Private debt is becoming a go-to asset class for investors looking to diversify beyond stocks and bonds. It’s all about lending money outside of traditional banks, whether to businesses, real estate projects, or even consumers. With a variety of structures and risk levels, private debt can serve different investment goals, from steady income to high-return opportunities.
Let’s break down the key types of private debt and how they work in real-world scenarios.
A Quick Overview of Private Debt
Private debt comes in many flavors, depending on who’s borrowing and what’s backing the loan. Some loans are secured, meaning they’re backed by collateral like real estate or business assets, while others are unsecured and rely solely on the borrower’s creditworthiness.
Private debt is also divided by purpose. Some loans are used to finance business growth, while others are tied to real estate acquisitions and development. There are also structured finance investments, such as collateralized loan obligations (CLOs), which bundle multiple private credit deals into structured securities.
Whether an investor is looking for regular cash flow or high-yield opportunities, private debt offers multiple ways to put capital to work.
Direct Lending: Fueling Middle-Market Businesses
Traditional banks have tightened their lending standards, making it tough for midsized businesses to secure funding. That’s where direct lending comes in.
Private investors or funds provide structured loans, often secured by company assets. This type of financing helps businesses expand, cover cash flow gaps, or make acquisitions, all without giving up equity. For investors, direct lending can provide attractive returns with relatively lower risk, especially when loans are backed by tangible assets.
Mezzanine Financing: The Middle Ground Between Debt and Equity
Mezzanine loans sit in a unique position in the capital stack: riskier than senior debt, but safer than equity. They offer higher yields to investors in exchange for increased risk.
In real estate, mezzanine financing is often used to complete renovations or stabilize a property before refinancing. Because these loans carry higher interest rates and sometimes include an equity kicker, they can be particularly appealing to investors seeking enhanced returns.
Distressed Debt: Finding Opportunity in Trouble
Distressed debt investing is about buying loans from struggling companies, often at a steep discount. The goal is either to work with the company to turn things around, or to profit from asset sales. Banks typically avoid these risky situations, but private investors willing to navigate the complexity can see substantial returns.
This type of investing requires deep expertise in evaluating distressed businesses, but when executed well, it can be a highly lucrative strategy.
Private Debt in Real Estate: Bridge Loans and Construction Financing
With banks pulling back on lending, private debt has become a major player in real estate financing. Bridge loans are a common tool in this space, offering short-term financing that helps real estate investors buy, renovate, or refinance properties when traditional lenders won’t step in. Construction loans also play a critical role, providing funding for new developments when banks hesitate due to perceived risk.
These loans can carry higher interest rates, but provide much-needed flexibility for borrowers and strong returns for investors.
Venture Debt: Helping Startups Grow Without Giving Up Equity
Startups don’t always want to dilute their ownership by raising more venture capital. Venture debt offers a solution, giving companies access to growth capital while keeping equity intact. It’s often used alongside traditional VC funding to extend runway and scale operations.
This type of financing works well for companies with strong revenue potential but limited access to traditional loans. Investors in venture debt benefit from high interest rates and the potential for warrants or equity upside.
Peer-to-Peer Lending and Private Consumer Debt
The rise of peer-to-peer (P2P) lending platforms has opened up private credit to everyday investors. These platforms allow individuals to lend directly to consumers or small businesses, bypassing traditional banks.
Investors can earn interest while diversifying their portfolios with consumer credit exposure. While this space can be riskier, platforms use credit analysis and risk-tiered lending models to help mitigate default risks.
Collateralized Loan Obligations (CLOs): The Structured Side of Private Debt
CLOs pool multiple loans into structured securities, allowing investors to spread risk across different borrowers. These instruments provide exposure to leveraged credit markets, offering a mix of high yield and diversification. While complex, CLOs can be an attractive option for sophisticated investors looking to gain broad exposure to private credit.
Private Debt vs. Real Estate Investing: A Smarter Long-Term Play?
Many investors looking to build wealth consider real estate investing, particularly in fixer-upper projects. While flipping houses or managing rental properties can be lucrative, private debt offers a more passive and potentially lower-risk alternative.
Real estate investing requires hands-on management, from dealing with contractors and tenants to navigating unpredictable market conditions. Fix-and-flip investors often face delays, cost overruns, and fluctuating property values, making returns uncertain. Private debt, on the other hand, provides consistent cash flow through contractual interest payments, offering more predictability.
Another major advantage of private debt is reduced operational burden. Property investors must constantly manage maintenance, tenant issues, and market cycles, whereas private lenders simply collect payments. Additionally, private loans, especially secured debt, offer downside protection, as they are often backed by real estate or business assets. If a borrower defaults, the lender has recourse to reclaim their capital.
Liquidity is another key consideration. Real estate investments can be highly illiquid, often requiring months or even years to exit. Private debt investments, particularly through funds or structured products, can provide greater flexibility and diversification across multiple loans and industries.
For investors who want exposure to real estate without the hassle of property management, private debt, especially real estate-backed lending, can be an attractive alternative. It combines the benefits of real estate’s tangible asset backing with the predictability of fixed-income investments.
Final Thoughts
Private debt isn’t just a niche alternative. It’s a powerful investment tool with a broad range of applications. Whether financing middle-market companies, real estate projects, or distressed assets, private credit fills a growing gap left by traditional banks. As credit markets tighten, private debt strategies offer compelling opportunities for investors seeking solid returns in a changing financial landscape.
For those looking to generate passive income, preserve capital, or gain exposure to real estate-backed investments without the operational headaches, private lending presents a strong case. As more institutional investors and high-net worth individuals recognize the advantages of private credit, it’s becoming a cornerstone of modern investment portfolios.
How Aspen Funds Helps Investors Navigate Private Debt
For investors looking to better understand private debt and alternative investments, Aspen Funds provides expert guidance and access to opportunities that might otherwise be difficult to source. With a focus on educating investors and curating high-quality private credit deals, Aspen helps bridge the gap between institutional-level investments and individual investors.
One example is how Aspen identifies opportunities in private real estate debt, such as bridge loans and mezzanine financing, which can offer attractive risk-adjusted returns. Another area of focus is distressed debt, where Aspen helps investors capitalize on unique situations that banks often avoid. By leveraging deep market expertise and structured investment strategies, Aspen Funds empowers investors to confidently place their capital in the private debt space.
About the Author
Ben Fraser is the Chief Investment Officer at Aspen Funds, where he combines his analytical nature with a passion for delivering outstanding client service and strong returns through out-of-the-box investments. With a professional background that spans over a decade, Ben has become an expert in the field of investment management and has worked for several reputable financial institutions.
Ben is the co-host of the Invest Like a Billionaire podcast, where he joins his father, Robert, co-founder and CFO of Aspen Funds, along with co-founder Jim Maffuccio, to discuss economic trends and best practices for alternative investing.
Ben holds an MBA from Azusa Pacific University and a Bachelor of Science in Finance from the University of Kansas, where he graduated magna cum laude. Ben’s commitment to excellence and his ability to deliver strong returns for clients make him an invaluable asset to the Aspen Funds team.