non-stabilised real estate. When a category of loan becomes expensive for a bank's balance sheet, the bank stops making it at scale. The borrowers did not disappear. Non-bank lenders took the business.

Capital found the trade attractive. Pension funds and insurers needed yield, and a floating-rate senior loan with contractual cash flow fits an insurance liability better than most equity. Institutional allocations to the category rose accordingly. According to Preqin's Global Alternatives Report, global private credit assets under management reached approximately $1.7 trillion at the start of 2026, with roughly $1.1 trillion of that in North America, and other industry forecasts built on the same data expect the category to exceed $2 trillion within the year.

Borrowers found it worth paying for. A private lender can commit in days, hold the whole loan, and amend terms with a phone call rather than a bondholder vote. Speed and certainty have a price, and borrowers who need them pay it. That premium is the origin of the yield.

Note what is not on this list: a new financial technology, or a discovery that lending is safer than previously understood. The growth is a transfer of activity from regulated balance sheets to funds, with the credit risk moving along with it.

## The map of private credit

The label covers at least four businesses that share little beyond the word "private".

| **Segment** | **Who borrows** | **Typical collateral** | **Typical term** |
| --- | --- | --- | --- |
| Direct lending | Mid-sized companies, often private-equity owned | Company cash flow, a lien on business assets | 5–7 years, floating rate |
| Asset-based lending | Companies with receivables, inventory, equipment | Specific pledged assets | 1–5 years |
| Specialty finance | Consumers and small businesses, via platforms | Pools of small loans | Varies |
| Real estate credit | Property owners, developers, investors | A recorded lien on real property | 6 months to 10 years |

Direct lending is the segment that gets written about. When a newspaper reports that private credit has taken over corporate lending, it means direct lending to companies backed by private equity sponsors. The underlying credit is a company's ability to generate cash, and the security is a claim on a business that may be worth very little if the business stops working.

Real estate credit is a different animal. The borrower is a property owner, the collateral is land and buildings, and the recovery analysis is an appraisal and a sales comparison rather than an enterprise valuation.

Within real estate credit, we occupy a small and specific corner: first-lien loans of roughly $150,000 to $1,000,000, on Texas real property only, generally 6 to 24 months, interest-only with a balloon, against a weighted portfolio LTV target of 65–75% with an 85% maximum. That is not a scaled-down version of a direct lending fund. It is a separate business with a separate risk profile, and it is small enough that almost no institution would bother with the individual loans.

## Why individuals mostly cannot access the famous version

The large direct lending funds that generate the headlines are typically closed to individuals for structural reasons rather than snobbery.

Minimums run to $5 million or more for a commingled institutional fund, and $25 million and up for a separate account. Fundraising happens through consultants and placement agents who are paid to call pension plans, not individuals. Capital-call structures require an investor to hold committed cash available for years. None of that suits someone allocating $100,000.

What is actually open to individuals:

**Business development companies (BDCs).** Registered vehicles that lend to middle-market companies. Listed BDCs trade daily, which gives liquidity and also gives you equity-market volatility on a credit asset. Non-traded BDCs offer periodic repurchases instead. Fee loads vary widely and are worth reading line by line.

**Interval funds.** Registered closed-end funds that offer to repurchase a set percentage of shares, often 5%, at stated intervals. They accept ordinary investors and provide real diversification. The repurchase limit is the point to understand: in a stressed quarter, redemption requests can exceed the offer and be prorated.

**Private funds under Regulation D.** Smaller funds offered directly, restricted to accredited investors. Matador Note Fund 1 LLC is one of these, offered under Rule 506(c) with a $5,000,000 maximum committed equity and a $50,000 minimum, with accredited status independently verified. Under 506(c) a sponsor may advertise publicly, which is why you can read this page at all, and in exchange every investor's accredited status must be verified rather than self-certified.

The trade across the three is consistent. More liquidity and more regulatory disclosure generally come with more fee layers and less direct contact with the person making credit decisions.

## What an individual gets that an institution does not

Size is the one real advantage a small investor has, and it is worth being precise about why.

A $30 billion credit fund must deploy in increments large enough to matter. A $5 million commitment to a strategy is a rounding error that still consumes a full diligence cycle, an investment committee slot and ongoing monitoring. So the institution passes, not because the strategy is bad, but because it cannot move the needle.

That leaves a set of managers doing loans too small to interest large capital. Our average loan across the manager's Texas lending record has been roughly $220,000, on 60 loans and $13.3 million of principal funded since October 2019. No institutional direct lending desk is underwriting $220,000 loans one at a time.

Say the unflattering part first. Small also means concentrated, operationally thin, and dependent on a handful of people. A small manager has fewer staff, less redundancy, and no capacity to absorb a large loss quietly. If the person doing the underwriting stops working, there is no bench. Institutional size buys real things: audited processes, third-party administration, key-person coverage, and the ability to survive a bad year.

The honest version of the pitch is that a smaller manager can lend in a niche a large one cannot reach, and you take specific operational and concentration risk in exchange for that access. Both halves are true.

## The criticisms, taken seriously

The category has drawn substantial criticism from serious people. Four charges recur, and they deserve straight answers rather than rebuttals.

**Valuation opacity.** Private loans are not marked by a market. Managers value them using models and judgment, and a loan can be carried at par until the day it is not. This is a real defect. It flatters reported volatility and it can delay recognition of trouble.

**Covenant erosion.** Competition for direct lending deals pushed covenants out of loan documents. Covenant-lite lending removes a lender's early warning system, so a borrower can deteriorate for several quarters before the lender has any contractual right to act. According to Proskauer's deal data, 21% of private credit deals were covenant-lite in 2025, up from 4% in 2023 — and in the upper-middle market (borrowers with $50 million or more of EBITDA), around 30% of recent deals carry no financial maintenance covenant at all. Smaller borrowers still mostly keep full covenant packages; this erosion concentrates in the larger end of the market.

