How Private Credit Outpaces Public Markets - While Being Secured
- Steadfast Equity
- Jun 19
- 12 min read
Updated: Jun 21
Private credit is growing fast, offering higher yields, flexibility, and secured structures compared to public markets. Here's why it stands out:
- Higher Returns: Private credit yields range from 8–12%, significantly outperforming public bonds (3–6%).
- Customization: Loans are tailored to borrower needs with strong collateral and covenant protections.
- Growth: The market has tripled in size over the last decade, now worth $2 trillion, and is projected to hit $2.6 trillion by 2029.
- Portfolio Benefits: Floating rates protect against rising interest rates, and private credit has a low correlation with public markets, providing diversification.
- Resilience: Default rates are lower (1.5–2.5%) than public high-yield bonds (3–4%), with better recovery rates for secured loans.
Quick Comparison
Feature | Private Credit | Public Bonds |
Yield Range | 8–12% | 3–6% |
Liquidity | Illiquid, held to maturity | Highly liquid, tradable |
Transparency | Limited public disclosure | Full SEC reporting |
Default Rates | 1.5–2.5% | 3–4% |
Recovery Rates | 70% (secured loans) | 47% (unsecured bonds) |
Investor Access | Institutional only | Available to all investors |
Private credit is a strong option for investors seeking higher returns, diversification, and secured investments. Dive into the details to see how it can enhance your portfolio.
How Private Credit Beats Public Market Returns
Higher Yields: Past and Present Data
Private credit has consistently delivered yields in the range of 8–12%, far outpacing the 3–6% typically offered by investment-grade corporate bonds. This yield premium has remained steady over time, making private credit a standout option for investors seeking higher returns.
The Cliffwater Direct Lending Index (CDLI) highlights this performance. In 2023, the CDLI posted a return of 12.13%, with an annualized total return of 9.55% since 2004. Even during periods of market stress, losses have been minimal - just –1.1%, compared to –1.3% for leveraged loans and –2.2% for high-yield bonds. This combination of higher yields and lower losses offers a compelling risk-adjusted return profile.
These strong returns underscore the unique structural advantages that make private credit a reliable outperformer.
Why Private Credit Performs Better
Private credit's ability to outpace public markets is rooted in its structural benefits. One key factor is the illiquidity premium, which compensates investors for the reduced liquidity and absence of daily pricing.
"Private credit is not a private version of what happens in public markets and bank syndicated lending... it's a step up in efficiently matching assets and liabilities."
This efficiency stems from private credit's ability to pool capital from investors with long-term commitments. Unlike bank depositors, who can demand their money at any time, private credit investors provide stability, allowing managers to focus on capturing spreads rather than managing liquidity.
Another advantage is the complexity premium. Private credit often involves customized loan agreements and stronger lender protections, which enable tailored financing solutions and higher yields.
Additionally, private credit's use of floating interest rates provides a significant edge in rising rate environments. Investors can benefit from an additional 200–300 basis points in floating yield, especially compared to the decade before 2022's rate hikes. This feature not only mitigates interest rate risk but can also amplify returns as rates climb.
Efficient capital allocation, combined with customized lending structures and tax strategies, further enhances private credit's performance.
Performance Numbers and Examples
The track record of private credit speaks for itself. According to Hamilton Lane, private credit has delivered positive vintage year IRRs for the past 23 years, outperforming the Credit Suisse Leveraged Loan Index by an average of 625 basis points in every vintage year.
"Private credit investors are positioned to experience higher yields for longer."– Nayef Perry, Head of Direct Credit, Hamilton Lane
The current market environment offers even more opportunities. As of Q3 2024, there is a $1.4 trillion funding gap between private equity buyout dry powder and credit origination dry powder. Additionally, a maturity wall of over $600 billion in performing loans through 2028 positions private credit for continued growth.
KKR’s perspective aligns with this optimistic outlook. Dan Pietrzak, Global Head of Private Credit at KKR, shared:
"Even with spread compression, elevated base rates make today's all-in yields compelling - especially for senior-secured risk."
He added:
"Direct Lending thrives because of its consistent, long-term ability to generate steady, compounding income. That's exactly why it remains a core portfolio staple."
Private credit also offers lower volatility compared to public equities and debt securities, providing a smoother return profile. Its lower correlation with public markets adds diversification benefits, making it a valuable component of a balanced portfolio.
