Private Credit vs Public Credit: What Investors Should Know About Public and Private Markets

There are two sides to the coin of the global market: private credit vs public credit. But what’s the difference?

Actually, both share a core purpose: they each lend capital to borrowers while delivering steady returns for investors. But compare their structure, who can invest, and their potential risks and returns, and you’ll soon see marked disparity.

Nowadays, it’s the small nuances between the private and public credit that make or break a portfolio strategy or risk management decisions. So investors need to understand the differences between the two forms of credit, particularly as they become increasingly converged.

What is Private Credit?

Private credit is essentially a form of lending that happens outside of the banking system (or public markets). Money is borrowed by companies from private investors, with the financing typically being provided by non-bank lenders like private debt funds, asset managers, and business development companies (BDCs).

There are a few types of private credit:

• Direct lending: A loan that an investor gives to a company, usually a mid-size enterprise (or middle-market company), without a bank acting as a middleman
• Mezzanine debt: A hybrid between debt and equity, where the lender gets an ownership stake if the borrower doesn’t repay
• Distressed debt: Buying the debt of a company in financial struggle, with the aim of restructuring, and profit if it recovers
• Special situation debt: Loans tailored specifically for unusual events, for example, in acquisitions or buyouts

So, who might use this type of credit? Mainly, it’s any business that might struggle to get an ordinary bank loan. SMEs, for example, may find this difficult due to their size or credit profile; they’re too large for a small business loan but not large enough to sell corporate bonds on the open market.

Larger companies might turn to private credit, too, for fast, confidential financing. The terms negotiated during these transactions are usually highly customized. As such, they allow more flexibility, which can be useful for companies wanting a unique repayment schedule.

The key characteristic of private credit loans is that they are negotiated behind closed doors without public disclosure. They often have higher interest rates, but they can easily be structured to meet specific company needs.

Direct Lending Features

The fastest-growing segment of private credit is direct lending, which has several distinguishing features:

• Flexible interest rates: Rather than having a fixed interest rate, many direct loans use “floating rates” that rise or fall with the market
• Backed by collateral: These loans are often “senior secured,” meaning they’re backed by assets (like property), so the lender has more protection
• Shorter lifespan: Direct loans usually only last five to seven years and can be refinanced earlier
• Held to the end: Public bonds are often bought and sold, but direct loans are usually kept by the lender until they’re fully repaid
• Fewer individuals involved: Direct loans often come from small groups of lenders rather than large groups of investors 

Benefits of Private Credit

Whether you’re an investor or a borrower, private credit deals have a range of advantages, making it one of the fastest-growing segments of the financial system over the past few years. According to Preqin, the global private credit market surpassed USD 1.6 trillion in 2024 and continues to grow at over 10% annually, driven by institutional investor demand.

For borrowers, it means:

• More accessible capital for businesses that struggle to get traditional loans from banks.
• Flexibility to tailor loans to specific needs
• Fast and efficient credit deals
• Private negotiations with no public disclosure of sensitive financial information
• Bespoke financing to fund complex or unusual situations

For investors, the benefits are:

• Higher payout compared to traditional public options, as it carries higher credit risk and is illiquid (meaning it’s harder to sell)
• Stable private investments despite market volatility, so your overall portfolio is protected
• Tailored terms to suit both the borrower and lender’s goals and risk tolerance
• Portfolio diversification across different credit instruments and asset class exposures

Valuation Considerations for Private Credit in a Portfolio

Valuing private credit is a little more complicated than valuing public credit because these loans don’t trade on exchanges, so rarely have observable prices. Instead, you have to rely on:

• Discounted cash flow analysis: Project future loan payments and discount them at a risk-adjusted rate
• Spread calibration: Compare the loan’s original interest rate to current market conditions and adjust for how the borrower’s financial condition has changed since the loan was made
• Benchmarking: Look at public market data to get a sense of what similar loans are earning, as a helpful reference rather than a perfect match
• Qualitative adjustments: Look at factors like the borrower’s financial health, protections built into the loan, how competitive the lending market is, and similar past deals to help refine the loan’s value beyond just numbers

What Is Public Credit?

As the name suggests, public credit is lending that takes place in the public markets, most commonly by issuing bonds through regulated exchanges or over-the-counter markets. An organization borrows money from several investors and promises to pay it all back over a set period of time, plus interest.

