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Beginner’s Guide to Passive Income (4): Private Credit Asset Class Cycles, Returns, and Entry Points
The Private Credit market is enormous and diverse. Essentially, any money lent out as debt can fall into this category. This includes consumer loans, business loans, real estate loans (e.g., first and second mortgages etc.), microloans, and countless other types and structures.
Debt investments are much simpler than equity, even though the range of debt types and structures is vast. Returns and cycles don’t vary much across the board, so I’ll summarize broadly.
Market Standards
Most private credit investments involve asset pools. These are bundles of hundreds or thousands of individual loans grouped together as underlying assets.
- Consumer Loans (e.g., personal or credit card debt): Annual returns typically range from 8–12%.
- Business Loans (e.g., SME financing): Annual returns are higher, generally 12–18%.
The key factors are default rate management and diversification. The loan pool must be large and diversified enough to mitigate risks. This is no small feat—even Goldman Sachs has failed in the consumer credit space before. Finding a consistently profitable credit pool is challenging.
Most private credit investments are structured as funds, offering better liquidity than equity investments. Debt funds typically have 2–3 year cycles before unlocking. Entry thresholds are also lower—$50,000–$100,000 is common.
My Approach
I’ve been active in private credit for many years, primarily through real estate bridge loans:
- Returns: Around 8–12% annually.
- Cycle: Typically, 12 months, secured by real estate collateral.
This market is overcrowded now, making good deals hard to find. When I do find solid deals, I renew the loans indefinitely to keep collecting interest, but the available amounts are small.
I don’t engage much in other private credit products now because my needs are already fulfilled by legal lending and litigation financing. These alternatives offer higher returns and shorter terms than most private credit opportunities.
The one exception I’m currently exploring is micro-lending in Africa:
- Entry Threshold: Just a few thousand dollars.
- Returns: Contracted at 30% annually.
- Terms: Locked for 1 year, with monthly exit options thereafter.
For details, check out my series Microlending in Africa, where I break down the specifics for those interested.
Platforms Offering Credit Products
Some alternative asset platforms provide credit-related products.
- Expected Returns: Typically, 6–15% (before management fees).
- Entry Point: Around $25,000.
- Terms: Usually 2–3 years.
I’ve compiled a list of such platforms in “Complete Guide to Start Your Passive Income Journey”. Feel free to refer to it if you’re considering these options.
Looking Ahead
If Private Credit is relatively standardized, the next category—Entertainment Financing—is a completely different story. This niche, encompassing assets like movies, music, and audio drama rights, is highly non-standardized and is still somewhat like the wild west. Stay tuned as we dive into this exciting world in the next post.
Till next time!