Navigating private credit – how it compares with T-bills and publicly issued bonds

Business Times

16-06-2025

[SINGAPORE] Private credit is rapidly gaining traction among retail investors as regulators around the world are giving these individuals more access to private markets in general.
Private credit refers to a type of debt negotiated between non-bank lenders and companies that are often below investment grade and unlisted.
The asset class flourished after the global financial crisis, when banks cut lending amid fears that they would not be able to recover the debt. Since 2009, the global private-credit market has grown more than 10 times, with assets under management exceeding US$3 trillion as at end-2024.
In Singapore, the size of retail demand for private credit could grow to as much as S$100 billion, said Hugh Chung, chief investment officer at Endowus. This is assuming that 5 per cent of the S$1.9 trillion of total household financial assets is allocated to the asset class.
How should retail investors navigate this asset, particularly as the Monetary Authority of Singapore is assessing feedback to its proposal to broaden access to it?
First, let us have a look at how private credit usually works.
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Assuming you are the chief executive officer and majority owner of an unlisted company, with earnings before interest, taxes, depreciation and amortisation of between US$50 million and US$100 million.
You want to raise capital but cannot access traditional bank lending because your business is too small. You may not have an extensive credit history, which would limit your ability to raise funding through debt markets. You also want to keep your ownership, so you do not want to sell a stake to private-equity firms or investors.
Why borrowers turn to private credit
In such a scenario, the most feasible option is private credit. This is where you negotiate a loan with lenders such as insurers, pension funds, or high-net-worth individuals who are more comfortable with your risk profile than banks are.
Listed companies may choose private credit as well, such as when they want to finance a project in a politically unstable country.
In uncertain economic environments, such as the current one in which US tariffs and their frequent changes are complicating business planning, demand for private credit may still be robust.
Sally Yim, managing director of financial institutions at Moody's Ratings, told The Business Times: 'There might be a more volatile environment, causing banks to be more cautious about lending to borrowers of lower credit quality... so private credit can help fill the gap.'
Private credit also enables borrowers and lenders to structure more tailored deals than traditional lending.
Creditors often price the loans at a premium to the prevailing benchmark interest rates, as these loans are seen as being more risky than those taken up by bigger corporates with more extensive credit histories.
As with other private assets, private-credit investors also receive the illiquidity premium, to compensate for the lack of liquidity in holding such alternative investments.
Debtors are willing to pay higher rates, given that they have limited access to other funding routes in the first place. They can also get loans tailored to their needs, with more flexible terms.
In theory, this results in a win-win situation for lenders and borrowers.
Returns vs risk
Mark Glengarry, Blackstone's head of Asia-Pacific for private-credit strategies, said: 'Private credit can offer companies a more direct and efficient way to access capital, resulting in greater speed, certainty in execution, and flexibility of structure. For investors, there's a broader receptivity to private markets, with more (of them) recognising that assets such as private credit can be a core portfolio building block, potentially helping to improve returns, to lower volatility and diversify portfolios.'
While private-market players position private credit as long-term investments that generate high yields, they caution that, ultimately, returns are not guaranteed. Investors may also not recover their full investment if the borrower defaults.
In contrast, government-backed Treasury bills (T-bills) guarantee capital and typically present the lowest risk, with a nearly zero chance of default.
Investment-grade corporate bonds are also less risky than private debt, since the issuers tend to have higher credit quality. Asset manager Schroders pegs the average annual default rate of such debt at 0.1 per cent over the long run.
Shihan Abeyguna, managing director for South-east Asia at Morningstar, said: 'The risk for private-credit funds is high simply because of the risk of default by companies that could be sub-investment-grade.'
In the United States, the 25-year average of leveraged loan default rate is 2.4 per cent, said US private-markets investment firm Hamilton Lane.
As with most investment tools, higher risks are usually accompanied by higher returns.
A US middle-market debt offering, while illiquid and unrated, can generate a potential return premium of 400 to 600 basis points over US high-yield bonds, together with added protections such as covenants and collateral, said Dennis Quah, head of Singapore wealth at BlackRock.
According to MSCI, global private-credit funds generated returns of 10.2 per cent in 2023, and 6.9 per cent in 2024 – higher than their private-equity counterparts. They also outperformed investment-grade bonds, which yielded returns of 8.3 per cent and 2.5 per cent for those two years, respectively.
However, during those two years, private-credit funds underperformed the MSCI high-yield corporate bond index, which tracks US dollar-denominated bonds that are not investment grade.
One-year Singapore T-bills, on the other hand, averaged 3.75 per cent in 2023 and 2.78 per cent in 2024. In the latest auction in April, the yield fell further, to 2.29 per cent.
Buyer beware
While the higher returns are tempting, investors need to bear in mind that private-credit funds are long-term investments, with the maturities of the underlying debt going beyond a decade. In contrast, T-bills can mature after a month.
BlackRock's Quah said 'private-credit instruments are still generally longer-dated investments than public equity and bonds, so investors should seek investment managers with deep expertise and experience navigating multiple market cycles'.
Private-credit funds are also less liquid than investment-grade bonds that are publicly traded.
Moody's Yim said: 'It's something that we need to be more cautious about when retail investors get into these private-credit funds – whether they understand the differences in terms of liquidity risk.'
To lower such risks, retail investors could consider allocating 5 per cent of their portfolios to private credit, with at least a six to 10-year horizon, said Abeyguna. 'These assets can complement traditional fixed income by offering differentiated sources of income and risk, but should be sized carefully, based on an individual's overall objectives and risk tolerance.'
To generate resilient incomes, Blackstone's Glengarry said the firm targets high-growth and low-loss sectors. It also structures its loans as senior secured, 'with significant equity cushion or credit enhancement'.
Secured by collateral, senior secured loans are at the top of a company's capital structure, meaning they are repaid first in the event of bankruptcy or liquidation.