Private Credit vs Public Listed Companies: Which Should You Choose?

Which financial option is better for investors, private credit or public listed companies? What sets them apart, and how do you know which is the right choice for you?

With so many investment options available today, it can be overwhelming, especially if you're just starting out. In this article, we’ll break down the key differences between private credit and public listed companies, helping you choose the right path based on your financial goals.

What is Private Credit?

Private credit involves lending capital directly to businesses or individuals, bypassing traditional financial institutions. Unlike private equity, private credit focuses on debt financing rather than taking ownership stakes in companies.

Types of Private Credit

So what are the types of private credit investments open to you? Let’s take a look below:

Direct Lending: These are loans provided directly to businesses, often for growth, acquisitions, or working capital. It typically involves writing an agreement that details the terms and conditions of the loan between both parties. Direct lending is commonly available through private funds or specialised lending platforms.

Mezzanine Financing: A hybrid of debt and equity, such instruments offer higher returns but come with higher risks. They sit below senior debt in priority, making them riskier but potentially more rewarding. Mezzanine financing often includes an option to convert the debt into equity if the borrower defaults, providing extra flexibility to investors. These investments are typically offered through private equity firms or mezzanine funds.

Venture Debt: This is a form of debt financing offered to early-stage, high-growth companies. Venture debt is usually used to extend a company’s runway before its next funding round or to finance capital expenses. Investors in venture debt often collaborate with venture capital firms and private debt funds that specialise in startup financing.

Asset-Based Lending (ABL): ABLs are loans secured by a company’s assets, like inventory, accounts receivable, or equipment. This type of lending is often used when companies need working capital but may not have strong cash flow. ABL opportunities are typically found through private credit lenders or specialty finance institutions.

Real Estate Financing: Examples of these include loans taken up for real estate projects like commercial, residential, or industrial properties. These loans may take different forms, such as mortgages, construction loans, or bridge loans. Private real estate funds and real estate investment platforms often offer these types of financing options.

Now, let us take a look at what public listed companies are and how they operate.

What are Public Listed Companies?

Public listed companies are businesses that issue securities for public trading on stock exchanges, making them accessible to a broad range of investors. These companies must meet strict regulatory standards and regularly disclose financial information, ensuring transparency and accountability.

Types of Securities Traded

These are some of the most common securities that are publicly traded.

Stocks represent ownership in publicly listed companies, such as those on the Singapore Exchange (SGX). Investors can buy and sell these shares and may receive dividends from the company’s profits.

Bonds are debt securities issued by governments or corporations to raise capital. Investors lend money to the issuer in exchange for periodic interest payments and the return of the bond’s face value at maturity.

ETFs (Exchange-Traded Funds) are investment funds traded on stock exchanges like stocks. They hold assets such as stocks, commodities, or bonds and typically track an index to reflect the performance of specific markets.

REITs (Real Estate Investment Trusts) are companies that own, operate, or finance income-generating real estate. They are publicly traded, allowing investors to invest in real estate without directly owning property.

Mutual Funds pool money from many investors to buy a diversified portfolio of securities. They are managed by professional fund managers, offering diversification and professional oversight.

Options are financial derivatives that give the buyer the right, but not the obligation, to buy or sell an underlying asset, such as a stock, at a predetermined price before or at a specific date. These are more sophisticated instruments, often used by experienced investors to manage risk or speculate on price movements.

Pros and Cons of Private Credit

Private credit comes with several advantages, but it also has some risks. Let’s take a quick look at both.

Pros

Private credit often offers higher returns than traditional investments due to higher interest rates and fees. It adds diversification to your portfolio, reducing overall risk by introducing a new asset class. 

Additionally, private credit is less exposed to market volatility, providing more stable returns since it isn’t directly affected by broader economic conditions. These investments are also more customisable, and can be tailored to the needs of both lender and borrower. 

By offering predictable cash flows from regular interest payments, such instruments can create a steady income stream. 

Finally, private credit often holds seniority in capital structure, meaning investors are paid before equity holders if the borrower faces liquidation.

Cons

However, private credit sometimes comes with higher risk, as borrowers, especially in distressed situations, may default. There may also be limited transparency since private credit has less regulatory oversight and fewer disclosure requirements than public listed securities. 

Finally, concentration risk is a factor, as investments are often focused on a single or small group of borrowers, increasing risk if one defaults.

Pros and Cons of Public Listed Companies

Likewise, investing in public listed companies offers several benefits, but it also comes with some downsides.  

