Private credit vs private equity, and who is paid first

What is the difference between private credit and private equity?

Private credit lends money to companies and earns contractual interest, while private equity buys companies and earns whatever remains after the lenders are paid. The lender is paid first and its return is capped by the loan’s terms; the owner is paid last and its upside has no cap. The two are often claims on the same company. This page compares the senior loans that the Federal Reserve note below says are typical of direct lending funds; other private credit strategies lend further down the capital structure, and some loans carry an equity component whose upside is not capped.

Private credit is also called private debt. A Federal Reserve note of February 2024 defines it as debt-like, non-publicly traded instruments provided by non-bank entities to fund private businesses, and says almost all such loans are floating rate, in a Pitchbook sample of about 17,000 loans with US-based borrowers and lenders. The Financial Stability Board (FSB) put the market at roughly $1.5 trillion to $2 trillion in its report of May 2026. Private equity buys the shares: Bain & Company counted 3,018 global buyout deals worth $904 billion in 2025, a count that leaves out add-ons, SPACs, loan-to-own deals and bankrupt-asset acquisitions. Buyout is one branch of private equity; venture capital is another.

	Private credit	Private equity
What the investor holds	A loan to a company	Shares in a company
Where the return comes from	Interest and fees set in the loan	The sale price of the company, less what the lenders are owed
Order of payment	Before the owners	After the lenders
Upside	Capped by the loan’s terms	Open
Cash during the hold	Interest on a schedule	Little until a sale

How do a lender and an owner fare in the same company?

A lender and an owner of the same company are paid in a fixed order, and in a hypothetical deal that order gives the lender 1.50x its money in three of four outcomes while the owner’s result runs from 1.68x to nothing. The company is invented to show the mechanism. Every figure below is Unmatched Capital’s calculation from the stated assumptions, before fund fees and tax.

Assumption	Value
Purchase	A company bought at an enterprise value of $100 million
Financing	A private credit loan of $45 million and $55 million of owner’s equity
Loan	Five years, repaid at the end, interest of 10% a year paid in cash
Owner’s cash	Nothing before the sale
Sale	After five years, with costs of 2% of the sale value
Four outcomes	A: sold for $140 million. B: $100 million. C: $60 million. D: $30 million, and the company stops paying interest after year 3

The 10% assumed here matches the 10% that Bloomberg Opinion’s Chris Bryant wrote private credit borrowers were often paying, spread included, in December 2023. The loan size and the split with the owner are ours and are not market data. The model has no enforcement costs and no other creditors, so in outcome D the lender recovers 65% of its principal, about twice the Federal Reserve figure discussed below.

What each side gets back	A: $140m	B: $100m	C: $60m	D: $30m
Lender, on $45m lent	$67.5m (1.50x)	$67.5m (1.50x)	$67.5m (1.50x)	$42.9m (0.95x)
Owner, on $55m invested	$92.2m (1.68x)	$53.0m (0.96x)	$13.8m (0.25x)	$0 (0.00x)

The lender’s principal is covered until the company sells for less than $45.9 million, a fall of 54% from the purchase price. The owner’s equity is gone at the same point. Above it, the lender earns the same 1.50x whether the company doubles or goes nowhere, and below it the lender starts to lose principal while the owner has already lost everything.

Timing narrows the gap in the good case: the lender’s interest arrives every year, so its 1.50x is a return of 10% a year, while the owner’s 1.68x in outcome A arrives only at the sale and is about 10.9% a year (Unmatched Capital’s calculation).

The cushion is the variable. Change only the split, to a $65 million loan and $35 million of equity, and the lender’s results become 1.50x, 1.50x, 1.40x and 0.75x, while the owner’s become 2.06x, 0.94x, nothing and nothing. The thinner cushion cuts the owner’s equity and raises the owner’s multiple in the good case. The lender’s principal is exposed from a sale value of $66.3 million, a fall of only 34%.

Is private credit safer than private equity?

