Why Institutions Are Pouring Billions into Private Credit - and You’re Still in FDIC Accounts

Steadfast Equity
Jun 21
11 min read

Updated: Jun 23

Your savings account is costing you money. While institutional investors earn 9%-11% annually in private credit, your FDIC-insured account barely keeps up with inflation, offering around 1%. The difference? Institutions are leveraging private credit for higher returns, diversification, and inflation protection, while individuals stick to low-yield, "safe" options.

Key Takeaways:

Private Credit Returns: Average 9%-11% annually, compared to 1% in savings accounts.
Safety vs. Growth: FDIC accounts are risk-free but fail to outpace inflation. Private credit involves risk but offers higher returns and floating rates to hedge inflation.
Wealth Gap: $100,000 grows to $236,736 in 10 years at 9% vs. just $110,462 at 1%.
Access for Individuals: Options like private credit ETFs and high-yield bonds are making this market more accessible.

Private credit offers higher returns but requires a tolerance for risk and liquidity trade-offs. FDIC accounts are safer but limit long-term growth. The choice depends on your financial goals.

Feature	Private Credit	FDIC Accounts
Annual Returns	9%-11%	~1%
Risk	Higher (default risk)	Minimal (insured)
Liquidity	Low (funds locked)	High (instant access)
Inflation Protection	Floating rates	Limited

Want higher returns? Private credit could be your answer. Prefer safety? FDIC accounts are the way to go.

How Private Credit Became One of the Hottest Investments on Wall Street

Why Institutions Choose Private Credit

Institutional investors are increasingly turning to private credit as a strategic alternative to traditional fixed-income investments. This shift is driven by the financial advantages private credit offers, including better returns, greater flexibility, and improved risk management.

Higher Returns with Tailored Risk Management

Over the past decade, private credit has delivered impressive annualized returns of 10%, significantly outpacing the 5% returns typically seen with public loans. On average, private credit yields 3–6% more than public high-yield and broadly syndicated loans, with an average yield premium of 4.2% over the last ten years. Notably, since January 2021, this premium has nearly doubled from its historical average of 121 basis points.

One of private credit's key strengths lies in its ability to negotiate protective covenants. For instance, in 2024, 98% of lower middle market loans included covenants, compared to just 10% in syndicated loans. These covenants help explain why private credit has consistently maintained lower loss ratios than high-yield fixed-income instruments.

Additionally, private credit often features floating interest rates, which help shield investments from the risks associated with rising interest rates. Beyond delivering higher returns, private credit also plays a role in enhancing portfolio stability, a topic explored further below.

Better Diversification and Stability

While higher returns remain a strong draw, private credit also stands out for its diversification and stability. It provides access to asset classes that are not correlated with traditional investments like FDIC-insured accounts. Unlike the static nature of FDIC accounts, private credit’s diversified portfolio offers resilience during market volatility.

Historically, unlevered private credit has demonstrated annualized volatility of around 3.7%, significantly lower than public equities, while still delivering strong returns. For example, Direct Lending has achieved approximately 90% of the returns of publicly traded equities but with less than a quarter of their volatility since late 2005.

Private credit also delivers steady income through regular interest payments, borrower fees, and timely loan repayments. This reliable cash flow makes it an attractive option for institutions needing to meet financial commitments, such as pension payouts or insurance claims.

Another advantage is the ability to diversify across unlisted companies, various industries, and geographic regions, areas that are often inaccessible in public markets. During economic downturns, Direct Lending has historically outperformed both stocks and traded credit markets, all while taking on less subordinated risk.

Flexible Terms and Custom Structures

Unlike the standardized nature of public markets or FDIC accounts, private credit allows institutions to design investments that align with their specific risk, return, and liquidity objectives. Instead of a one-size-fits-all model, private credit offers customizable structures and terms that can adapt to both borrower needs and lender preferences.