This consistent performance and stability highlight private credit’s role in building a high-yield, resilient portfolio. It’s an investment strategy that aligns well with both income generation and diversification goals.
How Private Credit Protects Your Investment
Collateral and Payment Priority
One of private credit's strongest features is its reliance on collateral-backed structures, which help safeguard lenders in case of defaults. Collateral can include tangible assets like real estate, commodities, and property, plant, and equipment (PP&E) - all of which tend to hold or grow in value during inflation. Lenders may also accept other forms of security, such as inventory, receivables, intellectual property, or even personal guarantees.
On top of this, private credit benefits from strict payment priorities. For instance, first-lien debt typically achieves a 70% recovery rate, significantly higher than the 47% recovery rate for unsecured bonds. More sophisticated structures, such as NAV (Net Asset Value) credit facilities, further spread risk by layering collateral from various sources like investments, equity, distribution proceeds, and cash or securities.
Risk Protection Methods
Covenants play a critical role in protecting against risk by setting conditions that limit activities such as excessive borrowing or asset sales. These rules give lenders greater control and visibility into a borrower's financial health. In 2022, over 90% of middle-market private debt deals included covenants, compared to only 7% of syndicated loans.
When a borrower breaches these covenants, it acts as an early alarm for lenders, giving them a chance to renegotiate terms before the situation worsens. Additional measures, such as directing cash flows into pledged accounts and maintaining uncalled capital, further protect the value of the collateral.
These safeguards not only provide early warnings but also create opportunities for lenders to step in and mitigate risks effectively.
Getting Your Money Back During Problems
Thanks to its emphasis on strong collateral and covenant structures, private credit offers a reliable framework for recovering capital during economic downturns. This resilience is reflected in the numbers: default rates in private credit hover around 1.5–2.5%, compared to 3–4% in the public high-yield bond market.
The combination of robust covenants, high-quality collateral, seniority in repayment, and guarantees significantly improves recovery outcomes. For example, during the market turbulence of 2020, private debt funds experienced losses of just 5–10%, whereas public high-yield bonds dropped by 15–20%.
Responsible and Ethical Private Credit Investing
Using ESG Standards in Private Credit
The integration of Environmental, Social, and Governance (ESG) standards in private credit has become a cornerstone for managing risks and enhancing portfolio value. With global sustainable investments now surpassing $30 trillion - a 68% increase in recent years - investors are clearly prioritizing transparency and accountability in how their portfolios perform on environmental and social fronts.
Private debt funds are increasingly evaluating the ESG practices of borrowers, recognizing these factors as critical to both performance and risk management. For lenders with a long-term outlook, ESG risks often surface gradually, making them essential considerations in credit assessments.
One tool gaining traction is the ESG margin ratchet, which has been incorporated into as many as 25% of European loans. These mechanisms offer borrowing cost reductions - about 7 basis points per monitored KPI, potentially totaling nearly 30 basis points - encouraging borrowers to improve their ESG performance.
"What we say to borrowers is that if you're able to meet certain ESG measures and milestones going forward, we will give you a reduction in the price of the debt as an incentive to get them to move towards a better ESG outcome."– Andrew Tan, Chief Executive Officer, Asia Pacific, Muzinich & Co
Interestingly, about 70% of ESG margin ratchets are "one-way", meaning they only lower borrowing costs when a company demonstrates improved ESG performance. In the Consumer Discretionary sector, the average discount is approximately 10 basis points - 40% higher than the overall average. Furthermore, nearly 75% of ESG-linked deals are concentrated in Industrials, Healthcare, and Consumer Discretionary sectors.
New regulations, such as the EU's Sustainable Finance Disclosure Regulation (SFDR), are pushing for even greater transparency and accountability in ESG-focused investments [30, 31]. Borrowers are also becoming more accustomed to providing ESG-related disclosures, which simplifies the integration process for both lenders and borrowers.
In step with these industry trends, Steadfast Equity has solidified its dedication to ethical investing practices.
Steadfast Equity's Ethical Investment Approach
Steadfast Equity has built its reputation on a foundation of transparency, expertise, and unwavering ethical standards that extend well beyond basic regulatory requirements.
