Private credit’s distinct features can be good for borrowers and investors.
The financial media has been filled with headlines about the growing convergence of public and private markets, particularly in private credit. But this convergence is not a new phenomenon: it’s been underway for decades. We aren’t seeing a structural shift so much as the continuation of long-term trends.
The investment-grade private placement market, where companies raise capital by selling debt securities to small groups of institutional investors instead of via public offering, is a good example. It gives institutional borrowers more choice and flexibility on pricing and structure.
The same is now true in leveraged finance. Following the massive growth of the private credit market, mega-cap private credit deals and broadly syndicated loans are increasingly interchangeable borrowing tools for large-cap issuers. Borrowers weigh cost of capital, speed of execution, certainty of closing and flexibility to determine which market is optimal for a particular financing. This choice is deeply rational. It reflects an increasingly efficient continuum of financing options for borrowers, not a bifurcated world.
The asset-based finance market is further expanding the choices for non-bank lenders and specialty finance companies that lack access to stable funding because they don’t have access to deposits. Private capital, with its flexibility and increasing scale in the asset-based finance segment, is a natural fit to optimize execution and diversify financing sources to avoid an overreliance on any single channel.
Borrowers, in our view, will go where they can access the cheapest and most flexible capital, the fastest execution and the highest certainty of closing.
Liquidity? That’s a Different Question
While capital sources may be converging, liquidity in private credit remains limited—and for good reason. It’s tempting to imagine a seamless secondary market for trading private loans, but we think that vision contradicts the structure and value proposition that has made private credit appealing to borrowers and investors.
Borrowers in private debt transactions, in our view, aren’t looking for anonymous capital. They want the certainty, speed of execution and alignment that comes with a single lender or small group of like-minded lenders. What’s more, we believe they value loan structures tailored to their specific needs. That’s why many private credit agreements include restrictions that limit lenders from transferring their obligations. These are not shortcomings, in our view. They’re features.
In the end, we think investors want enhanced yield, better downside mitigation potential—from custom structuring and strong lender-borrower relationships—and lower volatility. As we see it, trading has the potential to undermine many of these things. It would require standardized documents, mark-to-market pricing and—potentially—fragmented ownership in distressed situations.
We don’t think that’s the ecosystem borrowers or long-term capital allocators are looking for with private credit.
Investment-Grade Private Credit: Syndication vs. Origination
In our view, the desire to trade private credit is not aimed at creating a generalized secondary market. Rather, we see it as an attempt to syndicate large investment-grade private loans to institutions that can hold them for a long time.
We see some need for that. For example, a massive amount of capital is needed to power the energy transition and the data centers required to power digital services. This argues for an “all of the above” strategy for capital formation. If the goal is to use technology to enable more efficient risk sharing and distribution to meet the scale requirement, we see merit. But the further this pushes into an originate-to-distribute model, the more it begins to resemble public credit. We think that would risk undermining the flexibility and relationship certainty that borrowers have historically paid a premium for in private markets.
Deal Size and the Cost of Liquidity
What’s more, trading isn’t always possible. In the middle market, where deal sizes are limited and information more restricted, we think it’s impractical. And where trading is possible—for example, in mega-tranche loans of $1 billion and above—the market is limited. For investors not involved in underwriting such large deals, we think the due diligence required to acquire the loans may be prohibitive.
Structure Follows Function
The future of private credit isn’t monolithic. Investment-grade private loans may evolve toward modest liquidity. But we believe sub-investment-grade middle-market direct lending will remain firmly illiquid by design. Borrowers’ capital alternatives may be converging, but many of the core attributes that distinguish public and private markets remain segmented.
For borrowers, we believe the value proposition flows from three things: clarity, certainty and discretion. For investors, the merits are stable yield and low volatility. We believe that any effort to manufacture more liquidity must contend with these realities. Otherwise, we think the market runs the risk of creating a product that looks like public credit without offering the benefits of either the public or private variant.
Our point isn’t that liquidity is a bad thing. It’s that illiquidity, in the context of private credit, is a feature, not a flaw.
