The private credit market has undergone a remarkable expansion, with assets under management (AUM) growing from approximately $42 billion in 2000 to over $1.7 trillion by 2023.^[1]

Like many transformative asset classes, private credit appears to be following a familiar arc. An initial exclusive deal stage, where capital is deployed through private, tailored transactions that are often negotiated on a one-on-one or limited syndicate basis. In the second stage, as the original pool of exclusive investors becomes saturated, the creation of public market structures opens access to a broader investor base through more accessible, liquid, and regulated investment vehicles. In the final stage, direct access becomes available to a much broader base of retail investors through investment platforms, innovative fund structures and regulatory shifts.

With competition intensifying,^[2] this famously opaque asset class is rapidly expanding into the last frontier: everyday, retail investors.^[3]  What should private credit be mindful of as it takes this next step?

There are incentives powering this trend, on both the borrower and investor sides. For companies, especially those seeking certainty and speed of execution, private credit has emerged as a preferred financing channel. For investors, it presents an appealing proposition—offering consistent, elevated returns relative to comparable public-market instruments (see Table 1). This win-win proposition has fueled the market’s explosive growth.

Table 1. Historical Risk vs. Return Across Asset Classes, 2004 – 2023^[4]

Based on historical risk versus returns, this is a welcome development for retail investors. Until now, despite growth in AUM, these strategies have largely been deployed only by sophisticated, institutional investors. Indeed, the very term “private credit” is still a catch phrase for an amalgamation of many different strategies, not yet fully accessible for retail investors. While welcome, the evolution to retail investors calls to mind other financial innovations and comes with certain risks.

Many of the other asset classes’ financial innovations encountered common stress points as they went through their evolutionary paths: liquidity mismatches during downturns, retail investor misbehavior due to poor risk understanding, and a surge in regulatory scrutiny. Private credit has a unique opportunity to learn from these earlier examples to avoid repeating the same vulnerabilities.

Don’t promise liquidity that your loans can’t deliver.

Private credit loans are illiquid because they aren’t traded on public markets and generally can’t be sold quickly without a discount. However, the goal for private credit’s third stage should not be to figure out how to create a highly liquid investment vehicle. It should be to set redemption policies that reflect the illiquid nature of private credit—ensuring an investment platform can meet redemptions without harming portfolio value or remaining investors.

Educate before the panic sets in.

When retail investors flood into complex assets without proper risk understanding, markets can become irrational and highly volatile. If retail investors don’t understand what they are buying, they may overreact to normal volatility, cause a panic-based run on the fund, spread misinformation, and pressure fund managers to compromise long-term strategies for short-term optics. Firms entering stage three of private credit need to treat investor education as a core part of their risk management strategy.

Get ready for the regulatory heat retail attention brings.

Retail investors expect higher transparency, faster communication, and stronger protections than do institutional investors. Without robust internal controls, a firm risks valuation errors, liquidity shortfalls, compliance violations, or reputational damage—all of which are amplified in the public eye when retail investors are involved. This public attention then brings more regulatory scrutiny. Therefore, firms must stay ahead of evolving regulations by actively working with regulators (like the SEC or FINRA) as they design retail products.

Private credit presents opportunities for alternative asset managers and investors alike and alternative asset managers have already announced plans to launch private credit marketplaces.^[5] While this may ultimately be the trajectory of the industry, there remain hurdles. For private capital funds, establishing institutional governance is a necessity. From fundraising to origination and deployment, managing the flows of capital, and importantly, the expectations of investors, is critical. As the sources of capital expand to include wealth managers and retail investors, data systems will need to manage an exponential growth of clients. In origination, the diligence of investments must evolve to meet the appropriate risk/return premium for the fund. After origination, funds must be able to assess the fair market valuations of the loans they hold. And finally, reporting will undoubtedly grow in importance and frequency.

Private capital has already grown to meet a need in the economy, providing companies an alternative path to capital and growth. Now, as retail investors appear poised to enter the space and private credit in general matures, the structures and frameworks necessary to ensure stability will be critical to get right.

ENDNOTES

^[1] https://www.morganstanley.com/ideas/private-credit-outlook-considerations.

^[2] https://www.wsj.com/articles/private-credit-executives-grapple-with-price-hurdles-rising-competition-ffc8f548.

^[3] https://www.moodys.com/web/en/us/insights/credit-risk/outlooks/private-credit-2025.html

^[4] https://www.fticonsulting.com/insights/articles/private-credit-challenges-opportunities

^[5] https://www.bloomberg.com/news/articles/2025-02-05/apollo-plans-to-build-the-first-marketplace-for-private-credit.

This post comes to us from FTI Consulting.