Private markets have traditionally been limited to institutional investors and the very wealthy, out of reach of individual investors and the advisors who serve them. Private markets can let investors access companies whose shares are not yet trading on public exchanges, or invest in the bonds or loans from those companies.
Now fund companies are pushing to bring private markets to a wider audience. However, these markets differ in important ways from public markets. As part of a series this week on private markets, we’re offering material from PitchBook’s primer on how private markets work,
What Is the Difference Between Public and Private Markets?
Public and private markets both sit within the larger financial landscape, also known as the capital markets. There are some core differences between the types of companies and investors that participate in each, though. Public companies are publicly traded on the stock market, and members of the general public can invest in them. Private markets are funded by institutional investors, companies or organizations that invest on behalf of clients or members.
What Are the Public Markets and Traditional Asset Classes?
In public markets, companies sell shares to the general public. In other words, you are the investor. When someone invests in the stock market, they own a small portion of the public companies they’ve invested in. That small portion is called a share. Once shares are acquired, an individual can buy, sell, or trade them on a stock exchange. Stocks and bonds are examples of traditional asset classes and considered mainstream investments.
Often larger and more mature than private upstarts, public companies are heavily regulated by government organizations. To ensure these companies remain accountable to shareholders, public companies are required to disclose information about their performance, which makes it easy to see their financials, revenue, and more.
What Are the Key Characteristics of the Public Market?
• Members of the general public can invest.
• Securities issued by public companies are heavily regulated.
• Public companies must report on performance.
• It’s easy to find information about publicly traded companies.
What is Private Debt?
Private debt includes any debt held by or extended to privately held companies. It comes in many forms, including loans and bonds, but commonly involves private credit (when other asset managers make loans to private companies).
A variety of general partner credit investors manage private credit or other private debt funds. These alternative lenders manage investment strategies that include direct lending, distressed debt, mezzanine, real estate, infrastructure, and special situations funds, among others. In addition to paying back the full sum of the loan in the future, the company must pay interest to the lending institution.
Private debt funds come in different shapes and sizes. Some fund structures provide capital to sponsor-backed borrowers, others fund real estate development projects, and some invest entirely in the debt of distressed companies.
Private Credit vs. Private Debt
You will sometimes see private debt and private credit used interchangeably. However, an important distinction is that private credit is only one type of private debt. At PitchBook, we define private credit, or direct lending, as directly originated loans to corporate borrowers that are not broadly syndicated. They are typically unrated, and borrowers tend to be small or mid-sized companies. However, in recent years, larger borrowers have issued this type of financing as well.
Private credit is typically provided by a non-bank lender, or a small group of lenders in a club deal. That said, there are some cases wherein a bank is one of the lenders alongside an alternative lender or lenders. As mentioned above, this often includes general partners.
When regulations were put on banks after the 2008 global financial crisis, a new lending market formed for non-bank entities. With high-yielding opportunities in public markets being few and far between, investors explored new strategies. Private credit funds, serving as direct lenders to middle-market companies and sources of debt financing for leveraged buyouts, promised to provide the higher yields investors wanted.
Why Consider a Private Debt Investment?
Investor demand for private debt funds is on the rise. Companies increasingly turned to private debt in recent years when financial market volatility made public debt markets harder to access. Depending on interest rates, regulations, business cycles, and other factors, investors may view private debt as a relatively low-risk approach to private equity or the diversification of their assets.
What are Private Equity and Venture Capital?
Private equity and venture capital firms both raise pools of capital from accredited investors known as limited partners, and both do so to invest in privately owned companies. Their goals are the same: increasing the value of the businesses they invest in and then selling them or their equity stake for a profit.
How are PE and VC different?
PE and VC primarily differ in the following ways:
• The types of companies they invest in
• The levels of capital invested
• The amount of equity they obtain through their investments
• When they get involved during a company’s lifecycle
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
