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Tata Capital > Blog > Wealth Services > Private credit vs private equity vs public debt: Where to invest?

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Private credit vs private equity vs public debt: Where to invest?

Private credit vs private equity vs public debt: Where to invest?

Most of us are familiar with the typical investment options available in India. For instance, stocks, bonds, and mutual funds are easy to access and form the backbone of most portfolios. However, the world of investment is much bigger. There are several lesser-known avenues that may not be as popular but can provide potentially strong returns and meaningful diversification.

In this blog, we’ll talk about three such options: private credit, private equity, and public debt. Each of them works differently, and each carries its own level of risk and reward. Understanding what private credit, private equity, and public debt mean and how they differ from each other can help you make smarter and well-informed investment decisions.

What is private credit?

Private credit in India refers to loans provided by private lenders to companies, rather than traditional banks. It allows companies that may not have access to public markets or traditional lending institutions to raise funds directly from private lenders through  alternate investment funds. Since lending terms are negotiated privately, repayment schedules and interest rates may differ from those of conventional bank loans.

As an investor, you can invest in private credit funds in India. These funds pool money from several investors and lend it out to small and mid-sized companies. The returns are generated by collecting interest payments. But since these loans are not regulated, they often carry a high risk of default. To compensate for this, fund managers ask for higher interest rates. It means that private credit funds have the potential to generate high returns for investors who can tolerate the risk involved.

What is private equity?

Private equity involves direct investment in private companies. Investors buy shares in these companies to eventually sell them at a profit. Unlike private credit, which involves lending activities, private equity is about owning stakes in a company. Private equity funds in India pool money from institutional investors and High-Net-Worth Individuals (HNIs), then channel it into companies across different sectors.

Unlike private credit, private equity investors do not earn fixed interest. Instead, they make money only when the company becomes more valuable. Typically, the strategy includes acquiring a controlling share in a company, improving its operations, and driving growth. Once the business becomes more valuable, they usually exit the investment through a sale, merger, or an Initial Public Offering (IPO).

Private equity investment in India allows you to invest in companies that aren’t listed on the public stock exchanges. They have the potential to provide high returns in the long term, but may require significant capital. Additionally, returns depend heavily on the company’s ability to grow and expand.

What is public debt?

Public debt means money lent to the government through government securities, such as bonds and treasury bills, in exchange for future repayment with interest. It is considered one of the safest modes of investment because governments rarely default. 

Governments need funds for many purposes, such as building roads, running schools, paying salaries, and supporting civil welfare schemes. When the government’s income from taxes isn’t enough, it borrows the remaining amount from the public. This borrowing usually happens through instruments like government bonds, treasury bills, and securities. Investors who buy these instruments are essentially lending money to the government in exchange for regular interest.

In India, public debt forms a major part of the investment market. It offers stable returns through fixed interest and high liquidity because bonds can be traded easily. The main difference between public and private debt lies in the borrower (government vs private companies), risk (low vs high), and return potential (average vs high).

Private credit vs private equity vs public debt

By now, you must have understood the meanings of private credit, private equity, and public debt, and how they work for you as investment avenues. 

The table below depicts a comparison between private credit vs private equity vs public debt based on the usual parameters:

ParametersPrivate CreditPrivate EquityPublic Debt
DefinitionA loan given to a private company.Direct investment in private companies through equities.A loan given to the government.
Risk LevelMedium to highHighLow
Return PotentialOffers steady returns, which are often higher than from other fixed-income generating instruments.It can provide very high returns, but only if the company grows in valuation.Offers decent but safe returns.
LiquidityMedium to lowLowHigh
Suitable ForInvestors who want steady returns and can take moderate risks.HNI investors who want high growth and are open to risks.Investors who prefer capital safety and income stability.

To conclude

Private credit, private equity, and public debt are three very different investment avenues. Each serves a different purpose and offers a different risk-reward balance. Understanding their meanings and differences will help you make better decisions and build a robust portfolio.

If you want stable returns, public debt works well. If you want a higher fixed income, private credit is an option. And if you want growth, private equity may be worth exploring.

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FAQs

How can I invest in private and public debt?

You can invest in private debt through specialized private credit funds. To invest in public debt, you can buy government bonds.

How is private equity different from public equity?

 

Private equity refers to investment in private companies by buying ownership stakes. Public equity refers to the shares of companies listed on the public stock exchanges.

Is private equity suitable for all investors?

 

Not really. Private equity carries high risk, requires long lock-in periods, and demands large investment amounts. It works best for investors with high risk tolerance, long horizons, and sufficient capital.

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