This flexibility extends to challenging situations as well. Private credit structures are designed to be resilient, enabling lenders to renegotiate terms, extend payment schedules, or even restructure deals if borrowers face difficulties. These options, which are unavailable in public investments, provide a level of adaptability that is particularly valuable during uncertain times. The ability to execute deals quickly and with certainty makes private credit an appealing choice in turbulent markets.

"From the perspective of investors, private credit offers a relatively high and regular cash flow yield and a premium to publicly traded fixed income." – Aaron Mulvihill, Global Market Strategist

Private credit also opens doors to specialized opportunities like distressed debt, which traditional banks often avoid. As regulatory constraints have caused banks to scale back certain types of lending, private credit has stepped in to fill the void, creating new opportunities. With fewer regulatory hurdles, private credit deals can be structured more creatively and executed more swiftly, making it an increasingly attractive option for institutional investors.

Problems with FDIC-Insured Accounts

FDIC-insured accounts provide a sense of security, but they often fall short when it comes to growing your wealth. While these accounts protect your money, their low returns and limitations can significantly hinder long-term financial growth. Let’s break down why these accounts may not be the best choice for building wealth.

Low Returns That Fall Behind Inflation

One major drawback of FDIC-insured accounts is their inability to outpace inflation. According to FDIC data, the national average annual percentage rate for traditional savings accounts is just 0.33%. Meanwhile, the U.S. has experienced an average annual inflation rate of about 3.22%. This mismatch means your money loses value over time.

For example, if you placed $100,000 in a savings account earning 0.5% interest while inflation held steady at 4.5%, you’d lose about 4% of your purchasing power each year. Over five years, that adds up to nearly $18,000 in lost value. Even high-yield savings accounts, while slightly better, typically fail to keep up with inflation in the long run. They’re useful for short-term savings or emergency funds, but they’re not a solution for growing wealth.

Limited Access to Higher-Return Investments

FDIC insurance only applies to deposit accounts like checking, savings, money market accounts, and certificates of deposit. It doesn’t cover investments such as stocks, bonds, mutual funds, or private credit. This limitation creates an opportunity cost, as these alternative investments often deliver much higher returns.

Take private credit, for instance. These investments generally offer yields several percentage points higher than public high-yield bonds, thanks to premiums associated with illiquidity and complexity. In fact, during seven periods of rising interest rates since 2009, direct lending funds have consistently outperformed high-yield bonds and syndicated loans. Many private credit options also feature floating-rate structures, which help offset interest rate risks. By contrast, FDIC-insured accounts are stuck with fixed, minimal rates. Even Business Development Company (BDC) loans, with spreads narrowing to around 6 percentage points over the past decade, still deliver far better returns than traditional deposit accounts.

Challenges for Long-Term Wealth Growth

The combination of low returns and inflation’s eroding effects makes FDIC-insured accounts a poor choice for long-term wealth building. While these accounts are undeniably safe - since their creation in 1933, not a single cent of insured deposits has been lost - this security comes at the expense of growth potential.

FDIC insurance covers deposits up to $250,000 per depositor, per bank, per ownership category. For larger balances, this cap can complicate things. Investors either have to spread their funds across multiple banks to stay insured or accept the risk of leaving some money uninsured. Both options make it harder to optimize returns.

At today’s rates, it would take over 200 years for money in a traditional savings account to double. Meanwhile, inflation continues to chip away at purchasing power. For those looking to grow their wealth, alternatives like private credit offer higher yields and diversified strategies that far outpace the returns of FDIC-insured accounts.

How Individual Investors Can Access Private Credit

Private credit markets, once the domain of institutional investors, are now becoming more accessible to individual investors. With the market estimated at $2 trillion and projected to grow to $2.6 trillion by 2029, opportunities in this space are expanding. Historically, these investments required substantial minimums and insider connections, but today, individuals have several ways to participate.

High-Yield Bond Investment Options

Steadfast Equity offers high-yield bonds that provide individual investors with direct access to private credit and fixed, competitive returns. Their bond series includes:

A 1-year term with a 10.0% APY, paid monthly
A 12-year term offering 16.5% APY, compounded annually
A 5-year compounded option at 18.5% APY

These options allow investors to achieve attractive, fixed returns without the complexities of direct lending.

