Private Credit Interval Funds

Private credit interval funds are currently drawing attention from investors looking to access private lending markets without locking up their capital indefinitely. These funds offer a middle ground and many opportunities—combining the income potential of private credit with scheduled opportunities to redeem shares, a feature rarely found in traditional private investments.

These funds focus on loans to private companies that don’t trade on public markets, which can result in higher yields than standard bond portfolios. Professional oversight and defined liquidity windows allow investors to explore income sources outside of traditional public fixed-income options.

What Are Private Credit Interval Funds?

The term “private credit” generally refers to loans made to companies that do not trade publicly on an exchange. These loans often take the form of direct lending or asset-backed structures, opening possibilities for yields that differ from what you might find in public bond markets. Since these companies do not issue publicly traded securities, investors sometimes anticipate higher interest rates as compensation for the added risk.

An interval fund is a type of closed-end fund that offers limited opportunities for investors to redeem their shares based on a predefined schedule. This structure differs from open-end funds, which typically allow daily share redemptions. Instead, interval funds set specific quarterly intervals when a portion of the fund’s shares can be sold back.

When private credit is packaged within an interval fund, investors can access loans that might otherwise be out of reach. This approach strives to balance exposure to illiquid private debt with predictable redemption windows. It also allows participants to participate in strategies once accessible only to large institutions, potentially diversifying sources of return within private markets.

Key Characteristics of Private Credit Interval Funds

Several features define private credit interval funds, shaping the risk and return potential. Each characteristic underscores how these products differ from typical open-end funds or standard fixed-income investments. Below are some of the most prominent characteristics:

Structured Liquidity and Scheduled Redemptions: Private credit interval funds typically outline their redemption windows in advance, giving you a predictable timeline for potential exits. Investors might be able to redeem a limited percentage of shares during these windows, which helps managers maintain enough capital for illiquid loans. This format balances investor liquidity needs with the fund’s requirement to invest in less tradable assets.

NAV-Based Share Pricing and Valuation Methods: These funds usually rely on a periodic calculation of net asset value (NAV), representing the estimated worth of the underlying loans. Because many of these loans are not traded on public exchanges, managers rely on third-party valuations and market comparisons. This approach aims to reflect real-time worth as accurately as possible, although it can introduce some uncertainty.

Yield-Focused Approach and Income Generation: Given the nature of their loans, private credit interval funds often pursue higher yields compared to traditional bond portfolios. You might see a focus on interest payments from senior secured, mezzanine, or other loan structures that aim to produce steady cash flows. The objective is to tap into credit niches that can provide regular income distributions.

Diverse Loan Types (Senior Secured, Floating-Rate, Mezzanine, etc.): These funds are not restricted to a single debt category. They may hold a mix of senior secured loans, floating-rate notes, and mezzanine investments. This variety spreads risk across multiple structures, hopefully helping to maintain steadier performance under different market conditions.

Comparing Private Credit Interval Funds to Other Credit Investments

Bond funds present an alternative for those who value daily liquidity. They often invest in a mix of corporate, government, or municipal bonds, but their yields can be comparatively lower than what private credit options may provide. Another drawback is that bond funds can be vulnerable to shifts in interest rates, which affect market values.

Private lending funds tend to target higher returns but usually expect multi-year lockup periods. They also can come with higher minimum investments and rigorous qualification rules. While this structure might deliver larger yields, it reduces flexibility for investors who might want the option to redeem shares more regularly.

Business Development Companies (BDCs) offer a publicly traded avenue to invest in private firms, yielding more fluid share transactions. However, BDCs can be more exposed to ups and downs in the stock market, which may result in more volatility than interval funds.

Private Credit ETFs exist, but they typically hold more liquid instruments to allow daily trading. By focusing on widely traded securities, they might miss out on some of the yield opportunities inherent in less liquid, direct-lending arrangements.

Please Note: Interval funds can have expense ratios that go as high as 3%.1 These can be substantially higher when compared to the average expense ratios of ETFs and open-end mutual funds, which have been recently found to be 0.58% and 0.99%, respectively.2

Benefits of Private Credit Interval Funds

Investors often consider private credit interval funds for specific financial objectives. From diversifying a broader portfolio to tapping into opportunities in less accessible segments, there are multiple appealing aspects. Below are some primary advantages worth keeping in mind when considering these funds:

Diversification Advantages: These products add a layer of variety when combined with stocks, bonds, and other holdings. By providing exposure to different debt structures, they can contribute to portfolio diversification in ways that standard fixed-income products might not.

Income Potential from Illiquid Markets: Because the underlying loans lack a secondary trading market, they can offer higher yields. Investors who want to generate regular cash flow may find these funds useful in an income-focused strategy.

Professional Management and Underwriting: Fund managers typically conduct thorough reviews of borrower creditworthiness and market conditions. This professional approach can be attractive if you prefer to delegate loan sourcing and monitoring tasks to a specialized team.

Moderate Minimum Investments: Unlike some private funds that ask for very large commitments, these interval products usually offer lower initial investment thresholds. This approach invites broader participation from investors who might otherwise be excluded.

