The private credit market has seen significant growth in response to regulatory shifts, pursuit of yield and increased awareness of its unique characteristics. A previous blog explored its rise, and in this post, we will analyze private credit’s comparative performance, consistency and correlation to public markets—particularly broadly syndicated loans (BSL), which share private credit’s illiquidity and complexity.

The Allure of Private Credit

Interest in private markets is driven largely by the illiquidity premium that often accompanies lock-up periods. Over the one-year period ending Dec. 31, 2023, public and private credit performed similarly (see Exhibit 1).

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However, over a 10-year horizon, private credit indices exhibited stronger performance (see Exhibit 2). Notably, all indices declined during March 2020’s COVID-19 shock, but private credit demonstrated a stronger recovery, illustrating the divergence between private and public markets.

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In the first five years of the period studied, private credit typically delivered higher returns than public credit, though investment grade bonds occasionally outperformed. A study by PineBridge Investments found that private credit outpaced the BSL market by approximately 157 bps on average, largely due to its illiquidity premium.¹

Understanding Correlation in Private Credit

To further analyze private credit’s behavior, we examined correlation between public and private credit indices (see Exhibit 3).

• Investment grade bonds show little correlation to private credit strategies
• High yield bonds have notable correlation with all private credit strategies
• Leveraged loans exhibit strong correlation (80% or higher) with private credit, except for subordinated capital

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This suggests leveraged loans may be a useful public market comparison for private credit, given shared characteristics such as floating-rate coupons. It also highlights how credit risk, rather than interest rate sensitivity, drives performance in these instruments.

Navigating Risks in Private Credit

Private credit involves lengthy lock-up periods (typically 7-10 years) and illiquidity, limiting investors’ ability to exit positions. While private lenders cater to borrowers who are unable to secure traditional bank loans, private and public credit markets differ in liquidity and syndication.

In the public BSL market, loans are syndicated and actively traded, leading to price fluctuations. Private credit loans, though, are primarily “buy and hold,” not subject to syndication and generally unavailable to the broader market. This means investors manage capital calls and distributions over time while maintaining committed capital obligations.

In addition, private credit’s rapid growth raises questions about sustainability and potential oversaturation. Deal-making has kept pace with demand, but long-term durability remains uncertain.

Private credit managers negotiate preferred terms in loan agreements, but these require time and extensive assessment. Many private credit loans feature floating-rate coupons priced above the secured overnight financing rate (SOFR). With potential interest rates decreases, it remains to be seen how private credit will compete with, or complement, public markets as investor demand continues.

Learn more in our recent analysis, “The Rapid Rise of Private Credit.”

This blog was co-authored by Nicholas Godec and Greg Vadala.

¹ Wolfson, Kevin and Joseph Taylor. “Private Credit vs. Broadly Syndicated Loans: Not a Zero-Sum Game.” PineBridge Investments. July 2024.

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