Do Private Lending Funds Belong in an Individual Portfolio?

My inbox is full of companies asking me to extend their “private lending solutions” to my clients. Just yesterday, I listened to a pitch from a large fund company offering what they called “alternative lending solutions.” They suggested interest rates in the 6–9% range, depending on the funds chosen. But at no point in their 90-minute presentation did they meaningfully discuss risk or security. 

In what world would I ever invest the savings of my family and friends without a thorough understanding of downside risk? I have no interest in strategies focused solely on yield to the exclusion of risk management. 

Think about what it means if a stranger comes to you asking to borrow money at 8–9%. That’s all you know about them. You might also be told the loan falls into the category of “business development,” or that the risk is spread across a large portfolio of companies. What’s missing is visibility into the types of businesses involved, their financial condition, and how concentrated those risks actually are. That is essentially the position these funds are asking individual investors to accept in the name of “income.”

Common sense should raise some alarm bells. Why are they asking individual investors? Why couldn’t this financing come from a bank, the SBA, or traditional institutional capital? 

When capital is being raised from dozens of individuals in relatively small increments, it’s usually because other sources demanded terms the borrowers couldn’t accept. Given the illiquidity, junior position in the capital stack, limited transparency, and the incentives facing managers, I would pass on this for an individual portfolio.

I’m not opposed to diversification. If an investment offers a genuinely distinct source of risk and return that improves a portfolio, I’ll consider it. But the tradeoff has to be favorable, and the investment has to fit the client’s actual circumstances, not just a yield target.

I also want a very high degree of transparency into the financial condition of the businesses I’m lending to. Publicly traded bonds and stocks require years of audited financial disclosures, allowing investors to understand how a business has performed across different environments. With many private investments, that level of detail often isn’t available. Instead, investors are asked to trust that everyone up the chain has done sufficient due diligence and is being as careful with the risk as they would be with their own money.

For me, that’s a nonstarter, because no one will care as much as I do about risk.