It’s similar to stocks, as the bonds can be bought and sold by investors on public exchanges, and every detail of the deal (from prices to interest rates) is open for everyone to witness. It’s a completely transparent system where there are no closed doors.

There are three main types of public credit:

• Investment-grade bonds: low-risk bonds issued by established companies with strong credit ratings
• High-yield (or junk) bonds: Higher-risk bonds with greater interest issued by companies with weaker credit ratings
• Sovereign bonds: Issued by governments to fund projects and public services

Traditionally, it’s bigger, more established companies that take advantage of public credit. Why? They often need to raise large amounts of money and are backed by reputations that will allow them to attract enough investors to do this.

Benefits of Public Credit

Although private credit offers a faster, more flexible, and confidential way to access funds, there are distinct advantages to using the public credit approach, too.

For borrowers, it:

• Allows access to huge sums of money by selling bonds to many investors at once
• Lowers borrowing costs due to interest rates being lower as a result of competing investors
• Boosts your reputation as it demonstrates strength and trustworthiness
• Enables longer-term financing because public bonds can be issued for many years

For investors, it:

• Provides a source of reliable income as bonds pay regular interest
• Affords greater liquidity, as public bonds are far easier to buy, sell, and exchange
• Gives you transparent, detailed information about the borrower and their terms
• Offers a range of options, from safer to riskier bonds, depending on your goals

Private Credit vs Public Credit: How Do They Differ?

It’s evident that public credit and private credit can be used completely differently, despite both being centered around companies borrowing money to grow their operations.

So, how do you decide which is the best option for your investment objectives?

Customization

Public credit is typically very standardized; it’s a one-size-fits-all approach. This means that the terms (like repayment schedules, interest rates, maturity dates, etc.)  are pretty much the same for everyone, leading to widely available, easy trade, but also lacking any personalization to your unique needs.

Private credit doesn’t have this limitation. It’s more of a tailored solution than off-the-shelf, allowing investors and borrowers to negotiate terms so you both get the best deal for your exact situation.

You could have larger repayments one month than another, depending on cash flow, or the loan length could be more precise to fit an exact project rather than a standard 5/10/15 years. An investor could even agree to take ownership shares alongside loan payments if that works for them.

This flexibility makes private credit particularly appealing to businesses that don’t quite fit the mold that public credit is formed around.

Transparency and Oversight

The bottom line is that public credit is more tightly overseen. Borrowers have to regularly share detailed information like their financial health and credit ratings, so investors always have a clear picture of what exactly they’re buying into. If it’s peace of mind you’re looking for, this is the best option as it’s easy to compare investments and spot risks early.

Private credit, on the other hand, is a little more complex to analyze and monitor. It operates with far less public information, meaning a more opaque environment where financial details aren’t always freely shared. If you want to figure out the true value of a particular investment, you might have to rely on third-party assessments to try and get a clear picture. While this allows for greater flexibility and potentially higher returns, it’s a higher-risk gamble with more chance of surprises.

Liquidity

Whether you opt for public or private credit may come down to how tied up you want your money to be. Public credit is far more liquid. If you want your investment back, you can usually sell your bonds fairly quickly on the open market. Money can change hands easily, and you’re not “locked in” to anything too long term.

This isn’t the case when it comes to private credit. It all happens behind closed doors. There isn’t really a place where you can easily resell an investment, so it’s highly illiquid – though a growing secondary market for private credit funds and NAV-based financing is gradually improving liquidity options. You need to take into account the fact that you’ll likely have to wait until the loan is fully repaid before you see that money again.

So why do people choose this option? You’ll usually get rewarded with higher returns with private credit because of the risk of tying money up long term.

Potential Rewards and Risks

As previously touched upon, private credit is typically riskier than public credit. Not only does it have low liquidity (making it harder to sell if you need your money back), but it also often involves lending to smaller or newer businesses, which may potentially face financial trouble. The positive is that you’ll often get higher returns, but you must be careful to ask: at what cost?

With public credit, on the other hand, there’s less need to weigh up the risks. Often, loans are made to bigger and more established companies or even governments, which is a safer bet, as they’re less likely to default. It’s also far easier to resell these investments and return your money quickly. But don’t forget, public credit offers lower returns as a payoff for security.