Beyond bonds, other avenues include private credit ETFs, Business Development Companies (BDCs), and direct lending platforms. These products simplify access to private credit while allowing investors to align their choices with personal risk preferences.

Matching Risk Tolerance and Investment Goals

Private credit covers a wide range of instruments, so it’s essential to align your investment with your risk tolerance and timeline. For consistent yields, senior secured loans are a more stable choice. On the other hand, subordinated and mezzanine strategies carry higher risks but also offer the potential for greater returns.

For those with higher risk appetites and longer timelines, distressed and opportunistic strategies may be appealing. These strategies focus on restructuring companies, which can lead to significant upside, although they typically lack consistent income.

When assessing private credit investments, consider factors like:

The manager’s track record
Underwriting and borrower selection processes
Loan monitoring systems
Diversification across sectors and loan types

Additionally, private credit investments often use floating interest rates, which can provide some protection against rising interest rates compared to fixed-rate bonds.

Tax Rules and Legal Considerations

Once you’ve identified private credit products that align with your goals, it’s crucial to understand their tax implications and legal requirements. Unlike savings accounts, these investments come with specific tax treatments. Returns are typically taxed as ordinary income rather than capital gains, which can impact after-tax returns depending on your tax bracket.

Many private credit opportunities require accredited investor status. To qualify, an individual must have an annual income of $200,000 (or $300,000 jointly) for the past two years or a net worth exceeding $1 million, excluding their primary residence. However, products like private credit ETFs are making this asset class more accessible to a broader audience.

Before committing, conduct thorough due diligence. Since private credit involves non-public companies, understanding the structure of each deal is vital to ensure it aligns with your risk profile. Keep in mind that regulatory changes could affect the market’s growth and deal flow.

One key trade-off to consider is the illiquidity premium. These investments generally cannot be sold before maturity, meaning you must be comfortable locking up your funds for the duration of the term. While this lack of liquidity can lead to higher returns, it’s essential to evaluate whether you’ll need access to your funds during the investment period. With careful planning, individual investors can tap into returns that rival institutional strategies, offering a valuable alternative to traditional savings accounts backed by the FDIC.

Private Credit vs FDIC-Insured Accounts Comparison

Deciding between private credit investments and FDIC-insured accounts boils down to weighing risk, return potential, and your financial objectives. FDIC-insured accounts offer security and easy access to funds, while private credit investments have historically provided higher yields and diversification opportunities, albeit with greater risks and limited liquidity. Let’s break down how these options align with different investment goals.

Private credit investments have historically delivered stronger returns, averaging a 4.2% premium and achieving annual returns between 9% and 11% on average. On the other hand, FDIC-insured savings accounts typically offer much lower returns, which may lag behind inflation over time.

The safety of these two options differs significantly. FDIC-insured accounts guarantee protection for deposits up to $250,000 per depositor, backed by the U.S. government. This eliminates the risk of losing principal within insured limits. In contrast, private credit investments come with exposure to potential defaults and market volatility, making them inherently riskier and less liquid.

Liquidity is another major factor. FDIC-insured accounts provide immediate access to funds, making them ideal for emergency savings or short-term financial needs. Private credit, however, often requires locking in funds for a set period, reducing flexibility.

Side-by-Side Comparison: Private Credit vs FDIC-Insured Accounts

Feature	Private Credit	FDIC-Insured Accounts
Return Potential	9%-11% average annual returns	Lower returns
Risk Level	Higher – subject to defaults and market risks	Minimal – backed by FDIC insurance
Liquidity	Low – funds are typically locked in	High – immediate access to funds
Minimum Investment	Varies (often $1,000+)	Typically no minimum
Diversification	Access to private markets with lower correlation to public markets	Limited to cash equivalents
Interest Rate Protection	Often includes floating rates adjusting with market conditions	Fixed rates, may not keep up with inflation
Transparency	Requires detailed due diligence	Fully disclosed terms
Accessibility	Increasingly available via ETFs and bonds	Universally accessible

The private credit market has seen remarkable growth, expanding tenfold since the Global Financial Crisis. By December 2023, the market reached an estimated $2 trillion, with projections suggesting it could grow to $2.6 trillion by 2029. This growth reflects institutional confidence in the asset class.