"At Steadfast Equity, we believe that trust is earned through transparency, experience, and adherence to high standards."– Steadfast Equity
The firm's ethical commitment is rooted in measurable actions rather than superficial marketing claims. With a 20-year track record, over $800 million in assets compared to less than $200 million in liabilities, and a flawless on-time payment history, Steadfast Equity demonstrates its reliability. The company focuses on working with investors who value mutual respect, lawful practices, and the responsible use of funds, steering clear of investments that could contribute to harm, illicit activities, or exploitation.
To ensure legal accountability, Steadfast Equity complies with SEC regulations, making its disclosures accessible via the EDGAR database.
The firm's ethical principles are also reflected in its investment strategy. For example, Steadfast Equity supports advancements in artificial intelligence aimed at boosting productivity and economic growth, deliberately avoiding technologies that could be deemed exploitative. Additionally, the company employs an offshore incorporation model for tax efficiency while maintaining full regulatory compliance.
This well-rounded approach positions Steadfast Equity as a leader in responsible private credit investing, where delivering strong returns aligns seamlessly with promoting social responsibility.
Adding Secured Private Credit to Your High-Yield Portfolio
How to Add Private Credit to Your Portfolio
Incorporating private credit into your portfolio requires a careful look at your risk tolerance and liquidity needs. These investments often demand long-term commitments and restrict access to capital, so planning is essential.
Start by conducting a thorough credit analysis. Focus on factors like cash flow, leverage, industry conditions, and the quality of management. This is especially important given that only about 20% of issuers in the private credit market have credit ratings.
Liquidity is another key consideration. PIMCO estimates the cost of long-term illiquidity at roughly 200 basis points (2%) annually, which underscores the importance of maintaining sufficient reserves for unexpected expenses.
Choosing the right managers is critical. Look for those with a strong track record, as performance can vary widely. For example, top-quartile private credit funds have achieved an impressive 23.3% IRR, while bottom-quartile funds have seen returns dip to -3.6%.
Pay attention to debt covenants as well. These agreements are designed to limit borrower risk, and managers who can engage directly with borrowers play a pivotal role in addressing challenges as they arise.
"In private markets, careful selection may drive results. Investors considering private markets may want to focus their manager selection on those with experience investing through multiple credit cycles. For managers, credit selection is critical when seeking to achieve attractive outcomes and mitigating downside risk." – John Griffith III, Managing Director, Senior Strategist, Global Private Debt
By following these steps, you can integrate private credit into your broader fixed-income strategy, paving the way for a direct comparison with public bonds.
Private Credit vs Public Bonds Comparison
Understanding how private credit differs from public bonds is crucial for making smart allocation decisions. The differences go beyond yields and touch on risk, liquidity, and transparency.
Feature | Private Credit | Public Bonds |
Yield Range | 7%–9% all-in yields | ~3% for investment-grade corporate bonds |
Liquidity | Illiquid, held until maturity | Highly liquid, tradable daily |
Credit Ratings | Only ~20% of issuers rated | Majority have public credit ratings |
Transparency | Limited public disclosure | Full SEC reporting requirements |
Investor Control | Direct borrower engagement possible | No direct borrower interaction |
Valuation Method | Third-party valuations, less frequent | Daily market pricing |
Risk Assessment | Extensive due diligence required | Standardized credit analysis available |
Private credit generally offers higher yields, driven by the illiquidity premium and the additional credit risk taken on by lenders. Over the past decade, private credit has outperformed public loans, delivering annualized returns of 10% compared to 5% for public bonds. Additionally, private credit's less frequent third-party valuations can provide more stable pricing, avoiding the daily market volatility seen with public bonds.
Steadfast Equity's Investment Options
Steadfast Equity offers secured private credit investments with fixed returns and flexible terms. Their standard bond options range from one to 12 years, with annual percentage yields (APYs) spanning from 10.0% to 16.5%. For example, their 1-Year Monthly option generates a 10.0% return with periodic cash distributions, while the 12-Year Compounded option offers a 16.5% APY.
For those seeking higher returns, their high-yield bonds include 3-Year and 5-Year compounded options with APYs of 15.0% and 18.5%, respectively.
All investments come with strong security measures and ESG compliance. Steadfast Equity supports meaningful economic activities, such as advancements in AI and technology, while adhering to strict regulatory standards under SEC oversight.