Regulation of Private vs Public Credit

One of the greatest differences between public and private credit is how closely they’re regulated. Public credit markets are tightly controlled, so investors are more greatly protected. For example, when a company issues bonds, it has to publish detailed financial statements with details of the borrowing and maintain its credit ratings.

But who enforces this? In the US, it’s largely the Securities and Exchange Commission (SEC) that oversees the markets. In Europe, this task falls to the European Securities and Markets Authority (ESMA), among other bodies. The strict rules imposed by these organizations allow investors to easily compare opportunities for risk, and trust that they’re not going to fall victim to fraud.

Private credit is completely different in this regard. It has very little formal regulation, as loans are negotiated directly between the lender and the borrower. There’s no official obligation to make any details public. It’s not a total wild west, as private credit often does fall under frameworks such as the US Investment Company Act exemptions or Europe’s Alternative Investment Fund Managers Directive (AIFMD). These impose some oversight, but far less than in public markets.

Private Credit and Public Credit: Quick Comparison

	Public credit	Private credit
Definition	Lending occurs in public markets, usually via bonds that investors buy/sell openly	Lending happens outside of public markets, directly from investors to companies
Issuer	Large established companies or governments	SMEs, fast-growing companies, or larger firms wanting flexible deals
Yields	Typically lower, reflecting lower risk	Usually higher due to greater risk and illiquidity
Risk profile	Lower risk as borrowers are established and have good credit ratings	Higher risk with borrowers in small, new, or niche industries
Structure	Standardized terms with fixed repayment schedules and interest rates	Highly customized with terms negotiated individually
Regulation	Highly regulated with transparent reporting and disclosures required	Only lightly regulated, so financial information remains private and there’s less public oversight
Liquidity	Highly liquid. Bonds can be bought and sold easily on the public market	Illiquid. Investments are long-term and harder to sell before maturity

Convergence of Private and Public Credit Investments

Private credit has quickly expanded in recent years, mostly as a result of the 2008 Global Financial Crisis. After this event, new regulations emerged which required banks to tighten their lending standards. As a result, many mid-sized companies struggled to secure loans, and private lenders stepped in instead.

This was the kickstart to a rising demand for private credit, accelerated by the appeal of quick, tailored, and confidential deals. Recent events also played a part, from COVID-19 to rising interest rates, making flexible finances more important than ever.

Now, despite their distinct dissimilarities, the line between public and private credit is starting to blur. Private credit is actually becoming more accessible, standardized, and transparent, which makes it increasingly tempting compared to public credit’s lower yields.

At the same time, public credit is evolving too and now mirrors private lending structures far more. Banks and public lenders are now offering more flexible terms and granting loans that are easier for more businesses to manage. Companies are structuring their borrowing in ways that resemble private credit, with simpler terms and fewer restrictions. The result? Both public and private credit now share more similar characteristics in terms of structure, and potential risk and return.

How Does this Impact the Credit Market?

What does this convergence mean for you? You now have a wider range of investment opportunities and greater flexibility in growing your portfolio, as there’s less of a stark contrast in the risk and return of each credit option.

For borrowers, businesses have more options for obtaining money, with private and public lenders offering similar types of loans. With more competition between them, borrowing can be cheaper and easier with better terms and more ways to finance expansion.

How 73 Strings Technology Can Support Private Credit Investments

Investing in private credit has many unique opportunities, but it’s not without challenges if you go into it unsupported. From complex valuations to limited transparency and illiquidity, monitoring your portfolio can be complicated.

73 Strings helps you avoid this complexity through its three core services: Value, Monitor, and Extract. With Value, we deliver AI-powered, audit-ready valuations that bring clarity and consistency to private credit portfolios. Our Monitor service provides real-time oversight of portfolio performance, highlighting risks and opportunities as they arise. Meanwhile, Extract automates the collection and structuring of financial data, eliminating manual effort and reducing errors.

Together, these services enable you to track, analyze, and value private credit investments more accurately and efficiently. For you, this means clearer insights into the health and performance of private loans, the ability to make more informed decisions about allocation and risk, and saving time and costs wasted in tracking complex, illiquid investments.

By combining technology with expertise, 73 Strings demystifies private credit, making it easier for you to integrate these investments confidently into your broader portfolio strategy.