Private Credit funds in Portugal (eg. Capital Green) pool investor capital to provide loans and debt financing to private entities, These funds are alternatives to traditional bank loans, serving borrowers who don’t meet bank qualifications borrowers. The funds pool money from many investors and lend it, directly or indirectly through another party, to borrowers, who pay fees and interest.
Pros
- Diversification: Credit funds diversify an investor’s portfolio beyond traditional stocks by investing in a wide range of private debt instruments, spreading risk and potentially boosting returns.
- Income generation: Credit funds are designed to provide a steady stream of income to investors through interest and principal payments from private debt investments. This can be an appealing alternative for investors seeking regular returns.
- Potential for risk-adjusted returns: Credit funds may target higher returns than traditional fixed-income investments through investment in riskier, less liquid debt instruments. Note, though, that returns are not guaranteed and depend on market conditions and manager skill.
- Comparatively limited volatility: Private credit investments are typically less sensitive to interest rate fluctuations than publicly traded bonds due to their exemption from daily mark-to-market pricing and relatively illiquid nature. This reduces the impact of short-term market shifts and interest rate movements.
- Mitigation of systemic risk: Credit funds make loans to borrowers based on market valuations rather than a pledge of publicly traded stock. This does not eliminate risk. But it can offer some protection from systemic risks that can affect publicly traded assets.
Cons
investments in credit funds come with some inherent risks, including:
- Capital lock-up: Credit funds often have extended lock-up periods, limiting investors’ access to their capital. This can be an issue for investors needing short-term liquidity.
- Credit and default risk: Credit funds invest in debt instruments such as private company loans, which carry credit risk. According to Proskauer’s private credit default index, the default rate for U.S. senior-secured and unitranche loans was 1.84% for Q3 2025. U.S. investment-grade defaults remained near zero, and speculative-grade defaults were 0.1% in 2024, Fitch reported.
- Interest rate risk: Rising interest rates can impact credit funds, potentially reducing fixed-rate debt values. When interest rates increase, newly issued debt comes to market with higher yields. This makes existing fixed rate loans with lower coupon payments less attractive to investors.
- Manager risk: A credit fund’s success relies heavily on the fund manager’s skills, experience and judgement. Poor decisions can lead to underperformance.
- Valuation risk: Private credit assets, especially illiquid ones or ones with limited market data, may have valuation changes. This could lead to discrepancies between performance reporting and actual market value.
- Regulatory risk: Changes in regulations can impact the operations and strategies of credit funds, potentially affecting their return potential.
- Leverage: Some credit funds may use leverage to enhance returns. However, leverage can also amplify losses, increasing overall risk.
- Restricted visibility into holdings: Compared with public credit funds, private credit investments have different regulatory standards than publicly traded securities. As the CFA Institute explains, they typically lack the public financial reporting, management disclosures and regulatory filings that publicly traded securities are mandated to provide. This can make risk assessment challenging.
Compare
| Characteristics | Private Equity Funds | Private Credit Funds |
|---|---|---|
| Investment Focus | Invest in equity securities of private companies | Invest in debt securities of private companies or entities |
| Role of Investor | Part owner of the company | Acts as a lender and has a contractual relationship with the borrower |
| Return Profile | Aims for capital appreciation through ownership stakes | Earns steady returns primarily through interest payments; lower potential for capital appreciation |
| Risk Profile | Generally higher risk due to equity position and potential for significant returns; subject to market volatility and company performance | Lower risk compared with equity because debt instruments have priority in repayment over equity; more predictable cash flow |
| Investment Horizon | Typically longer term | Shorter term compared with private equity |
| Liquidity | Less liquid with longer lock-up periods | Slightly more liquid than private equity |
