BAJAJ BROKING
June 13, 2025
2 mins read
Private credit and private equity are two different investment strategies that are part of the alternative investments category. These products are not listed on public exchanges and tend to be attractive to institutional investors and high-net-worth individuals. Although they both represent capital deployment into private companies, their structures, returns, risk profiles, and investor expectations are different.
Private credit refers to non-bank lending that is not issued or traded in public markets. In this model, investors provide debt to companies, usually with agreed-upon repayment terms and interest. On the other hand, private equity involves acquiring ownership in private companies with the goal of generating value over time and eventually exiting via routes such as mergers, acquisitions, or an initial public offering.
Both types of investments fulfill different functions within a diversified portfolio. They are suited to particular financial objectives and tolerance for risk, and investors will generally evaluate a number of factors before making a decision between them. These could be duration, liquidity, income, and growth.
Private credit refers to investments in debt instruments issued by private companies, typically in the form of loans or debt securities. Unlike public debt, these instruments are not traded on open markets, making private credit a non-public investment option. It encompasses various forms, such as direct lending, mezzanine financing, distressed debt, and asset-backed lending.
One of the distinguishing features of private credit is the direct negotiation of terms between the investor and the borrower. The return on investment primarily comes from regular interest payments, with a strong emphasis on capital preservation. Most private credit loans are secured by collateral, which helps mitigate downside risk, offering a level of security for the investor. In addition, lenders may include covenants in the agreement to monitor borrower performance and ensure timely repayments.
Private credit is often chosen by investors seeking a structured and relatively stable income stream. These investments tend to appeal to those prioritising fixed returns over the potential for capital appreciation. Moreover, private credit plays a crucial role in supporting companies that may not qualify for traditional bank loans, particularly mid-sized or growth-focused businesses in need of capital.
Despite its benefits, private credit does come with risks. The illiquidity of these investments, meaning that they cannot be easily sold or traded, is a significant consideration for investors. Additionally, credit risk is inherent in private credit, as the repayment capacity of the borrower and the broader economic environment directly impact the performance of the investment.
Private equity is an investment strategy where capital is used to acquire partial or full ownership of companies. These investments are not listed on public stock exchanges. The objective is typically to restructure, scale, or improve the business and eventually exit the investment through a profitable sale or public listing.
The private equity process involves several stages. Investors usually participate via private equity funds, which pool capital and deploy it across a portfolio of companies. These funds have a general partner (GP) who manages the investments and limited partners (LPs) who contribute the capital.
Investments in private equity span various sectors and company stages, from startups to mature enterprises. Venture capital, growth capital, and buyouts are all part of the private equity spectrum. The strategy may involve operational improvements, financial restructuring, or strategic guidance to enhance the value of the business.
Returns in private equity are often realised over a longer time horizon. This investment is considered illiquid, as funds are locked in for several years. Performance can vary widely based on the quality of portfolio companies, market conditions, and fund manager expertise.
Factor | Private Credit | Private Equity |
Definition | Debt investment in private companies | Equity investment in private companies |
Ownership | No ownership, only creditor relationship | Partial or full ownership stake |
Return Source | Interest payments and principal repayment | Capital appreciation upon exit |
Risk Type | Credit risk | Business and market risk |
Liquidity | Limited; shorter lock-in periods | Very limited; longer lock-in periods |
Control in Company | Generally limited | Often includes board influence |
Investment Vehicle | Direct lending, debt funds | Private equity funds |
Typical Investor Goal | Regular income, capital preservation | Long-term capital growth |
Monitoring Requirements | Loan covenants and financial checks | Active involvement, strategic oversight |
Exit Mechanism | Maturity of loan or refinancing | IPO, merger, or sale of stake |
Private Credit:
Credit Risk: Private credit carries the risk of borrower default, which can lead to a loss of principal.
Secured with Collateral: Most private credit investments are secured by collateral, which helps reduce downside risk.
