Private credit is moving beyond pension funds, insurers and other institutional investors and into the portfolios of individual investors, but the shift could create new vulnerabilities for investors and the broader financial system.

Private credit is increasingly reaching individuals through semiliquid funds, nontraded business development companies, feeder structures, digital platforms and other investment vehicles, according to a new report from the CFA Institute Research and Policy Center. While the expansion gives retail investors greater access to income-generating private assets, it also creates risks because the underlying loans are typically difficult to sell and value.

"Retail-oriented vehicles may add expectations of periodic liquidity and more frequent valuation that do not always align with those underlying characteristics," the report stated.

That mismatch could become particularly problematic during a market downturn. Funds may offer investors periodic redemption opportunities while holding loans that cannot easily be sold. A rush of withdrawals could therefore increase pressure on managers to sell assets, restrict redemptions or take other steps to preserve liquidity.

Private Credit’s Valuation Challenge

The report also flags valuation concerns. Private loans are often valued using models rather than frequent market transactions, potentially delaying recognition of deteriorating credit quality and making returns appear smoother than the underlying risks.

But the CFA Institute says the risks go beyond individual funds. Concentrated exposures, layered leverage and connections among private-credit funds, private-equity sponsors and banks could create channels through which financial stress spreads across the financial system. 

The report also points to weakening creditor protections as another concern. Covenant-lite lending and more permissive loan documentation can give borrowers and sponsors greater flexibility, but can reduce lenders’ ability to respond before a company formally defaults.

Regulation is a central part of the CFA Institute’s warning. The report says regulatory frameworks have not fully kept pace with changes in private-credit market structures and the expansion into retail channels.

"Gaps remain in valuation standards, liquidity-risk management, disclosure, cross-border oversight, and the monitoring of newer structures such as NAV-based lending and tokenized credit vehicles," the report said.

Calls Grow for Stronger Oversight

The CFA Institute is calling for regulators and industry bodies to strengthen investor safeguards through suitability standards, clearer disclosures and greater investor education. It also recommends improving valuation and fee transparency, liquidity-risk management, data sharing and cross-border coordination.

The report further urges policymakers to address risks associated with leverage, securitization, NAV-based lending and potential conflicts involving private-equity sponsors.

"The objective is not to restrict innovation, but to align broader access with appropriate safeguards," the report said.

That distinction is important as policymakers grapple with how to regulate an asset class that has traditionally been designed for sophisticated institutional investors but is increasingly being packaged for individuals.

The CFA Institute says the retail shift is ultimately testing whether regulatory frameworks built around institutional participation can adapt to a much broader investor base.

"If liquidity, valuation, governance, and disclosure practices are poorly aligned with the underlying assets," the report warns, "wider participation could amplify vulnerabilities during periods of market stress." 

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