Private Credit vs Private Equity: What’s the Difference for Investors?

Private credit is not a safer version of private equity. One lends and one owns, and they earn their returns in opposite ways, which is exactly why they belong together rather than instead of each other.

Key takeaways

• Private credit lends to a business and gets paid first at a contracted rate. Private equity owns the business and gets paid last, but with uncapped upside. That position in the capital structure drives every other difference.
• The returns are closer than the reputation suggests: the CDLI has run at about 9.5% a year over 20 years with one down year, while the Cambridge US private equity index returned 8.1% in 2024, both net of fees. The difference is the shape, steady income versus a lumpy gain realised at exit.
• Part of private credit’s headline yield is payment for illiquidity, not skill. The skill lives in structure, covenants, collateral and seniority, which is also what protects you in a default.
• Both are global asset classes, and you no longer need to be a US institution to reach either. A non-US investor gets private credit through wrapped vehicles such as the UK LTAF, the EU ELTIF, UCITS-style listed credit trusts, and gets private equity through London-listed PE investment trusts such as 3i, HgCapital Trust and Pantheon International, or the same LTAF and ELTIF route.

Ask most people what separates private credit from private equity and you get some version of “one is the safer one.” That answer is where a lot of allocation mistakes start. The two are not two settings on the same dial. They are two different jobs, done in two different parts of the same company’s balance sheet, and they pay you for two completely different things.

The quickest way to see it: in private equity you own the business, in private credit you lend to it. An owner gets whatever is left after everyone else is paid. A lender gets paid first, at a rate agreed in advance, whether the business triples in value or merely survives. That single fact, who gets paid and in what order, drives almost every other difference that matters to you as an investor: the shape of the return, the risk you are taking, how long your money is tied up, and what a bad year actually looks like.

The difference shows up where it counts. Where each sits in the capital structure. Where the return actually comes from. What the long-run numbers look like once fees are out. And the part most comparisons skip: whether you should think of these as rivals or as two halves of the same allocation.

The one distinction everything else hangs off

Every company funds itself with a stack of capital, and that stack has an order. At the top sits senior secured debt, first in line to be repaid and backed by collateral. Below it comes other debt. At the very bottom sits equity, the ownership, which gets paid only once every lender above it has been made whole.

Private credit lives near the top of that stack. A direct lending fund makes a loan, usually senior and secured against the borrower’s assets, and collects interest. Private equity lives at the bottom. A buyout fund buys the equity, often using a chunk of borrowed money to do it, and aims to sell the business later for more than it paid.

That position in the stack is the whole game. It sets a hard ceiling and a hard floor on what each can do:

• As a lender, your best case is that every loan pays back in full with interest. You do not share in the upside if the company doubles. Your return is capped at what the contract says.
• As an owner, your loss is capped at what you put in, but your upside is not capped at all. If the business is worth three times what you paid, that gain is yours, after the lenders have taken their fixed cut.

So the honest framing is not safer versus riskier. It is capped-and-contractual versus uncapped-and-residual. Get that clear and the rest of the comparison falls into place.

For the full mechanics of each, our private credit guide and private equity guide go deeper than we can here.

Where the return actually comes from

This is the part that separates a real understanding from a marketing one.

Private credit earns a contractual yield. Most direct lending is floating-rate: a base rate (SOFR in dollar loans, SONIA or EURIBOR in sterling and euro deals) plus a fixed credit spread, topped up by arrangement fees and sometimes an original issue discount. You are being paid to lend, and the payment is written into the loan. When base rates are high, that running yield is high without anyone needing markets to cooperate. The Cliffwater Direct Lending Index, which tracks roughly 21,000 US middle-market loans worth about $549bn, reported income equal to 10.4% of assets across 2025 (Cliffwater, 2026). That number is income, cash coming off the loan book, not a mark-up in someone’s valuation.

Private equity earns a change in the value of a business. A buyout fund makes its money three ways: growing the company’s profits, paying down the debt used to buy it so the equity slice grows, and selling at a higher multiple than it paid. None of that is contracted. It has to be created, and then a buyer has to agree to it at exit. The return is real, but it is residual and it is uncertain until the day the business is sold.

Here is the practical consequence. A private credit return is mostly cash you can see arriving. A private equity return is mostly paper value that becomes real only at exit, which is why it is measured over the life of a fund rather than year to year. Same asset class label, “private markets”, two entirely different clocks.