Investment minimums and availability vary by product. The firm emphasizes building partnerships with investors who prioritize ethical practices, mutual respect, and responsible deployment of capital.
Private credit in focus: A deep dive into direct lending
The Future of Secured Private Credit
The secured private credit market has seen impressive growth, expanding from $1 trillion in 2020 to $1.5 trillion by early 2024, with forecasts suggesting it could hit $2.6 trillion by 2029. This rapid expansion is paving the way for transformative changes in technology and regulation.
Technology is reshaping credit underwriting and risk management. Tools like AI and advanced data analytics are making credit assessments more precise. In 2023, over 90% of organizations reported measurable benefits from their investments in data analytics, highlighting how crucial these tools are for staying competitive. On top of that, AI-powered fraud detection systems are now capable of identifying unusual activities and flagging potential security threats, providing an added layer of protection for secured investments.
These technological strides are coinciding with a shift in how public and private markets interact, opening up significant opportunities. Companies are remaining private for longer periods, and the potential market for private credit is now estimated to exceed $30 trillion across various asset classes. This trend is particularly pronounced in AI-driven industries, where the growing need for data centers and infrastructure is creating new types of collateral that align with long-term technological advancements.
"Amid the current economic environment, we continue to take a proactive approach, which includes closely analyzing companies' earnings and free cash-flow generation."– David Miller, Head of Global Private Credit & Equity, Morgan Stanley
Ethical investing is becoming a cornerstone of private credit's evolution. To achieve long-term success, financial returns must increasingly go hand-in-hand with ESG (Environmental, Social, and Governance) considerations. Companies that adopt sustainable practices not only benefit shareholders but also create value for employees, customers, and communities.
Steadfast Equity is at the forefront of this shift, combining high-yield secured private credit opportunities with a strong commitment to ethical investing. By adhering to ESG principles and forming selective partnerships with investors, the firm ensures that capital is directed toward meaningful economic activities while delivering the security and returns investors seek. With annual percentage yields (APYs) ranging from 10.0% to 18.5% across various term structures, Steadfast Equity proves that prioritizing ethics doesn’t mean compromising on performance.
"At Steadfast Equity, our firm commitment to long-term value creation is the cornerstone of everything we do. While others may chase fleeting trends, we remain focused on investments that endure."– Steadfast Equity
As this guide has shown, the future of secured private credit hinges on balancing strong returns with effective risk management. With traditional banks increasingly collaborating with private credit lenders and technology continuing to advance risk assessment, the space is ripe with opportunities for savvy investors. The key lies in partnering with firms that combine deep market knowledge with unwavering ethical standards - qualities that define the next era of secured private credit investing.
FAQs
What are the key risks of private credit investments, and how can they be managed?
Private credit investments come with a unique set of risks, including borrower default risk, liquidity risk, and market or systemic risk. If not carefully managed, these risks can directly affect the returns investors expect.
To address these challenges, private credit often leans on collateral-backed loans and structured protections. For example, senior secured loans take priority for repayment in the event of a default, offering an added layer of security. Beyond that, robust risk management practices play a crucial role. This includes independent valuations, thorough due diligence before committing to an investment, and continuous monitoring to catch potential issues early.
By combining these safeguards, private credit can offer a stable, income-generating option for investors seeking to diversify their portfolios while aiming for consistent, long-term growth.
How does incorporating ESG standards influence the performance and risk management of private credit investments?
Integrating ESG (Environmental, Social, and Governance) standards into private credit investments helps improve both performance and risk management by focusing on sustainability factors that can influence returns. By recognizing and addressing ESG-related risks, investors can create portfolios that are more resilient and better prepared to navigate potential challenges.
On top of that, incorporating ESG principles can appeal to socially conscious investors, lower financing costs, and promote long-term value. This strategy not only aligns with ethical investing practices but also supports steady and reliable returns, making it a key element in building a strong and secure private credit portfolio.
Why do some investors prefer private credit over public bonds, even with less liquidity and transparency?
Private credit often draws investors because it tends to deliver higher returns, thanks to risk premiums. This makes it especially appealing when interest rates are low. Additionally, these investments come with collateral and structured protections, offering a layer of risk management even though they lack the transparency and liquidity of public bonds.
For investors aiming for secured, high-yield opportunities, private credit can be an excellent way to diversify. It offers a mix of stability and performance that public markets don't always provide.