**Leverage layering.** Funds borrow to lend. When a fund uses a credit facility, and its borrowers are themselves leveraged, and the end investor borrowed to invest, the same underlying cash flow supports several stacked claims. Stress at the bottom travels up fast.

**Correlated losses in a downturn.** The category has grown mostly in a benign credit environment. Many of these portfolios have not been tested by a genuine recession at current size, and losses in a downturn would not be independent across managers lending to similar borrowers.

Now, which of these apply to a short-duration first-lien real estate loan against hard collateral, and which do not.

Valuation opacity applies, but less severely. A six-to-twenty-four-month loan either pays off or it does not, and the answer arrives quickly. Over a short term, the mark matters less than the payoff, and a portfolio of short loans turns over fast enough that reported values are tested continually rather than annually.

Covenant erosion largely does not apply in the same form. The protection in this lending is not a financial covenant on a company's earnings. It is the LTV at origination and the ability to foreclose, which in Texas runs non-judicially under the power of sale in the deed of trust.

Leverage layering does apply and should be asked about directly. Our fund may use a note-on-note credit facility within the limits set in the PPM. That facility would raise returns when loans perform and deepen losses when they do not. Ask any fund you look at for the facility's size, its cost, its advance rate and its covenants.

Correlated losses apply fully, and in a geographically concentrated portfolio they apply more than average. We lend only in Texas. A severe Texas housing downturn would hit many loans at once, and diversification across 40 Houston-area loans does not protect against a Houston-wide decline in values.

Whether all this adds up to a bubble is a separate argument, and we have written it up separately rather than settling it in a definitions post. See "Is private credit in a bubble" below.

## What to ask before you allocate

Five questions. They are more useful than any performance chart.

1. **What is the lien position, and what is the LTV against which value?** Senior or junior, and measured against as-is value, purchase price, or after-repair value. The answer changes the downside completely.

2. **What does the fund borrow, at what cost, and on what terms?** Fund-level leverage, advance rate, and what triggers a margin call or a facility default.

3. **What happens when a loan stops paying?** Who services it, who decides to foreclose, how long enforcement takes in that jurisdiction, and what the manager's actual record of workouts looks like.

4. **What are the fees, including the ones below the headline?** Management fee, profit split, origination points retained by the manager rather than the fund, servicing fees, and administration costs.

5. **How do I get out, and what happens if others want out at the same time?** Lock-up, notice period, quarterly caps, and whether redemptions can be suspended. Our own terms are a 24-month lock-up, then a written request with 90 days' notice, processed quarterly at up to 25% of balance per quarter and subject to fund liquidity.

A manager who answers all five in plain language without a slide deck has told you more than a track record does.

## Frequently asked questions

**Q: What is private credit?**<br />A: Private credit is lending done by someone other than a bank or the public bond market. A fund or other non-bank lender negotiates a loan directly with a borrower, holds it, and collects the interest. The loans are not traded on an exchange and usually have no public price. The category covers lending to companies, lending against assets such as equipment or receivables, and lending against real estate.

**Q: How is private credit different from private equity?**<br />A: Private equity buys ownership; private credit makes loans. An equity owner is paid last and has unlimited upside. A lender is paid first, on a contractual schedule, and the best case is being repaid with interest. In a bad outcome the lender's claim sits ahead of the owner's, which is why credit returns are lower and more stable in good years and less catastrophic in bad ones.

**Q: Can individual investors invest in private credit?**<br />A: Yes, through three main routes. Business development companies are listed or non-traded vehicles that lend to middle-market companies and are open to most investors. Interval funds are registered funds offering periodic, limited redemptions. Private funds under Regulation D are open only to accredited investors and usually carry minimums from $25,000 to $250,000. Each route has different fees, liquidity and disclosure.

**Q: Is private credit riskier than bonds?**<br />A: It is different rather than uniformly riskier. Private credit is generally less liquid than a listed bond and often less transparently priced, and borrowers are typically smaller and more leveraged than investment-grade issuers. Against that, many private loans are senior, secured and floating-rate, and the lender negotiates terms directly. The honest summary is that you are paid for illiquidity and complexity, and you should check that you are paid enough.

We write a short letter for accredited investors on Texas lending conditions and how this corner of private credit is actually behaving. Join the newsletter to get it.

**Important disclosures.** This article is for informational purposes only and is not an offer to sell or a solicitation of an offer to buy any security. Any offer is made only through the Private Placement Memorandum, Operating Agreement and Subscription Agreement of Matador Note Fund 1 LLC, which govern in all cases and should be read in full, including the risk factors. Interests are offered only to accredited investors as defined in Rule 501 of Regulation D, pursuant to Rule 506(c); accredited status must be independently verified. Real estate debt investments involve significant risk, including possible loss of principal. The 8% preferred return is non-cumulative and is payable only from available distributable cash at the manager's discretion; it is not guaranteed. The 8–12% figure is a target objective, not a promise or projection of results. Targeted returns are not guarantees of future performance, and past performance is not indicative of future results. Figures describing prior lending are the manager's own lending record and are not audited fund performance. Nothing here is legal, tax or investment advice. Matador Lending LLC is not a registered investment adviser.

## What to read next
- [Is private credit in a bubble](/insights/is-private-credit-in-a-bubble/)
- [Debt funds vs bonds and CDs](/insights/debt-funds-vs-bonds-and-cds/)
- [What is a real estate debt fund](/insights/what-is-a-real-estate-debt-fund/)