The key risks are defaults rising together in a downturn, being unable to exit, and intermediary failure. Costs include layered fees, and interest is frequently taxed less favourably than gains.
12 min read · Level 3
I think the tax point is underrated for private credit sold to individuals. A product can be marketed with a return that sounds comparable to equities, while the investor, holding it in a taxable account, keeps materially less. Where tax-advantaged accounts are available and allowed, income-producing assets like this often belong there first.
The risks that matter most:
Risk What happens Clustered defaults downturns raise defaults across many borrowers at once Illiquidity secondary markets dry up; semi-liquid funds limit redemptions Platform or manager failure, fraud or poor servicing affects all loans Concentration too much in one borrower, sector or region Valuation lag losses appear in reported values late
Costs stack. A semi-liquid private credit fund might charge a 1.25% management fee, an incentive fee on income, and expenses, taking 2% or more a year from the loans' yield. On a 9% gross portfolio yield, a 2.5% total cost leaves 6.5% before any credit losses.
Tax often works against lending returns. In many countries interest is taxed as ordinary income, frequently at higher rates than capital gains or dividends. Whether losses on defaulted loans can be offset against interest income depends on the jurisdiction and account type. Holding lending investments inside a tax-advantaged account, where available and permitted, can change the result substantially.
Because the worst outcomes in lending are correlated. When the economy weakens, defaults rise, recoveries fall, secondary buyers disappear and redemption requests spike - all at the same time.
Tax matters especially because lending returns are mostly income. The same pre-tax return can leave a lender with noticeably less than an equity investor after tax, depending on local rules.
This is educational information, not tax or accounting advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Sources: U.S. IRS - official tax information; UK Government - Capital Gains Tax guidance; OECD - tax policy and statistics; U.S. SEC - Investor.gov
After-tax comparison, illustrative rates. An investor in a jurisdiction taxing interest at 40% and capital gains at 20% compares two holdings each returning 6% pre-tax on 100,000.
Holding Pre-tax Tax After tax Private credit (income) 6,000 2,400 3,600 = 3.6% Equity (all gains) 6,000 1,200 4,800 = 4.8%
The lending return, which looked equal before tax, is worth 25% less after it (3,600 versus 4,800). Rates differ widely by country; the point is that the type of return affects what you keep.
Assuming a semi-liquid fund's redemption feature means you can get out when you need to. Redemption limits apply precisely when many investors want out, typically during stress.
Raise defaults, cut recoveries and assume no exits for two years, and see whether you could live with it.
Include management, incentive, servicing and platform fees, and subtract them from gross yield.
Find the limits on withdrawals per period and when they can be suspended.
Ask how interest and losses are treated in your country, and whether a tax-advantaged account would be better.
Before investing in private credit, and when deciding which account should hold income-producing investments.
Do not apply the illustrative tax rates to your own situation. Tax treatment varies by country, investor and account type.
In 2022 and 2023, several large non-traded real estate and credit vehicles sold to individuals received redemption requests exceeding their periodic limits and paid out only a portion, as disclosed in their filings and widely reported. Investors who expected monthly or quarterly access waited considerably longer.
Treat semi-liquid as illiquid when planning. Redemption limits are designed to be used in exactly the conditions when you are most likely to want out.
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