Private credit has become a more visible option for investors seeking income beyond public bonds and dividend-paying shares. At its core, it involves lending to businesses or projects through non-bank lenders, usually in exchange for interest payments. For Canadian investors researching private credit investing, Questrade offers a web-based, self-directed platform for eligible investors to review available private credit funds, including details on strategy, terms, fees, and minimums. As a Canadian online brokerage, Questrade offers self-directed cash, margin, RRSP, and TFSA accounts, where eligible. But availability doesn’t make private credit suitable for everyone. Consider it as one part of a broader plan with liquid reserves, diversified public-market investments, and assets suited to near-term spending.
Why Private Credit Is Drawing Attention
Private lenders finance mid-sized companies, real estate and infrastructure projects, and other borrowers unable to raise capital through public bonds. Private credit refers to debt arranged outside public markets, often through direct lending or pooled funds.
Investors are drawn to the asset class for its income potential. Interest-earning loans may seem attractive amid volatile stock prices or shifting bond yields. But income targets aren’t guaranteed: distributions may fall if borrowers struggle, defaults rise, expenses increase, or managers change distribution policies.
How Private Credit Works
Most individuals do not make private loans directly to a single borrower. Instead, they invest through a fund or another pooled structure managed by a professional lender or investment firm. The fund may make loans to multiple borrowers, which can reduce the impact of a single borrower’s problems but cannot eliminate the possibility of losses.
Common Features to Review
- Interest structure: Loans may pay fixed or floating interest rates.
- Repayment priority: Senior secured loans may rank ahead of junior debt if a borrower becomes insolvent.
- Collateral and covenants: Some loans are backed by assets or include lender protections, while others offer fewer safeguards.
- Borrower exposure: A fund may focus on corporate, real estate, or infrastructure lending, or on a specialized sector.
For example, a fund could lend to several established mid-sized companies rather than relying on one company. That diversification may help, but economic weakness can affect many borrowers simultaneously.
Where It May Fit in a Portfolio
Private credit is generally considered an income-oriented allocation, not a substitute for long-term equity growth or short-term cash needs. Investors who use it may place it alongside government bonds, bond funds, dividend stocks, and cash reserves rather than treating it as a complete fixed-income replacement.
- Income potential: Funds may distribute interest income on a regular schedule.
- Diversification: Private loans do not trade continuously on a stock exchange, so their reported values may not move in lockstep with public equities.
- Rate exposure: Floating-rate loans may generate higher income when reference rates rise, although higher borrowing costs can put pressure on borrowers.
- Longer-term capital: A modest allocation may be more appropriate for money that will not be needed for several years.
There is no universal percentage that belongs in every portfolio. The right amount, if any, depends on the investor’s objectives, total assets, tolerance for losses, and ability to leave money invested.
How It Compares With Other Income Assets
- Cash: Usually offers the easiest access and relatively low price risk, though income may not keep pace with inflation over long periods.
- GICs: Can provide a known rate and term, but early access may be restricted depending on the product.
- Government bonds: Typically offer strong liquidity and established credit characteristics, but market prices can change before maturity.
- Dividend stocks: Can provide income and potential growth, but share prices and dividends can decline.
- Private credit: May offer income and exposure beyond public markets, but often comes with limited liquidity, less frequent pricing, and meaningful default risk.
A higher target yield should prompt more questions, not automatic enthusiasm. Investors should understand what risks, leverage, borrower types, or liquidity limits may be supporting the expected return.
The Main Risks to Review
Credit, Valuation, and Concentration Risk
Borrowers can miss payments, need to restructure debt, or default. Because private loans are not generally priced on an exchange throughout the trading day, fund valuations may rely on periodic estimates and valuation methods. A fund concentrated in a single industry, geography, or a small group of borrowers can be especially vulnerable to a single economic shock.
Fee and Structure Risk
Management fees, fund expenses, performance fees, financing costs, and account-level charges can reduce net returns. Read the offering documents carefully to understand the fund structure, use of leverage, and all costs paid directly or indirectly by investors.
Why Liquidity Rules Matter
Liquidity is often the deciding issue. Someone saving for a down payment on a home, tuition, or an emergency within the next year may not want money tied up in an investment with delayed withdrawals. Some funds offer periodic redemptions, while others have fixed terms or strict limits on early exits.
In structures that use periodic repurchase offers, investors may only be able to request withdrawals at specified intervals, and requests can be subject to limits. Before investing, confirm the lock-up period, notice deadline, redemption frequency, and whether the fund can delay or limit redemptions.
A Simple Investor Checklist
- Define whether the goal is income, diversification, or long-term capital allocation.
- Confirm that the money can remain invested for the required period.
- Review borrower industries, loan seniority, collateral, and concentration.
- Separate fund expenses from platform, advisory, and transaction charges.
- Read all redemption, lock-up, and notice provisions.
- Consider how lower distributions, defaults, or valuation declines would affect the plan.
- Check whether the fund is eligible for the intended account type.
- Compare the investment with simpler alternatives, including cash reserves, GIC ladders, and bond funds.
Who May and May Not Be a Good Fit
Private credit may suit investors with a longer time horizon, adequate emergency savings, diversified liquid holdings, and a willingness to study fund documents. It may be less appropriate for people who need immediate access to the money, depend on the investment for essential monthly expenses, expect GIC-like protection, or are uncomfortable with limited redemption options.
A Balanced Way to Think About Private Credit
Private credit can play a useful role in some income portfolios, but its risks may be less visible than the daily price changes of publicly traded investments. The most thoughtful decision considers credit quality, fees, liquidity, valuation practices, account eligibility, and personal time horizon. Used carefully, private credit may complement a diversified plan. It should not replace emergency savings or a well-built core portfolio.