Pros

Public listed companies provide liquidity, meaning their securities can be bought and sold quickly, giving investors easy access to their funds. These companies are subject to greater levels of transparency and regulation, with strict rules requiring regular disclosure of financial performance. 

Additionally, investors have access to a wide range of companies and sectors, allowing for diversification across industries and geographies.

Cons

On the downside, public listed companies are more prone to market volatility, with prices fluctuating due to market conditions, economic news, or investor sentiment. While generally more stable, public investments may offer lower returns compared to private credit. 

Public companies are also susceptible to market sentiment, meaning prices may be influenced by factors unrelated to the company’s performance. Regulatory costs can also be high, as companies must comply with various rules that may affect profitability. 

Lastly, the dilution of control is common, as ownership is often spread across many shareholders. Thus, individual investors have less say in how the company is run, especially if its performance declines.

Choosing between Private Credit and Public Listed Companies

When deciding between private credit and public listed companies, it’s important to understand their differences and how they align with your investment goals.

#1 Investment Access and Availability

Private credit is typically available to accredited investors through private funds, or platforms like BigFundr, where investments are fractionalised to allow for smaller contributions. 

In contrast, public listed companies are widely accessible to most adult investors, offering greater flexibility for entry.

#2 Risk and Return Profiles

Private credit offers the potential for higher returns but comes with higher risks and less liquidity. Investors must be prepared for illiquid investments and the chance of borrower default. 

Public listed companies, on the other hand, tend to provide more stable returns, though they are subject to market volatility, meaning prices can fluctuate based on market conditions.

#3 Regulatory Environment and Transparency

Private credit operates with less regulatory oversight, offering fewer disclosures compared to public listed companies. While this may seem risky to some investors, it can also be a benefit. With fewer regulatory burdens, private credit lenders and borrowers enjoy greater flexibility and reduced overheads.  

Public companies, on the other hand, are highly regulated, with mandatory financial reporting. While this transparency is valuable, it also results in higher operational costs due to compliance, potentially impacting profitability and reducing returns for shareholders.

#4 Investment Horizon and Flexibility

Private credit typically involves longer-term commitments, making it suitable for investors with long-term goals who are seeking a steady income through interest payments. 

On the flip side, public listed companies offer more flexibility, allowing you to buy and sell securities easily. This makes them an ideal option for both short-term and long-term investment goals.

#5 Risk Tolerance and Liquidity Needs

Private credit is better suited for investors who can tolerate the risk of borrower default and don’t need quick access to their capital, as these investments tend to be illiquid. However, shorter-term options do exist, with tenures ranging from 6 to 24 months, offering some flexibility for those seeking quicker returns. 

Public listed companies, however, provide high liquidity, allowing you to trade shares and access funds more easily, making them suitable for those who need quick access to their investments.

#6 Market Knowledge

Investing in private credit typically requires specialised knowledge and thorough due diligence, as there is less public information available. 

Public listed companies, by comparison, are easier to navigate if you have general market knowledge and can access publicly available financial reports and data.

Introducing BigFundr

BigFundr bridges the gap between the benefits of private credit and the accessibility of public listed companies, offering investors the best of both worlds.

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Here’s what makes BigFundr a versatile and secure investment platform:

• Curated Debt Investment Opportunities: BigFundr handpicks each investment, offering detailed insights and analysis to guide your decisions.
• Stringent Assessment Criteria: Every opportunity undergoes rigorous due diligence, ensuring only the best developers and projects are selected.
• Attractive Interest Returns: Enjoy interest rates that rival those of traditional private credit investments, providing competitive returns.
• Layers of Security: Multiple safeguards are in place, including thorough risk assessments and security measures to shield and preserve your investments.
• Short Tenures: Unlike typical private credit’s long lock-in periods, BigFundr offers shorter-term options, allowing quicker access to your capital.

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By combining the high returns and stability of private credit with the liquidity and transparency of public listed companies, BigFundr stands out as a flexible and secure investment option.

Conclusion

In this article, we’ve explored the key differences between private credit and public listed companies. While private credit offers higher potential returns, customisation, and stability, it comes with higher risks and less liquidity. Public listed companies, on the other hand, provide greater transparency, liquidity, and easier access for most investors but may deliver more stable, yet lower returns.

Ultimately, the choice between private credit and public listed companies comes down to your financial goals, risk tolerance, and investment horizon. If you’re comfortable with higher risk and less liquidity for potentially higher returns, private credit might be the right fit. But if you value flexibility, ease of access, and transparency, public listed companies could better suit your needs.

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