Private Credit vs. Public Debt: Which One Wins?

Introduction

In the world of investments, the number of choices often feels overwhelming. For today's savvy Canadian investor, making the right choices is more important than ever. This article aims to offer a balanced view on two intriguing avenues: Private Credit and Public Debt. As someone who's been an investment advisor for years, I've had many clients ask me which of these options could work best for them. Here's my take on it.

1. What is Private Credit?

Definition and Basics

Private credit refers to loans or debt financing provided by non-bank financial institutions. Unlike traditional loans, private credit often comes with bespoke terms tailored to the needs of the borrower. This is particularly appealing for businesses or ventures that may not have access to public markets.

The Private Credit Market in Canada

The private credit market in Canada has seen significant growth over the last few years. Institutional investors are increasingly eyeing private credit as a credible way to maximize returns while managing risk.

Who Invests in Private Credit?

Typically, those who opt for private credit are investors looking for opportunities that public markets don't provide. These are often, but not always for High-Net-Worth Individuals (HNWIs) or institutional investors. We may look into private credit for its higher yield and potential for capital preservation.

2. What is Public Debt?

Definition and Basics

Public debt consists of financial instruments like government bonds and corporate bonds, issued to finance government or corporate operations. They are often considered "low risk", making them appealing for conservative investors.

Who Invests in Public Debt?

Public debt is generally favored by conservative investors or those looking for a stable income stream, like pension funds or older adults.

3. The Comparative Analysis

Risk Factors

Private credit carries higher risk compared to public debt, but it's all about the risk-reward ratio. The higher risk often comes with the potential of higher returns. Public debt, while considered safe, offers comparatively lower returns. As Warren Buffett once said, "Risk comes from not knowing what you're doing."

Returns

In my experience, private credit tends to offer better returns compared to public debt. It's not uncommon to see higher returns in private credit, especially in niche markets. Public debt yields, on the other hand, are generally lower but more consistent.

Liquidity

When it comes to liquidity, public debt takes the cake. Government bonds for example, can often be easily traded or sold. Private credit investments, however, may have lock-up periods, reducing your ability to cash out quickly.

Tax Benefits

In Canada, different tax rules apply depending on your investment choice. Private credit often comes with structures that could provide tax advantages. However, understanding these can be complex, and it's essential to consult tax professionals.

Diversification Opportunities

Both private credit and public debt offer diversification benefits. Private credit allows investors to tap into markets and sectors not commonly available in public markets. Public debt offers geographic and duration diversification. It may be wise to have a mix of both to balance a portfolio's risk and return.

Conclusion

Private credit and public debt each have their own pros and cons. Your choice between the two should be based on your risk tolerance, investment horizon, and financial goals. Personally, I often find that a diversified approach, incorporating both asset classes, often yields the most balanced outcomes.

I'm here for you if you have any questions or want to learn more. Reach out to me by email at gkaraiskos@argosynet.ca or directly message me from any social media platform.

Happy to help,

Georgios Karaiskos

Disclaimer:  The views expressed do not necessarily reflect the opinion of Argosy Securities Inc. Neither Argosy nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents. This does not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. Please consult a professional before making an investment decision.

 Forward Looking statements: Certain information set forth in this material contains forward-looking information. Forward Looking Information is subject to risks and uncertainties and cannot be relied upon as guarantees of future performance. The information contained herein is based upon what the writer believes to be reasonable; the writer cannot assure that actual results will be consistent. Undue reliance should not be placed on them.Historical analysis does not reflect future returns. Investing involves risk.