Predictable Income: These investments typically provide steady income through fixed interest payments, offering a more stable cash flow.
Limited Impact from Market Volatility: Private credit is less sensitive to market fluctuations, making it a more stable investment in volatile periods.
Lower Return Potential: Compared to equity-based investments, private credit generally offers lower returns due to its lower risk profile and fixed income nature.
Private Equity:
Business and Market Risks: Private equity is exposed to risks associated with the business performance and overall market cycles, which can affect returns.
Illiquidity: Private equity investments are illiquid, meaning they cannot be easily sold or accessed before a liquidity event, adding a layer of risk.
Exit Strategy Dependent Returns: Returns in private equity are often realised through successful exit strategies such as acquisitions or IPOs, which may not always occur as planned.
Active Management Impact: The involvement of active management in private equity can significantly influence the performance and success of the investment.
Higher Return Potential: Private equity has the potential for higher returns due to the higher risks involved, but the return can be more volatile and uncertain.
Private credit strategies focus on generating fixed income through lending to companies. These investments typically involve direct lending to mid-sized businesses, providing bridge loans, or investing in distressed debt. Investors in private credit typically look for predictable, steady income streams, often secured by collateral. The investment period for private credit is generally shorter, ranging from three to seven years, with periodic interest payments and principal repayment upon maturity. The time horizon for private credit is relatively shorter compared to private equity, with investors seeing returns more quickly through regular interest payments.
On the other hand, private equity strategies require a more active, hands-on approach. Private equity funds may acquire businesses to enhance operational efficiency, consolidate industry segments, or facilitate geographic expansion. These investments are generally longer-term, often spanning seven to ten years or more. The longer duration is due to the time needed to improve the portfolio companies, streamline their operations, and achieve a successful exit, either through an acquisition, initial public offering (IPO), or sale.
The time horizon is one of the key differences between private credit and private equity. Investors in private credit may see returns earlier due to the structure of loan repayments, which are often scheduled and predictable. In contrast, private equity investors typically experience a longer waiting period before realising gains, as value creation and exit planning are integral to these strategies. While private credit focuses primarily on the servicing of loans, private equity requires careful planning for exits to ensure the realisation of returns at the right time. This long-term commitment distinguishes the two investment types and their corresponding risk-return profiles.
Private Credit May Suit:
Investors looking for consistent income generation through interest payments.
Portfolios that prioritise reduced volatility and more stable returns.
Individuals or entities with medium-term investment horizons (typically 3-7 years).
Those seeking structured capital preservation, with collateral backing loans to reduce risk.
Private Equity May Suit:
Investors with a higher tolerance for risk and the potential for fluctuating returns.
Portfolios focused on long-term capital appreciation and growth.
Those with a long-term investment horizon, typically 7-10 years or more, to realise returns.
Entities or individuals who can withstand illiquidity and are willing to commit to investments for extended periods before seeing returns.
Private credit and private equity are two very different strategies within the alternative investment universe. Private credit is essentially lending to private businesses, with more stable income-driven returns via fixed-interest repayments, prioritizing capital preservation. Private equity, however, is about purchasing ownership interests in businesses, seeking long-term value creation through operating enhancements or growth initiatives. The strategy tends to be riskier but has higher potential for big returns.
Each of the two investment vehicles has distinct risk-return patterns and horizons. While private credit has more stable income and shorter horizon investments, private equity involves a longer holding period and is exposed to business cycles and market downtrends. Knowing the features, risks, and possible returns of each can guide investors to match their strategy and make better choices in accordance with their investment objectives and risk profiles.
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Private credit involves debt financing to private firms, while private equity involves acquiring ownership stakes in those firms.
Key risks include borrower default, illiquidity, and changes in interest rate environments.
Access to private credit is often limited to institutional and high-net-worth investors, but select funds may offer indirect access.
Private credit generally spans 3–7 years, while private equity often involves 7–10 years or longer.
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