As physicians, we spend decades mastering the intricacies of medicine, yet many of us feel less confident navigating investment options beyond the traditional stocks and bonds. While your retirement account likely holds a healthy mix of index funds, there’s a compelling case for diversifying into alternative investments—particularly private debt lending. This investment category has historically been accessible only to institutional investors, but increasingly, individual accredited investors like physicians can participate. Let’s explore how private debt might fit into your financial strategy and what you should know before diving in.

What Exactly Is Private Debt?

Private debt refers to loans made to companies or real estate projects that aren’t financed through traditional banking channels or public bonds. These loans typically come from private funds that pool money from investors (like you) to provide financing to borrowers who need capital but don’t fit the strict criteria of conventional lenders. Think of it as being the bank rather than using the bank.

The appeal of private debt becomes clear when you understand its fundamental characteristics:

• Higher yields than traditional fixed-income investments—often ranging from 7-12% annually versus the 3-5% you might see from investment-grade bonds
• Regular income streams through consistent interest payments, typically distributed quarterly
• Lower correlation to public markets, potentially providing stability when stock markets fluctuate
• Shorter investment horizons (typically 1-5 years) compared to equity investments with indefinite timelines
• Capital preservation focus with loans often secured by collateral like real estate or business assets

Why Private Debt Makes Sense for Physicians

The physician career path creates unique financial circumstances that make private debt particularly appealing. After enduring years of training with minimal income, we suddenly find ourselves with significant earning potential but a compressed timeline for wealth building. Private debt offers several advantages aligned with our situation:

Higher, more predictable returns can help compensate for our delayed entry into serious investing. While your college roommate who became a software engineer has been building wealth since age 22, your investment journey likely began a decade later. The enhanced yields of private debt can help accelerate your portfolio growth.

The income-generating nature of these investments can supplement your clinical earnings, potentially providing flexibility to reduce call schedules or pursue other professional interests as you approach financial independence. One emergency physician colleague uses private debt income to fund locum tenens work in underserved communities, effectively subsidizing this meaningful but lower-paying service.

Additionally, the reduced volatility compared to stocks can be psychologically beneficial for physicians who make high-stakes decisions all day and may prefer less daily fluctuation in their investment portfolios. After making life-or-death decisions in the hospital, the last thing many physicians want is to worry about dramatic market swings.

Common Private Debt Investment Categories

Private debt encompasses several distinct strategies, each with different risk-return profiles:

Direct Lending

This involves providing loans directly to middle-market companies for growth, acquisitions, or restructuring. These loans typically offer interest rates between 8-12% and are often secured by company assets.

A radiology group partner I know participates in a fund that specializes in loans to healthcare businesses—an area where his professional knowledge gives him additional confidence in evaluating the investment opportunity. The loans in his fund average 10% annual returns and are secured by the borrowing companies’ equipment and receivables.

Real Estate Debt

These investments finance commercial or residential real estate projects through mortgages, bridge loans, or construction financing. Returns typically range from 7-11% depending on the property type and loan position.

A surgical specialist in my hospital invests in a fund providing construction loans for multifamily apartment developments in growing metropolitan areas. These loans are secured by the properties themselves and typically have 12-36 month terms with quarterly distributions of around 8% annually.

Distressed Debt

This higher-risk, higher-reward strategy involves purchasing the debt of troubled companies at a discount with the goal of either collecting full repayment or converting debt to equity ownership. Returns can range from 12-20% but come with correspondingly higher risk.

Specialized Lending

Some funds focus on specific niches like litigation finance, music royalties, or equipment leasing. These specialized areas often depend on the fund manager’s specific expertise and connections within an industry.

An anesthesiologist colleague participates in a fund that finances medical equipment purchases for ambulatory surgery centers, leveraging his understanding of both the equipment value and the business operations. His investment provides approximately 9% annual returns while financing equipment he uses in his own practice.

Key Considerations Before Investing

While private debt can be attractive, it requires careful evaluation before committing your hard-earned capital:

Fees and Their Impact

Private debt funds typically charge a management fee of 1-2% annually plus a performance fee (often 15-20% of returns above a minimum threshold). These fees can significantly impact net returns, so understanding the fee structure is crucial.

For example, a fund advertising 10% returns might deliver only 7-8% after fees. Always calculate the net return, not just the headline figure. In one real-world example, a fund promoting “12% target returns” delivered 9.7% to investors after accounting for its 1.5% management fee and 20% performance fee above a 6% hurdle rate.

Illiquidity Premium

Unlike publicly traded bonds or stocks, private debt investments typically lock up your capital for a specific period—usually 1-5 years with limited or no ability to withdraw early. This illiquidity is partly what drives the higher returns, but it means these investments should only represent the portion of your portfolio you won’t need access to during the investment term.

Minimum Investment Requirements

Private debt funds typically require minimum investments ranging from $25,000 to $250,000, making them accessible to many physicians but requiring significant commitment. Some platforms now offer lower entry points ($10,000-$25,000) through feeder funds or fractionalized investments, though these may have additional fee layers.

Accreditation Requirements

Most private debt investments are only available to accredited investors—individuals with either $1 million in net worth (excluding primary residence) or income exceeding $200,000 individually ($300,000 with spouse) for the past two years. As a physician, you likely meet these criteria, but verification is required before investing.

