Going Beyond the Stock Market: Private Credit vs Private Equity

Key Takeaways 

• The private credit strategy primarily involves lending for interest payments, with a focus on high-risk borrowers.

• Companies sometimes turn to private credit for debt financing for buyouts, business expansion, or cash ongoing operations. 

• Private equity refers to investment funds that buy and manage companies before selling them. 

When many people think of investing, their first thoughts are of stocks and bonds. However, investors seeking to diversify their portfolio with less-volatile alternatives have private credit (PC) and private equity (PE) as options.

Despite their limitations, which can include risk, illiquidity, and accreditation, both asset classes can offer high returns. It is essential, though, to understand the distinctions and similarities between the two. 

Here is a breakdown of the strategies, risks, and potential returns associated with each, and how they compare to traditional public investments.

Private Credit vs. Public Debt

Also known as direct lending, private credit covers a number of approaches that traverse borrower type and capital structures. 

Companies sometimes need debt financing for buyouts, business expansion, or for ongoing operations. To meet their needs, they can borrow from a bank or issue bonds that ultimately trade in public markets. Another option is private credit, which involves working with a lender to establish a customized capital solution.

Such loans, depending on type, carry varying risk levels. Returns will also vary, commensurate to that risk, and across capital appreciation and yield components. For example, while senior, secured loans generally offer more stable yields and relatively lower risks, there are higher yields, but more risk, associated with mezzanine and unsecured, subordinated strategies.

Since 2008, private credit has evolved to fill traditional banking gaps. Note this quote by Ted Yarbrough, Yieldstreet’s chief investment officer, in an open letter about private credit:

“The aftermath of the financial crisis brought considerable change to this model. particularly the loan market,” Yarbrough said. “Global regulators realized that large amounts of credit exposure were heavily concentrated on the balance sheets of the largest and most interconnected banks in the world, which requires extensive ‘bailouts’ and other governmental intervention. “

“… As banks have reduced their exposure to the loan market over the last couple of years, the demand for corporate loans has continued to grow, particularly from small and mid-sized companies.”

Exploring Private Credit 

The private credit strategy primarily involves lending for interest payments, with a focus on high-risk borrowers.

As with any investment, there are pros and cons associated with private credit. Potential upsides include high, predictable returns, more investor control, and fixed payments. Prospective drawbacks are higher risks, including to credit, and illiquidity.

Who Can Invest in Private Credit?

Due to comparably high minimums and the expertise needed to invest in private credit, the typical investor in institutional.

Yieldstreet, though, changes that and makes private credit investing available to retail investors. Generally, private credit refers to corporate lending. In addition, though, it can include associated asset classes such as trade finance, structured finance, and supply chain finance. Yieldstreet’s PC presence is primarily in the structured finance and asset-backed space.

As such, the platform offers accessible opportunities in art, litigation finance, leasing, consumer lending. aviation, and trade and supply chain finance. It also expects to widen such opportunities in the near future.

Private Equity vs. Public Equity 

In the main, private equity involves ownership stakes in companies not listed on a stock exchange, while public equity covers public stock investments.

With private equity, sources can range from family and friends to venture capital and crowdfunding. The financiers invest in a private company. By contrast, public equity arises with an initial public offering. A company on a stock exchange can subsequently raise funds on the public market.

Investments in listed shares can, at any time, be monetized. Because investments in private companies are typically meant for a specified period, PE has more of a long-term investment nature. Also, investors in private companies can often have a say in strategy. Shareholders in listed companies may have voting rights.

Keep in mind that, unlike listed companies, private companies need not provide information to anyone. Thus, transparency may be an issue.

What is Private Equity?

Private equity refers to investment funds that buy and manage companies before selling them. Traditionally for institutional investors, PE funds are now available to retail investors through platforms.

PE funds, which usually have no investments in companies that are listed on stock exchanges, generally acquire stakes in companies to increase their value before a sale or IPO. As part of a consortium, such funds also invest in buyouts of mature companies.

In the last 25 years or so, private equity funds have generated strong returns. The result has been fast industry growth. PE buyouts hit a record of $1.1 trillion in 2021, according to a 2022 Bain & Company report, doubling 2020 numbers. 

There are a number of benefits to PE investing, including the potential for high returns. Taking positions in a flagging business that goes on to succeed can pay off in a big way.

Compared with the public sector, PEs also offer more investment opportunities, rendering them more flexible, and have been shown to be resilient. Another attraction for many is the minimal effort required for investing, as passive income generation is handled by professionals.

However, there are significant risks associated with private equity. After all, investments hinge on a company’s success or failure. And that can depend on PE firm management and factors such as the timing of the buy and sale.

Other potential drawbacks can include high barriers to entry, although those are eroding, and prospects for losses. There is also a lack of transparency in PE, since private markets are not subject to reporting requirements.

Who Can Invest in Private Equity?

Due to the investment complexity, institutional and high-net-worth individuals are primarily PE investors. 

Still, Blackstone, KKR, and some other large funds seek to widen access to retail investors. New lanes for participation also include fund of funds. With those — which do require due diligence — private wealth firms invest for 100 clients in one transaction, performing as general partners.

Then there are less-common secondary market platforms that buy existing shares in private equity funds, as well as regulation changes that are opening up some direct investments.

The alternative platform Yieldstreet, with its private-market offers, also has retail opportunities in PE. After all, retail investors account for 50% of all wealth globally, according to Bain & Company. While Yieldstreet’s PE program is more for intermediate investors, it does offer opportunities with accessible minimums and early liquidity options.

Private Credit vs. Private Equity 

When it comes to private credit vs. private equity, the two investments do have similarities, including that they’re both alternative investments, they offer the potential for high returns, and generally involve accredited investors.

Overall, private credit investors to borrowers who may experience difficulties securing loans elsewhere. On the other hand, PE involves purchasing ownership shares in a private company.

Private credit is more associated with predictable and stable returns. High returns that are possible with private equity come with the possibility of substantial losses.

Making the Choice

When deciding between private credit and private equity, the rule of thumb is that the former has the potential for stable returns. Private equity, meanwhile, may be more suitable for investors who accept and seek out high-reward scenarios, despite the high risks. Which one is ultimately selected will largely depend on the investor’s risk tolerance, time horizon, and short- and long-term financial goals.

Whether the interest is more toward private credit or private equity, both are alternative investments, which are increasingly popular. After all, the private market has topped the S&P’s performance in every downturn of nearly the last two decades. And it’s less volatile than constantly fluctuating public markets.

Now, every investment carries risk, and it’s feasible to gain professional advice to determine whether an asset class aligns with the investor’s goals, time horizon, and risk tolerance.

However, alternatives such as PC or PE generally provide better returns than stocks and can shield against inflation. Yieldstreet, on which $4 billion has been invested as of 3/31/24, is one of the leading alternative investment platforms. It offers highly vetted opportunities in both with accessible minimums. 

In addition to potentially generating steady secondary income, investing in the private market also diversifies investment holdings, which may serve to lessen overall risk. In fact, diversification is a key pillar of long-term investing success.

Alternative Investments and Portfolio Diversification

Alternatives can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially attractive gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary 

Going beyond the stock market, private credit and private equity can be high-return alternatives, depending upon the investor’s risk tolerance and return expectations.

Generally, those seeking high risk/reward scenarios may be better suited for PE, while those who put a premium on stable returns may find private credit more attractive.

In addition to providing less volatility, alternative investments as a whole also serve to diversify investment holdings, which can potentially mitigate risk and even improve returns.