Ultimately, each investment option has its trade-offs. Private credit offers the potential for higher returns and diversification benefits but demands a tolerance for reduced liquidity and greater risk. FDIC-insured accounts, on the other hand, provide unmatched safety and instant access to funds, though their lower yields may erode purchasing power over time.

To strike the right balance, consider your risk tolerance and liquidity needs. While FDIC-insured accounts are ideal for stability and short-term access, private credit can be a strategic addition for investors seeking higher yields and a more resilient portfolio.

Conclusion: Maximizing Your Investment Returns

Traditional FDIC-insured accounts offer limited growth, while institutional investors have long leveraged private credit to achieve far better returns. This asset class marks a major evolution in fixed-income investing.

For over a decade, private credit has consistently delivered a 4.2% yield premium compared to public alternatives. With the market projected to hit $2.6 trillion by 2029, waiting to invest could mean missing out on a significant opportunity to grow your wealth.

Shifting from conventional savings to private credit requires partnering with experienced managers. Platforms like Steadfast Equity offer structured high-yield bonds with annual returns ranging from 10.0% to 18.5%, helping position your portfolio for today’s financial landscape.

What sets Steadfast Equity apart is its ability to combine competitive returns with ethical investment practices through ESG-focused private credit. This approach allows you to pursue strong financial outcomes while contributing to sustainable finance initiatives.

The time to act is now. As Michael Murphy, Portfolio Manager at Perpetual, puts it:

"The best time to be in private credit was probably two years ago – but the second-best time is now".

With features designed to manage interest rate and downside risks, private credit offers a compelling alternative to the stagnant returns of traditional savings accounts.

FAQs

What are the risks of investing in private credit versus keeping money in FDIC-insured accounts?

Investing in private credit involves a higher level of risk compared to FDIC-insured accounts. Unlike FDIC-insured accounts, which protect your deposits up to $250,000, private credit investments don’t come with any guarantees. If a borrower fails to repay, you could lose your entire investment.

Another factor to consider is liquidity. Private credit assets are harder to convert into cash quickly, which might be an issue if you suddenly need funds. On top of that, borrowers in the private credit space often take on more debt, making these investments riskier, especially during economic downturns. While private credit can offer the chance for higher returns, it’s crucial to carefully balance that potential against the security and reliability of FDIC-insured options.

What are private credit markets, and how can individual investors get involved?

Private credit markets offer a way to lend directly to private companies, providing investors with a chance to earn higher yields while adding diversity to their portfolios. For individual investors, access to these markets typically comes through private credit funds, which gather capital to issue loans, or publicly traded options like business development companies (BDCs) that provide added liquidity.

Additionally, some financial institutions and platforms offer direct lending opportunities or tailored private credit products aimed at retail investors. These options often come with shorter lockup periods and more flexible capital commitments, making them easier to access. Private credit investments can also offer floating rates and tend to have a lower correlation with traditional stock and bond markets, adding a unique layer to an investment strategy.

Why do private credit investments typically offer higher returns than FDIC-insured savings accounts?

Private credit investments often offer higher returns, but that's because they come with greater risks and limited liquidity compared to FDIC-insured savings accounts. These types of investments typically include tailored terms, such as negotiated interest rates, which aim to reward investors for accepting the added risk and reduced ease of access.

On the other hand, FDIC-insured accounts focus on security and easy access to funds, which is why they provide lower yields. For investors willing to evaluate private credit opportunities thoroughly, there’s a chance to earn higher returns while adding diversity to their income sources.