Public and private credit: An introduction

The public and private credit markets together form a broad, evolving universe of financing options, ranging from highly liquid government and corporate debt to higher yielding, less transparent private loans. As these markets expand and diversify, their once distinct roles are increasingly intersecting – setting the stage for deeper convergence ahead.

Public credit

Public credit markets make up a vast segment of global finance, with more than $145 trillion in outstanding fixed-income securities – including Treasuries, corporate bonds, and securitized debt. They span a wide spectrum of maturities, credit qualities, and structures, from ultra-low-risk U.S. government debt to investment-grade and high-yield corporate obligations, as well as mortgage- and asset-backed securities. Together, these markets provide essential funding channels and diversified opportunities for investors.

Private credit

Private credit markets offer a way to seek additional compensation for things such as complexity and illiquidity, which are not currently found in the public markets. These factors can potentially lead to higher levels of income generation and total return diversification.

Convergence of public and private credit

The private credit market is rapidly growing and trending toward a convergence with the public debt markets. Several of factors have fueled this growth. Over the past decade, more corporate borrowers have turned to nonbank lenders in pursuit of more favorable debt terms, while the expansion of business development companies (BDCs) has supported the emergence of new markets across a wide range of private credit sub asset classes. As a result of this trending convergence, a blended investment approach to public and private credit can help maximize income while also identifying the best value opportunities across both markets.

But what exactly can an investor get exposure to in today’s private credit market? Below, we show some examples of how there are equivalents across both public and private investments – where Loomis Sayles’ Credit Research Team looks for opportunities.

Compare what’s inside both public and private credit markets

Glossary of key terms for public and private credit

Asset-backed securities (ABS): A financial instrument that is backed by a pool of income-generating assets, such as loans, leases, or forms of consumer debt. These securities allow for investors to gain exposure to the cash flows from the underlying assets while providing diversification, potential for enhanced liquidity, and a structured way to manage credit risk.

Asset-based finance (ABF): Refers to lending that’s backed by specific assets – such as equipment, mortgages, or leases – rather than a company’s overall credit profile. These assets generate cash flows that are used to repay the loan.

Bank loans: When commercial banks or other financial institutions lend to companies; features include a floating-rate coupon and a senior, secured position in the capital structure.

Below-investment-grade bonds (high-yield bonds): Bonds that receive a low credit-quality rating (BB or lower) from an established rating agency.

Collateralized loan obligations (CLOs): A type of structured investment that combines many corporate loans – mostly to companies with lower credit ratings – into a single pool.

Commercial mortgaged-backed securities (CMBS): A financial instrument backed by a portfolio of loans secured by commercial real estate.

Corporate bonds: Bonds issued by corporations to secure funding for a range of strategic needs.

Direct lending: Involves nonbank institutions, such as private credit funds, providing tailored loans directly to companies. By bypassing traditional banks, this financing offers borrowers greater flexibility to support various goals, while offering attractive risk-adjusted returns through enhanced yield potential to lenders.

Distressed debt: Bonds or loans issued by companies facing severe financial challenges, such as a high likelihood of default or bankruptcy. They typically trade at a significant discount to their face value, reflecting the market concerns about the ability of an issuer to meet its obligation and an elevated risk of loss.

Emerging and developing markets: Bonds issued in markets that have economies undergoing rapid industrialization and growth yet typically feature lower household incomes and less developed financial systems compared to developed economies.

Fund finance: Refers to lending directly to private credit funds to help them manage liquidity and operations.

Investment-grade bonds: Bonds that receive a high credit-quality rating (BBB or higher) from an established rating agency.

Mezzanine debt: Subordinated debt with lower repayment priority compared to other debt, often unsecured or partially secured, that offers higher yields to compensate for higher risk.

Mortgage-backed securities (MBS): A financial instrument that represents an ownership interest in a pool of residential mortgages.

Municipal bonds: Debt securities issued by state or local governments to fund public projects.

Non-US bonds: Bonds issued by companies domiciled in countries outside the United States.

Private credit: Debt investments that are originated or negotiated outside the public markets. These opportunities are typically illiquid and may offer higher yields, spanning a broad spectrum of risk and return profiles.

Public debt: Debt issued or traded on the public markets.

Real assets: A category of investments that derive value from tangible, physical properties, such as real estate, infrastructure, and natural resources.

Risk transfer/secondaries: Involves buying and selling existing stakes in private credit funds.

Specialty situations: Refers to lending and investment approaches outside the traditional banking system, targeting borrowers or projects that are underserved by conventional credit channels. They typically rely on the valuation of specific assets or distinctive income streams, rather than primarily on a borrower’s credit profile.

Structured finance: Sophisticated financial instruments that aggregate various assets and reallocate associated risks across different layers, or “tranches,” each with distinct risk and return profiles.

The convergence of public and private credit

Public and private credit are converging, creating new public private income opportunities for investors.