The air in the Singapore high-rise was thick with the scent of expensive roasted coffee and the quiet, desperate hum of a man trying to convince himself he hadn't made a massive mistake. My friend David sat across from me, tapping a glossy brochure for a "Private Credit Income Fund" that promised a steady 9% return while the rest of the market was convulsing like a landed fish. He looked at me with the eyes of someone who wanted a blessing, but as I scanned the fine print, all I saw was a beautifully decorated trapdoor. Everyone in London, New York, and Hong Kong is currently chasing these "private" yields, convinced they’ve found a sanctuary from the volatility of the stock market, but they are ignoring the fact that you cannot manufacture safety out of thin air.
Most investors believe that if a price doesn't move every day on a screen, the investment isn't risky. This is the great lie of modern "smoothed" returns that has taken over the portfolios of the wealthy and the retirees alike. Imagine you own a house in a neighborhood where no one has sold a home in three years. You tell yourself your house is worth a million dollars because that’s what a surveyor told you back in 2021. You feel wealthy and secure. However, if you suddenly needed to sell that house tomorrow morning to pay for a medical emergency, and the only buyer in town offered you six hundred thousand, your "stable" value was nothing more than a polite fiction. These private funds are essentially portfolios of loans to companies that were too small or too shaky to get money from a regular bank. By calling it "private credit," fund managers make it sound like an exclusive club, but in reality, they are just charging you a hefty management fee to hold onto a bunch of IOUs that have no exit sign.
I spent the better part of my early career on a buy-side desk watching how "yield" is actually constructed when the cameras are off. The math is stubborn and unforgiving. To get a 9% return when safe government bonds are paying significantly less, you have to be taking a specific kind of pain. In this case, the pain is "illiquidity." You are being paid a premium to have your hands tied behind your back for years at a time. I remember a specific fund in 2019 that claimed it had never had a down month. They achieved this by simply not re-valuing their loans even when the underlying companies were clearly struggling. It’s like a pilot telling you the plane is perfectly level because he’s taped a picture of a clear blue horizon over the cockpit window. As long as you don't look out the side glass at the actual ground rushing up to meet you, everything feels great.
If you are looking at one of these products today, you need to apply a stress-test of reality before you commit your hard-earned savings. First, look at the redemption terms, not the headline yield. If the fund says they can "gate" or limit withdrawals to 5% of the total fund value per quarter, they are telling you exactly what they plan to do when things get ugly. You aren't buying an investment; you are buying a long-term marriage with no possibility of divorce during a fight. Second, check the "PIK" (Payment-In-Kind) ratio of the loans in the portfolio. If a company can’t pay its interest in cash and instead just adds that interest to the total debt it owes, that is a red flag waving in your face. It’s the corporate equivalent of paying your mortgage by getting another credit card. If the PIK percentage is rising, the fund is essentially manufacturing "income" out of thin air to keep the brochure looking pretty.
The most dangerous moment for any investor is when they start prioritizing "comfort" over "clarity." It feels comfortable to see a flat line on a statement every month while the S&P 500 is swinging wildly. But that comfort is an optical illusion. Real markets are messy, loud, and constantly changing. If your investment is staying perfectly still while the world is on fire, you aren't safe; you are just uninformed. I’ve seen dozens of these "stable" vehicles eventually hit a wall where they have to admit the loans are bad, and the resulting "catch-up" loss is usually a violent drop of 20% or 30% overnight. There is no such thing as a free lunch, and in the world of private lending, the lunch usually consists of your own principal being served back to you.
I told David to put the brochure down and ask his wealth manager one simple question: "If 10% of your investors want to leave next Tuesday, where does the cash actually come from?" He didn't like that answer because it forced him to realize he was trading his freedom for a few extra percentage points of theoretical gain. We ended up talking about his logistics business instead, which is a real asset with real cash flow, unlike the paper castles being sold by the "alternative income" industry. He left the coffee shop without signing the papers, but I could tell he still felt the pull of that smooth, unmoving line on the chart.
Are you holding these assets because you actually understand the underlying loans, or are you just hiding from the volatility of the public markets? Most people are doing the latter, and they won't realize they are locked in the building until they smell smoke and find that the emergency exit has been welded shut for "the protection of the investors." How much of your net worth are you willing to lose access to for the next five years just to avoid seeing a red number on your screen today? If the door only opens when the sun is shining, is it really an exit at all?
Disclaimer: Mention of any brand or trademark is for identification only and does not imply partnership or endorsement
