Private credit vs. public credit: Understanding the key differences and benefits

Private credit and public credit represent two distinct segments of the global credit market. While both serve the same fundamental purpose, which is to provide capital to borrowers while generating consistent returns for investors, they differ significantly in structure, accessibility, and their risk and return profile.

In this private credit vs public credit comparison guide, we’ll break down how the two asset classes stack up against one another so investors and borrowers alike can decide which is the better option for their needs and circumstances.

Understanding private and public credit

What is private credit?

Private credit refers to corporate lending that takes place outside the traditional banking system and public markets. It occurs between private investors and companies that prefer not to issue debt publicly. Non-bank lenders such as private debt funds, asset management firms, and business development companies (BDCs) often provide this type of credit.

Private credit is most commonly used by SMEs or middle-market firms that may have problems securing commercial bank loans due to their size, credit profile, or complex business models. Transactions are typically negotiated privately and often feature customized terms tailored to the specific needs of both the lender and the borrower.

As an asset class, private credit has gained popularity in recent years, particularly among middle-market companies looking for customized financing solutions and investors seeking higher yields than what’s currently being offered by bank loans and public debt, fueling the rapid expansion of the private debt market.

What is public credit?

Public credit refers to debt instruments, such as corporate bonds, that are issued and traded on public markets.

Larger, more established companies seeking capital from a wide pool of investors generally offer these instruments. Public credit is subject to extensive regulatory oversight, and details such as interest rates and maturity dates are publicly disclosed and accessible through open markets.

Private credit vs public credit: Key differences

Let’s look at some key differences between private and public credit.

Investor access

Public credit is available to both institutional and retail investors through platforms like bond markets or mutual funds. In contrast, private credit is generally limited to institutional investors such as private debt funds, mainly due to high minimum investment thresholds and the fact that there’s no open market for this asset class..

Standardization vs customization

Public debt instruments are typically standardized. This standardization allows for efficient trading and widespread accessibility. However, it also limits the ability to tailor loan terms to the specific needs of individual borrowers.

Private credit, on the other hand, offers greater customization. Loans can be structured to meet borrowers’ unique requirements, including flexible repayment schedules. For instance, a growing company seeking financing for a specific project might require a loan with a unique repayment structure that aligns with its projected cash flows. Private credit lenders can accommodate such needs.

Transparency and regulation

Public credit is highly regulated. Issuers are required to disclose financials, credit ratings, and material updates on a regular basis, which translates to high transparency for investors. 

Private credit operates in a more opaque environment. Detailed financial information may not be publicly accessible, and valuation may rely on third-party assessments. This lack of transparency increases the complexity of analyzing and monitoring private credit investments.

Liquidity

Public credit boasts high liquidity, meaning it’s relatively easy for investors to exit their investments. Private credit, on the other hand, is highly illiquid. There’s limited secondary market activity for the latter, and investors must be ready to commit their capital for multiple years (typically 5-10 years).

Risk and return profile

Private credit tends to carry higher risks than its public counterpart. This is primarily due to lower liquidity in private credit instruments. Additionally, private credit deals often involve smaller, less-established companies, which can increase the potential for default. To compensate for these increased risks, private credit typically offers higher yields.

Conversely, the yields of public credit are lower due to its higher liquidity and the fact that it generally involves lending to larger, more established firms, which have a lower risk of default.

Benefits of private credit

Private credit offers several benefits for both investors and borrowers.

Investors

For investors, the biggest benefit of private credit is the potential for enhanced returns. As mentioned, this asset class offers higher yields to compensate for its illiquidity and the overall higher risk of investments. For example, while investment-grade corporate bonds may yield 3–6%, private credit strategies (such as direct lending or mezzanine financing) often deliver 8–12% or more in annual returns. The Cliffwater Direct Lending Index (CDLI), for example, returned 12.13% in 2023 and has delivered a 9.55% annualized total return since its inception in 2004.

The other benefit is diversification. Private credit allows investors and managers to diversify their portfolios beyond just traditional equity or public debt. It has low correlation to public markets and can therefore act as a hedge against market volatility.

Finally, private credit allows investors to negotiate and tailor debt arrangements to align with their specific risk and return objectives.

Borrowers

Private credit provides a crucial source of capital for borrowers who may face challenges securing financing from traditional sources like banks. In particular, private debt financing enables businesses to structure deals quickly and confidentially, often on terms that align more closely with their unique operational and financial needs.

Private debt deals can also be completed faster, which is especially valuable in time-sensitive situations. Furthermore, unlike public debt, which requires detailed disclosures, private debt transactions are typically confidential. This allows borrowers to avoid disclosing sensitive information, which could impact their competitive position or market perception.

Benefits of public credit

Just like private credit, private credit also has its benefits for both investors and creditors.

Investors

Since public credit instruments, like corporate and government bonds, can be traded easily in secondary markets, this allows for quicker investor portfolio adjustments in response to changing market conditions or investment objectives.

Additionally, public disclosure requirements associated with public credit instruments make it easier to assess the relative value and potential worthiness of an investment.

Borrowers

For borrowers, public credit markets enable businesses to raise large amounts of capital efficiently from a broad investor base. Additionally, successfully issuing and managing public credit can enhance a borrower’s credibility, visibility, and creditworthiness in the eyes of stakeholders. The transparency and oversight involved can signal to the market that the company is financially sound and can meet its obligations.

Finally, for investment-grade issuers, the cost of capital in public markets is typically lower than private debt due to the lower perceived risk from public scrutiny and the liquidity offered to investors.

Final thoughts: Choosing between private credit and public credit

Private and public credit play important roles in the debt financing ecosystem. But as seen, they offer quite different value propositions for both investors and borrowers. Private credit stands out for its flexibility and potential for higher returns. It appeals to long-term investors willing to accept illiquidity and higher risk for the chance of greater rewards.

On the other hand, public credit offers greater liquidity, accessibility and a lower-risk profile. It is a better fit for investors who prioritize ease of entry and exit, transparency, and standardized terms.

Ultimately, choosing between private and public credit comes down to your investment objectives, risk appetite, and time horizon. By understanding what each option brings to the table, you can make more informed decisions and build a well-balanced credit strategy. Many sophisticated investors choose to incorporate both into their portfolios to balance risk and maximize returns.

For fund or asset managers looking to unlock the full potential of private credit, Alter Domus offers specialized solutions that support every stage of the private credit lifecycle, from fund structuring and loan administration to data analytics and investor reporting.

Get in touch with Alter Domus to learn how our private debt solutions and services can support your investment goals and help you create more value for your investors.