Alternative Asset Spotlight: Private Credit Investments in a Self-directed IRA
Published on December 9, 2024
An alternative asset class that’s getting attention from self-directed investors is private credit, also called private debt, which has grown due to tighter lending policies among traditional financial institutions. The tighter credit market has created opportunities for self-directed investors to become lenders through their retirement accounts.
In short, private credit is a way for businesses (usually small or middle-market companies) to borrow needed funds from non-bank entities and for investors to generate sustainable fixed income. The lender may be an accredited investor or in the case of our clients, a SDIRA. (Note that some private credit funds—another way to invest in this asset—require the IRA owner to be accredited.)
According to Morgan Stanley, the private credit market was around $1.5 trillion at the start of 2024 (up from approximately $1 trillion in 2020) with forecasted growth estimates pegging it at $2.8 trillion by 2028.
The benefits of private credit investing
Businesses get the cash they need in the form of a loan and investors get a fixed return on the investment, with terms (interest rate, payment schedule) agreed upon in advance by both parties.
Investors who include private credit in their retirement account:
- create portfolio diversity and another hedge against market volatility, since—as with other alternative assets—private credit is not correlated to stock market performance.
- see relatively high yields when compared to other (traditional) fixed-income investments, since businesses that may not qualify for traditional lending arrangements may pay a higher interest rate for private credit (which factors in the risk).
- receive a reliable income stream regardless of the economic environment.
- do not have an equity stake or other participation in the borrowing entity.
A range of private credit opportunities
Private debt ranges from distressed debt to specialty finance and middle-market investing. These include direct lending to private, non-investment-grade companies; investing in mezzanine or “junior capital” debt; and real estate, venture, infrastructure, and asset-based lending. The loans may be secured or unsecured (another term for both parties to work out before sending instructions to the self-directed IRA administrator).
Self-directed investors may also invest in private credit funds, in which investors pool their capital, and the fund manager invests in loans to various private companies; and interval funds, investment companies that offer to repurchase their own shares from shareholders periodically (i.e., investors may redeem their shares at certain intervals).
As we shared in prior posts, other ways account owners diversify their SDIRA portfolios is by investing in promissory notes and private equity funding.
Examples of investing in private debt
Investors may invest in private debt (or said another way, include a private credit investment) for a variety of business scenarios, such as:
- a bridge loan
- debt restructuring
- to support an acquisition
- finance short-term operating costs
- help launch a high-tech startup
Next Generation is here to help with all type of nontraditional investments
As with any self-directed investment, we encourage all our clients at Next Generation to research carefully and truly understand the alternative asset—which in some cases noted above, can be complex. Through our commitment to client education, you can schedule a complimentary educational session with a Next Generation representative, who can explain more about private credit and other alternative assets allowed in SDIRAs. You can also contact our office during business hours: NewAccounts@NextGenerationTrust.com or (888) 857-8058.