There is a trap in the credit number worth naming, because it is where investors overpay. A portion of private credit’s headline yield is not skill. It is simply the price of giving up liquidity, of holding something you cannot sell quickly without a discount. That part is not alpha, it is rent for patience. The skill sits in the structure, the covenants and collateral and seniority that decide what happens when a borrower gets into trouble. Judge a private credit manager on that, not on the yield alone.

The numbers, side by side

Below is an assembled comparison from primary sources, current as at July 2026. Every figure is dated and cited beneath the table. Where a range is genuinely uncertain, it is shown as a range rather than a false single number.

Sources for the figures above: the ~9.5% twenty-year CDLI return, the single negative year in 2008 and the 9.3% 2025 result are Cliffwater’s (Cliffwater, 2026). The 8.1% 2024 private equity return, the S&P 500 comparison and the $1.6tn / 1,661-fund figures are Cambridge Associates’ (Cambridge Associates, 2025). Fee structures are from industry fee studies (Macfarlanes; Cliffwater fee study). The ~$1.7tn private credit AUM figure is Preqin’s (Preqin, 2025).

Two things jump out of that table. First, the long-run returns are closer than the “one is the safe one, one is the exciting one” story suggests: high single digits for credit, high single digits and up for equity, both net of fees. Second, the shape of those returns could not be more different. Credit delivered its 9.5% with exactly one down year in twenty. Private equity’s return is lumpier, backend-loaded, and only shows up when funds sell what they own.

What a bad year actually looks like

The honest test of any credit strategy is not the yield in good times. It is what happens when borrowers stop paying, because that is the risk you are actually being paid to take.

Private credit’s cushion is recovery. When a senior secured loan defaults, the lender has a claim on collateral and sits at the front of the queue. First-lien middle-market loans have historically recovered around 69% of principal, and one senior-loan index recorded an annualised loss rate of just 0.29% from 2010 to 2025, against 1.49% for high-yield bonds over the same stretch (StepStone). Reported default rates in the sector have sat in the low single digits, around 2.7% on a broad definition that includes covenant breaches, closer to 1.2% if you count only payment defaults and bankruptcies (Proskauer, 2026).

Work through what that means for a portfolio. Take a book yielding 10% with a 3% default rate and a 69% recovery. The loss from those defaults is roughly 3% multiplied by the 31% you fail to recover, a little under 1% of the book. Net that against a 10% gross yield and the running return still clears the high single digits. The structure absorbs the hit. That is the mechanism doing the work, not optimism.

Now the counterweight, because the rosier figures are not the only ones on the table. The Federal Reserve has flagged that private credit recoveries can be far lower than the direct-lending industry’s own numbers, closer to 33% in its analysis, partly because many borrowers operate in asset-light sectors such as software and healthcare where there is less collateral to seize (Federal Reserve, 2024). The Fed also points to the real soft spots: loans are illiquid with no secondary market, valuations are marked to model rather than to live prices, and a downturn that stresses floating-rate borrowers could push defaults up sharply. Take both sets of numbers seriously. The recovery you actually get depends on the manager, the seniority, and what the borrower owns.

Private equity’s bad year is a different animal entirely. There is no collateral to fall back on because you are the owner, last in line. If the business underperforms or cannot be sold at a decent price, the equity is where the pain lands first and hardest. The upside that makes private equity worth owning is the same feature that removes the floor underneath it.

Rivals, or two halves of the same allocation?

Here is the view, and it is the opposite of how these two usually get sold against each other.

Private credit and private equity are not substitutes. They are complements, and often two ends of the very same deal. When a buyout fund acquires a company, someone has to lend it the debt that sits on top of the purchase, and increasingly that lender is a private credit fund, sometimes one run by the same firm. The equity investor is betting on the upside. The credit investor is getting paid a contractual return for financing the same transaction from a safer seat. They are not competing for your money so much as occupying different floors of the same building.

The industry itself has voted with its feet. Every major buyout house is now also a credit manager. Apollo’s credit business dwarfs its private equity arm. KKR, Blackstone and Carlyle have all built large credit platforms in the past few years, and Ares runs $407bn of credit inside a $623bn total (search of public AUM disclosures, 2025-2026). These firms did not add credit because it is a better version of equity. They added it because it is a different return, with a different risk, that fits alongside the equity rather than replacing it.