Private credit is safer than the equity in the same company while the owner’s cushion lasts, but the published evidence on a defaulted direct loan’s worth is thin, and lower than the first-lien recoveries KKR’s guide cites. The Federal Reserve’s February 2024 note reported that a direct loan was worth around 33 percent at default and 30 days after it, against 52 percent for syndicated loans and 39 percent for high-yield bonds, using KBRA DLD data. Its chart, titled “Recovery Rate”, puts direct loans at 76 percent a year before default and 33.7 percent at default and 30 days after, and gives no sample, period or base. The note calls this a recovery rate, but its last reading is 30 days after default, so it shows a value soon after default rather than the cash finally recovered. The note’s key reason is sector mix: over half of value-weighted private credit goes to sectors with few collateralisable assets, such as software, financial services and healthcare services.

The note reported year-to-date default rates to October 2023 of 1.6% for direct lending, against 5% for syndicated loans and 3.3% for high-yield bonds, and that the industry had yet to go through a prolonged recession. Proskauer’s index of US senior-secured and unitranche loans reported a default rate of 2.41% for the third quarter of 2026. Proskauer, a law firm that advises direct lenders, does not define a default in its public release. Proskauer’s index and the Fed note’s loan sample are both US, and the KBRA DLD figures state no geography, so this is evidence about US-focused lending.

Each default costs far more than a year’s interest earns. Suppose the lender finally recovers the 33% the Fed note shows 30 days after default, after three years of 10% interest. It gets back 0.33x plus 0.30x of interest, 0.63x, a loss of 0.37x. A loan that performs for five years earns 0.50x of interest, so the loss on one defaulted loan cancels about three-quarters of the profit on one loan that performs. At the roughly 71% first-lien recovery that KKR’s guide cites, the defaulted loan returns 1.01x, against 1.50x for the loan that performs. This is our arithmetic.

Our position is that a lender’s safety is the owner’s equity beneath its loan and the company’s cash for interest, and that it is paid for the risk above that cushion with a return it cannot raise. The decision rule is to compare what each loses in the bad case: for private credit, the cushion and the cash recovered after a default; for private equity, the cash returned.

The strongest counterargument is the gap between the Fed’s figure and KKR’s. KKR’s guide to private credit says first-lien recoveries have averaged about 71%, with a median of about 80%, and gives no source. If it holds, the 30-day value understates what lenders collect. That has force, but KKR does not say whether its figure is cash finally recovered, on which loans or over what period, while the Fed’s is a value 30 days after default, and neither comes with a sample a reader can check. The reader’s action is to ask a manager for the cash recovered on its defaulted loans, over what period and against what.

Are private credit and private equity separate bets?

Private credit and private equity are often not separate bets, because the Federal Reserve’s February 2024 note found that for the majority of the private credit loans in its data, where borrowers and lenders are US-based, the borrower is backed by a private equity sponsor. Bain described private credit in February 2026 as the lender of choice for deals under $1 billion. A sponsor-owned company with a private credit loan is one business with two claims on it, and the owner’s equity is the lender’s cushion.

An investor in a private credit fund and in a private equity fund can therefore be on both sides of the same company, or on opposite sides of a restructuring. The FSB said in May 2026 that interconnections between private credit funds and banks, insurers and private equity firms are deepening. Whether two funds share companies depends on their portfolios, and a manager can be asked to list the sponsors behind its loans.

How do insolvency rules treat lenders and owners in different countries?

A lender’s place ahead of the owner shows up, when a company is restructured, in the tests a plan must pass over a creditor who objects, and the statutes in the United States, the United Kingdom and the European Union share a no-worse-off test and differ on priority. The table covers plan approval in three jurisdictions; liquidation and other countries are outside it.