Please Note: Traditional private credit funds frequently come with steep minimums, often starting in the high six figures and reaching into the millions.3 Interval funds, like those for private credit, are much more accessible by comparison. Some funds may let you get started with a minimum investment of $25,000.4

Risks and Drawbacks to Keep in Mind

While private credit interval funds have their upsides, there are a few drawbacks. Each carries unique risk elements tied to the nature of private debt and the fund’s structural constraints. Below are some challenges that investors might encounter:

Redemption Limitations and Suspension Risks: Scheduled redemptions can become an obstacle if market conditions make it challenging to liquidate assets in time. In extreme cases, a fund might limit or suspend redemptions to protect existing shareholders. This could hinder your ability to withdraw your investment promptly.

Credit Risk and Default Potential: Private loans can carry a higher possibility of default, as borrowers may have less financial stability than large public entities. Even with rigorous underwriting, there is no guarantee that borrowers will meet their obligations. If defaults rise, the fund’s overall performance could suffer.

Opaque Valuations and NAV Estimations: The process of pricing loans that do not trade on an exchange involves appraisal techniques and manager discretion. This means that valuation can be less transparent than in highly liquid markets. As a result, the calculated net asset value may not always reflect immediate realizable prices.

Higher Fee Structures: Some funds might apply management and performance fees that exceed those found in standard mutual funds. Because the managers often require specialized expertise and resources, these costs may be substantial. As a result, higher fees can eat into overall returns.

Economic Downturn Sensitivity: A slowdown in business cycles can hurt small or mid-sized borrowers, leading to higher delinquency or default rates. When companies struggle, interest payments might stall, impacting distribution levels. Thus, investors in these funds should be comfortable with the potential economic headwinds.

How to Evaluate a Private Credit Interval Fund

Choosing the right private credit interval fund involves looking at more than just past performance. Certain attributes can reveal how well the fund might align with your goals and comfort level regarding risk. Below are some points to explore:

Check the Prospectus: The prospectus spells out the fund’s investment mandate, risk profile, and use of leverage—details that aren’t always obvious from marketing materials. It’s also where you’ll find limits on asset types, borrower criteria, or redemption terms that could impact your expectations.

Fund Manager’s Track Record and Expertise: Assessing how long the manager has operated in the private credit arena can offer clues about the fund’s potential consistency. A manager who has navigated multiple market cycles may demonstrate more profound knowledge. Understanding the manager’s style and track record in similar strategies is often a good starting point.

Portfolio Composition and Loan Diversity: Some interval funds limit themselves to a narrow collection of loans, while others spread investments across different industries or collateral types. Checking whether the fund includes loans from real estate, manufacturing, or technology might help you gauge volatility. Allocating capital across varied asset classes can lower concentration risk.

Fee Structure and Transparency: Because fees can cut into returns, comparing one fund’s expense ratio and performance fees with others can be instructive. Examining the basis for those fees may also be beneficial, especially if the fund charges performance-based costs.

Redemption Process and Liquidity Provisions: Confirming whether the fund follows a quarterly, semi-annual, or other redemption cycle can help set your expectations. Each approach has unique constraints on how quickly you can access your money. Also, check whether the fund can refuse or delay redemptions in certain circumstances.

Reporting Quality and Fund Updates: Frequent and detailed updates on the fund’s holdings and performance can improve clarity. Reviewing past reports or statements can help you gauge how transparent the manager is. Timely communication can help investors stay informed.

Diversification is Key in Private Credit

When allocating to private credit, investors often face a choice between sector-specific strategies and broadly diversified interval funds. The latter can provide access to a wide range of sectors—including real estate debt, corporate direct lending, asset-backed lending, specialty finance, and infrastructure debt—helping to reduce the risk associated with concentrated exposure to a single sector or borrower type.

This diversification can enhance risk-adjusted returns by mitigating the impact of sector-specific downturns or market events. Unlike a more concentrated private credit strategy that may focus heavily on a single niche (such as real estate bridge loans or middle-market corporate lending), a diversified interval fund spreads capital across multiple industries, borrower types, and loan structures. This approach can offer more stable performance over time.

A diversified interval fund can be an attractive solution for investors seeking access to the private credit market while prioritizing risk management.

Our Advisory Team Can Help You Invest in Private Credit Interval Funds

Our advisory team can compare multiple private credit interval funds and recommend the ones that may align with your personal preferences. We examine performance history, structural details, and redemption policies to identify the most suitable options. If you’re focused on finding a reliable income stream, we can offer guidance on building or complementing your existing allocation.

We also help you properly place these holdings, whether in a tax-deferred or a taxable account. By matching possible distributions with your broader financial plan, we aim to reduce the tax impact where possible.

Finally, we focus on your broader goals: how much income you need, how long you intend to stay invested, and how much risk you are comfortable taking. In the end, we strive to shape an investment thesis that looks beyond simple yield and addresses your personal objectives.

If you’re curious about private credit interval funds or considering adding them to your portfolio, we’d be happy to discuss them with you. Schedule a complimentary appointment with our team to learn more.

Resources:
1) Investopedia
2) ThinkAdvisor
3) Aspen Funds
4) NorthWestern Mutual