Asset Threshold Considerations

Financial advisors often recommend limiting alternative investments (including private debt) to 20-30% of your overall portfolio. This suggests having at least $500,000-$1,000,000 in investable assets before allocating to private debt, ensuring proper diversification across asset classes.

How Private Debt Performs in Different Economic Environments

Understanding how private debt might behave in various economic scenarios helps set appropriate expectations:

During Economic Growth: Private debt typically provides steady returns as borrowers successfully execute their business plans. However, returns may lag behind the stock market during strong bull markets.

During Recessions: Higher-quality private debt may outperform stocks during downturns, but distressed debt could face increased defaults. Fund manager selection becomes particularly critical during economic stress.

During Inflation: Private debt often includes floating rate provisions that adjust interest rates upward as inflation rises, potentially providing better inflation protection than fixed-rate bonds.

During Rising Interest Rates: Existing fixed-rate loans may become less valuable, but new loans can be issued at higher rates, eventually increasing overall returns.

Getting Started: A Practical Roadmap

If private debt sounds appealing for your portfolio, here’s how to proceed:

Step 1: Assess Your Portfolio Readiness

Before considering private debt, ensure you have:

• A fully funded emergency fund (3-6 months of expenses)
• Maximized tax-advantaged retirement accounts
• A diversified portfolio of traditional investments
• Sufficient liquid assets outside the amount you’ll commit to private debt

Step 2: Education and Due Diligence

• Read prospectuses and offering memoranda carefully
• Understand the fund’s investment strategy, track record, and team background
• Verify the fund’s audited returns (not just projected returns)
• Research the fund manager’s experience through market cycles, particularly during downturns
• Consider consulting with a fee-only financial advisor familiar with alternative investments

Step 3: Start Conservative

Consider these entry approaches:

• Begin with more conservative private debt strategies like senior secured loans
• Diversify across multiple funds rather than concentrating in one
• Start with a smaller allocation (perhaps 5% of your portfolio) and increase as you gain comfort
• Consider intervals for investment (perhaps quarterly) rather than committing all capital at once

Step 4: Access Points

Several pathways exist for physicians to access private debt investments:

Private Wealth Management: Many larger financial institutions offer private debt funds to their high-net-worth clients, typically with $100,000+ minimums.

Investment Platforms: Several online platforms now specialize in alternative investments, including:

• Platforms specializing in real estate debt with minimums from $25,000
• Technology-enabled lending platforms with minimums as low as $10,000
• Specialized physician investment networks with customized offerings

Interval Funds: These registered funds offer some private debt exposure with lower minimums ($10,000-$25,000) and limited quarterly liquidity, serving as a middle ground between completely illiquid private funds and daily-liquid public investments.

Tax Considerations

Private debt investments present distinct tax implications physicians should understand:

Interest income from private debt is typically taxed at ordinary income rates rather than the lower qualified dividend or long-term capital gains rates. This makes private debt particularly well-suited for tax-advantaged accounts like self-directed IRAs or solo 401(k)s when possible.

For investments held in taxable accounts, be prepared for K-1 tax forms rather than the simpler 1099 forms, potentially complicating your tax preparation. You may need to file tax extensions if K-1s arrive late in the tax season—a common occurrence with private investments.

Real-World Results: A Physician’s Experience

A neurosurgeon colleague began incorporating private debt into his portfolio five years ago. He started with a $50,000 investment in a real estate bridge loan fund, representing about 5% of his portfolio. Satisfied with the quarterly distributions and performance, he gradually increased his allocation to 15% of his portfolio across three different private debt strategies.

During the market volatility of 2022, when both stocks and bonds declined significantly, his private debt investments continued providing consistent income, demonstrating the diversification benefit. However, he notes that the tax complexity and illiquidity are meaningful tradeoffs that shouldn’t be underestimated.

The Bottom Line: Is Private Debt Right for You?

Private debt lending can offer compelling benefits for physician investors seeking income, reduced volatility, and portfolio diversification. However, it requires comfort with illiquidity, higher fees, and more complex investments.

Consider private debt if:

• You’re an accredited investor with adequate liquid investments elsewhere
• You seek income generation beyond traditional bonds
• You can commit capital for multiple years
• You’ve reached a portfolio size where diversification into alternatives makes sense
• You’re willing to perform substantial due diligence or work with advisors who can

Like many aspects of physician financial planning, the decision involves balancing potential rewards against complexity and risk. Just as we appreciate nuance in clinical decision-making, we should bring the same thoughtful analysis to our investment choices.

Private debt isn’t the right solution for every physician investor, but for those with appropriate financial stability, risk tolerance, and time horizon, it can be a valuable addition to a well-diversified portfolio—potentially providing the steady income that allows for more flexibility in your practice and personal life.

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This post is for informational purposes only and does not constitute investment advice. Always conduct thorough research and consult with financial professionals before making investment decisions.

About the Author: Dr. BWMD is a practicing physician and parent who writes about the intersection of medicine and personal finance. When not seeing patients or writing about physician finances, he enjoys spending time with his family and teaching the next generation of medical professionals about the importance of financial wellness.