	Instrument	What the text says about objecting creditors and owners
United States	11 U.S.C. 1129(b), Chapter 11 plan confirmation	A plan can be confirmed over a dissenting class if it does not discriminate unfairly and is fair and equitable. For an unsecured class that is not paid in full, junior holders may not receive or retain any property under the plan on account of their junior claims or interests. For secured claims, one route is keeping the liens and receiving deferred cash payments totalling at least the allowed claim, worth at least the value of the holder’s interest in the collateral; a sale or the “indubitable equivalent” are the others. Separately, section 1129(a)(7) gives a dissenting creditor at least what it would receive in a Chapter 7 liquidation
United Kingdom	Companies Act 2006, section 901G, restructuring plans	The court may sanction a plan over a dissenting class if no member of it would be worse off than in the relevant alternative, and if a class that would be paid, or has a genuine economic interest, under that alternative approves by 75% in value. Section 901G sets no priority rule in its own text
European Union	Directive (EU) 2019/1023, Article 11, cross-class cram-down	A dissenting class must be treated at least as favourably as any class of the same rank and more favourably than any junior class. Member States may instead require a dissenting class to be satisfied in full before a more junior class receives anything. The plan must also pass a best-interest-of-creditors test (Articles 10(2)(d) and 11(1)(a)), and Member States may derogate from the full-payment option where that is needed to achieve the plan’s aims and no affected party is unfairly prejudiced

All three require that an objecting creditor be no worse off than in the alternative: liquidation in the US, the likeliest alternative in the UK, and the best-interest test in the EU. They differ on priority. The US text bars junior holders from keeping property on account of their junior interests while an objecting unsecured class is unpaid; the EU default requires only better treatment than junior classes, with an option for Member States to require full payment first; and section 901G sets no priority rule in its own text. A lender’s claim to be paid first therefore depends on where the case is heard. Statutes do not show what lenders and sponsors have recovered or kept in practice, each EU Member State implements the Directive in its own law, and UK case law on departures from priority is outside the table.

How do fees and cash flow differ?

Private credit generally charges lower fees than private equity and pays cash sooner, and private equity returns capital mainly at sale, which has been slow. Dakota, a private markets data vendor, wrote in September 2026, in a page that cites its own Dakota Private Markets data, that direct buyout funds cluster at a 1.5% to 2.0% base fee with 20% carry over an 8% hurdle. For senior, first-lien direct lending it said some funds charge around 1% or less, with 10% carry over a 7% to 8% hurdle. It gave named funds for buyout and “some funds” for credit, with no sample or period.

A fund’s own terms decide. Bloomberg Opinion’s Chris Bryant wrote in December 2023 that Blackstone’s non-traded private credit fund BCRED charged a 1.25% management fee and a 12.5% incentive fee, with a return of more than 5% needed to trigger it. The column added that because the loans float, borrowers were often paying 10% including the spread, and it quoted Ares co-founder Michael Arougheti saying the excess return basically all flows into the accrued incentive fee.

Cash arrives on different schedules. Interest is paid under the loan as it falls due. In private equity, Bain reported that distributions were about 14% of net asset value in the twelve months to the third quarter of 2025, the lowest level since 2008 to 2009, and that the average holding period at exit was about seven years, up from five to six years in 2010 to 2021. Bain also counted about 32,000 unsold companies worth $3.8 trillion.

On what a lender earns, the Federal Reserve’s February 2024 note said direct lending had over the past decade generated higher returns than most other comparable asset classes, including 2 to 4 percent over syndicated leveraged loans. That compares direct lending with loans, not with private equity.

What this means when you are choosing between private credit and private equity

Choosing between private credit and private equity is a choice between a capped claim paid first and an uncapped claim paid last, and the questions that separate good from poor funds sit under the headline yield or target multiple. The Federal Reserve’s February 2024 note put the value of a direct loan 30 days after default at around 33 percent, while KKR’s guide cites average first-lien recoveries of about 71%, which is why the second question below asks for cash recovered. This is general information, not investment advice.

Before committing to a private credit fund, ask five things:

1. How large is the equity cushion beneath its loans, how well do borrowers’ earnings cover their interest, and how much of its portfolio is lent to sponsor-owned companies?
2. What has it recovered, in cash, on loans that defaulted or were restructured, over what period, and measured against what?
3. Does the fund borrow itself, and does it promise investors a way out that its loans cannot meet?
4. In which countries do its borrowers sit, and which restructuring rules would apply?
5. What do the fees take, and when does the incentive fee start?

For a private equity fund, the question is how much has come back as cash, which a sponsor’s valuation of the holdings does not show. How to invest in private equity covers how investors reach those funds and who controls their exit, and tokenised private credit covers what changes when loans are held as tokens. A fund can also borrow against its investors’ commitments through a subscription line.