Public bonds hand you a daily price. Private credit hands you the loan. In a higher-for-longer world, that difference is where the return lives
Begin with a point that sounds pedantic but isn't. Public debt, as an investment experience, is not really about lending. A government or investment-grade corporate bond is bought and sold continuously on a secondary market intermediated by a surprisingly small number of dealers. What the holder actually owns is a daily mark — a price that moves with rates, spreads and sentiment, often with little to do with whether the borrower will pay. The credit can be pristine while the quote lurches. In 2022, holders of perfectly money-good bonds lost double digits, not because anyone defaulted but because the discount rate moved. That is duration and mark-to-market risk wearing the guise of safety.
Private lending is a different proposition. A direct loan is negotiated bilaterally, priced to the borrower's own cash flows, and generally held to maturity. There is no ticker and no daily quote — and, crucially, the terms are not standardized. A public bond conforms to market convention precisely so it can trade; a private loan is structured to the lender's business. The covenants, security, amortization, call protection and information rights are whatever the two parties agree they should be. That bespoke quality is the source of both the yield premium and the control.
Debt's role in a portfolio is income and ballast. Private credit delivers both with more of the first. Senior, secured first-lien direct loans sit at the top of the capital structure and throw off steady, current income, typically several hundred basis points above comparable public credit — a compensation for illiquidity and for the real work of originating and underwriting. Most of it is floating-rate, which matters enormously right now. The Bank of Canada has held at 2.25 per cent through the back half of 2026, and the easing cycle looks essentially finished, with energy costs nudging inflation up and the risk arguably tilted toward a hike rather than a cut. The Fed and ECB are past their peaks but sitting well above the 2010s floor. That “higher-for-moderate” world is close to ideal for floating-rate private debt: base rates reset the coupon upward automatically, so all-in yields stay attractive without the duration hit that punishes fixed-rate bonds when rates climb. The investor gets credit exposure and rate protection in a single instrument.
Private credit isn’t broken. But advisors need to look under the hood
What a difficult year has taught investors about liquidity, leverage and the next opportunity in private credit
Private credit has spent the past decade becoming one of the most important parts of the alternative-investment universe. Investors liked the income, borrowers liked the flexibility and institutions liked the diversification that came from lending outside traditional public markets.
Then came the stress test.
The past year has exposed weaknesses that were less obvious during the industry's long expansion: aggressive lending, opaque valuations, leverage at multiple levels and, perhaps most importantly for financial advisors and their clients, a mismatch between the liquidity investors expected and the liquidity the underlying loans could actually provide.
The growth behind private credit is structural, not a yield-chasing fad. Global private credit has scaled to roughly $2 trillion and is forecast toward $3–$5 trillion by the end of the decade — the durable consequence of post-2008 capital rules pushing banks out of middle-market and real-estate lending. The assets have always been financed by someone; only the lender has changed.
Canada's version is distinctive, and for now more conservative. Domestic managers oversee an estimated $20–$30 billion, a sliver of the U.S. market's $1.5 trillion-plus, concentrated among institutional players and tilted toward multi-tenant real estate rather than the leveraged software borrowers that dominate U.S. direct lending. That caution shows up where it counts: in the documentation. In the U.S. large-cap market, more than 90 per cent of syndicated loans are now covenant-lite, and even within private credit, maintenance covenants have grown rare on deals above roughly $500 million. Europe is drifting the same way, as U.S.-style cov-lite terms migrate from broadly syndicated loans into upper-mid-market unitranche. This is not a documentary nicety: a maintenance covenant is an early-warning tripwire, and lenders who can act at a covenant breach recover materially more than those who wait for a missed payment. The erosion, though, is concentrated at the large-cap end. In the lower-middle market — Canada's sweet spot — roughly 80 to nearly 98 per cent of direct loans still carry genuine maintenance covenants. The lesson for allocators is to know exactly which covenant package sits behind each position, because the same manager may run a covenant-rich mid-market book and a covenant-lite large-cap one under the same roof.
None of this repeals the illiquidity, and it shouldn't be wished away. Private yield is the compensation for capital you cannot pull on demand, and the discipline that makes it work — matching a fund's redemption terms to the liquidity of its assets, insisting on covenants, backing managers who underwrite rather than merely deploy — is the same discipline that separates the funds investors are glad they held from the ones they wish they could exit. Bought that way, private lending isn't a substitute for the bond market's quote. It's an upgrade on what that quote was always meant to represent.
The opportunity, therefore, isn't necessarily to abandon private credit after a difficult year. It may be to become much more selective about which private credit investors own. A more mature private-credit market. The private-credit industry may ultimately emerge from this period stronger.
The Bank of Canada's concerns should not be interpreted as a call to abandon the asset class. The central bank recognizes that private credit fills genuine financing gaps and has become an increasingly important part of the financial system. But growth brings responsibility.
For advisors, the next stage of private credit should be less about headline yields and more about underwriting, collateral, leverage, duration and liquidity.
A strategy offering an attractive yield may be compelling—but only if the investor understands what generates that yield and what risks accompany it. The most important questions are therefore not simply:
“What does this fund pay?” They are: What am I lending against? How much leverage is involved? How quickly does the underlying capital come back? Who controls the valuation? And what happens if investors want their money at the same time?
Private credit may not be broken. But after the past year, looking under the hood is no longer optional.
