Private Credit Is Giving Investors Better Returns Than Private Equity (2024)

FAQs

Is private credit as good as private equity? ›

Private credit investments are typically short- or long-term, depending on the investor's risk appetite or interests. Commitments tend to be more flexible than private equity investments, making it easier for investors to withdraw their money in the short term rather than holding their capital in a debt instrument.

Private equity vs public equity

The simple answer is: yes, by a significant margin. Source: Cambridge Associates, 30 June 2018; MSCI Equity Index alongside the internal rate of return for the Global Private Equity Index (pooled return), annualized over 5-, 10-, 15- and 20-year periods.

Private Credit Returns

Looking back further, over the past decade senior lending has returned nearly 9% on an annualized basis, roughly twice the return on public loans, and has outperformed global equities.

This means that there is more risk involved for the investor. Additionally, private credit investments typically have a higher interest rate than traditional bank loans, which means that investors will have to pay more in interest over time.

Diversification: Private credit has been less correlated with public markets than other asset classes, such as equities and bonds. This can help reduce portfolio volatility and improve risk-adjusted returns.

Private credit is a fast, secure and effective way for these companies to generate the funds it needs. Secondly, investors are drawn to private credit investing options due to their better-than-average rate of return.

The minimum return to investors to be achieved before a carry is permitted. A hurdle rate of 10% means that the private equity fund needs to achieve a return of at least 10% per annum before the profits are shared according to the carried interest arrangement.

Target private equity returns vary depending on the specific investment strategy and whether the investment is direct or through a fund structure, but typically they will be around 2.0x-5.0x capital returns within five years. Often there will be an opportunity for upside.

Another major downside is that private equity is a much more saturated market today than in previous decades. There's too much capital chasing too few high-quality companies, which means that returns will almost certainly decrease in the future.

Private credit funds say they can accommodate borrowers whose credit metrics make them ineligible for a bank loan (as is the case for many fast-growing but loss-making companies) or that require very flexible terms. Another advantage is that the pricing of private deals is often set up front.

Is Blackstone private credit fund a good investment? ›

Private credit offers high yields, floating rates, and has some defensive characteristics at a time when interest rates are fluctuating. The 10.1% total return since inception is far less than the 10.5% that the fund has returned to investors annually over three years.

Advantages of private credit include high potential returns, relatively low risk, increased control for investors, fixed payments and diversification capabilities. Its potential downsides are the high entry barrier, illiquidity, and potential credit risk.

Private credit funds raise capital by selling limited partner interests to investors. Private credit funds are generally exempt from registration as investment companies under the Investment Company Act of 1940, although some private credit funds may be so registered.

A prominent difference between private credit and private equity is how they generate potential returns - private credit is based on companies repaying the loan with an interest rate, and private equity includes an investor acquiring an ownership stake.

With a thriving market and a diverse range of activities, private credit stands as a lucrative field for finance professionals.

Private Equity vs Private Debt

Private equity is a form of investment. It involves the acquisition of an ownership stake in a company. In contrast, personal debt is a form of investment that involves lending money to a company or individual.

Private credit funds say they can accommodate borrowers whose credit metrics make them ineligible for a bank loan (as is the case for many fast-growing but loss-making companies) or that require very flexible terms. Another advantage is that the pricing of private deals is often set up front.