Watch for one thing when the same firm sells you both. Reporting KKR’s credit AUM as a single headline number blurs the fact that only a slice of it is the senior direct lending most investors picture when they hear “private credit”. A large platform can carry many kinds of credit risk under one label. The label tells you less than the seniority and the collateral, which is exactly the point of this whole comparison.

So the useful question is not “which one”. If you want contractual income with a real floor under it and you can accept your money being locked up, that is the credit side of the stack. If you want ownership upside and can stomach a return that only appears at exit with no floor beneath it, that is the equity side. Plenty of serious portfolios hold both, deliberately, because they do different jobs. As ever, this is analysis of how the two work, not a recommendation about your money, which depends on your own circumstances and is a conversation for your adviser.

How a non-US investor actually gets exposure

Both of these are global asset classes, and the numbers above are drawn from global indices even where the largest data providers happen to be American. The access routes are global too, and they have widened sharply outside the United States in the past few years.

For private credit, the wrapper matters more than the geography. In the UK the vehicle is the Long-Term Asset Fund (LTAF), an FCA-authorised structure that lets ordinary retail investors hold illiquid assets such as direct lending, and which can now sit inside a stocks-and-shares ISA. LTAF assets reached about £7.3bn, with private debt one of the two dominant strategies (Morningstar, 2025). The EU equivalent is the European Long-Term Investment Fund (ELTIF), reformed in 2024 to open the same private-markets exposure to retail investors across the bloc, and there is a growing set of UCITS-style listed credit trusts you can buy on an exchange like any share.

For private equity, the cleanest non-US route is a listed PE investment trust. On the London Stock Exchange you can buy 3i Group (LSE: III), the UK’s largest investment trust at more than £26bn, HgCapital Trust (LSE: HGT), Pantheon International (LSE: PIN) or Oakley Capital Investments, and get diversified buyout and growth exposure in a single liquid line of stock, in pounds, inside a normal brokerage or ISA account. The LTAF and ELTIF wrappers carry private equity too. That is how a retail investor in London, Frankfurt or Singapore reaches an asset class that used to require an institutional cheque.

One caveat that applies wherever you are resident: a vehicle’s own home-country tax (US withholding on a US fund, for instance) is a property of the vehicle, but your personal treatment depends on where you live and is a question for your adviser, not something to assume from the fund’s domicile.

FAQs

Is private credit safer than private equity?

It has a floor that private equity lacks, because a senior secured lender is repaid before the owner and can claim collateral in a default. But safer is the wrong word. Private credit carries its own risks: illiquidity, mark-to-model valuations, and recovery rates that can fall well below the industry’s headline numbers in asset-light sectors, as the Federal Reserve has flagged. It is differently risky, not simply less risky.

Which one has produced better returns?

Over the long run they have been closer than most people expect. The Cliffwater Direct Lending Index has averaged about 9.5% a year over 20 years; the Cambridge Associates US private equity index returned 8.1% in 2024 net of fees and has beaten the S&P 500 over ten-year-plus horizons. Private equity’s ceiling is higher because its upside is uncapped, but its return is far lumpier and only realised at exit.

Can I hold both?

Yes, and many portfolios do, because they perform different jobs: contractual income from the credit side, ownership upside from the equity side. The two often finance the very same company from different points in its capital structure.

How do I invest if I am not in the United States?

Both are global asset classes with global access routes. A non-US investor typically reaches private credit through a wrapped vehicle such as the UK LTAF, the EU ELTIF, or a listed credit trust, and reaches private equity through a London-listed PE investment trust such as 3i, HgCapital Trust, Pantheon International or Oakley, or through the same LTAF and ELTIF wrappers. These trade in pounds or euros inside an ordinary brokerage or ISA account. Your own tax treatment depends on where you are resident, so take that to your adviser.

Why do private credit funds charge lower fees than buyout funds?

Fees track return expectations. Direct lending funds typically charge around 1.5% management and 15% carry over a 6.5% hurdle, against roughly 2% and 20% over an 8% hurdle for buyout funds. The lower numbers reflect that a lender’s return is capped by contract, while an owner’s is not.

Next read

• Private credit, explained in full: the mechanics, vehicles and risks of lending in private markets.
• Private equity, explained in full: how buyout returns are actually built, from entry to exit.