Hiding in Plain Sight: The Public Credit Opportunity

In our view, public credit is increasingly attractive because today’s market places greater value on transparency, liquidity, diversification, and the ability to reposition quickly. Those advantages are structural, but are especially important in this phase of the cycle.

For allocators, the relevant question is no longer simply where yields are highest. It is which form of credit now offers the stronger combination of income, visibility, flexibility, and governance.

Executive summary

The environment has changed in ways that make the benefits of public credit more valuable. Higher rates, wider dispersion, and greater macroeconomic uncertainty have increased the premium on transparency, liquidity, and the ability to reposition. Public credit markets now offer compelling all-in income—the U.S. high-yield market delivered an 8.5% total return in 2025¹—without requiring investors to sacrifice visibility or flexibility. At the same time, the illiquidity premium available in private markets has compressed to levels that may no longer compensate for the trade-offs involved.

This paper examines why public credit’s structural advantages—continuous price discovery, daily liquidity, broad diversification, and governance simplicity—are particularly well-suited to the current phase of the cycle. It presents data on the convergence of public and private credit yields, the divergence in credit quality and default experience, and the practical implications for portfolio construction.

What has changed

For much of the past decade, private credit offered a straightforward value proposition: meaningfully higher yields in exchange for illiquidity and limited transparency. That trade-off was easier to accept when base rates were near zero, defaults were low, and the illiquidity premium exceeded 400 basis points over broadly syndicated loans. The environment today is materially different.

The Illiquidity premium has compressed

The spread differential between private direct lending and broadly syndicated loans has narrowed from approximately 400 basis points in 2022 to roughly 150–200 basis points in senior secured structures today (see Figure 1). In higher-quality “jumbo” transactions where private lenders compete directly with the syndicated market, pricing and documentation terms have become nearly indistinguishable. At the investment-grade level, the premium has similarly compressed.

Figure 1: Illiquidity premium for private credit continue to compress | Private credit vs. Single-B BSL spread basis

Credit quality: a diverging picture

One of the advantages of public credit is the transparency and consistency with which credit quality can be assessed. Public markets offer standardized measurement, continuous surveillance, and a track record of improving fundamentals—advantages that are especially relevant as the credit quality picture across public and private markets continues to evolve.

Public credit: a strong and improving default picture

The public high-yield bond market has experienced a meaningful up-in-quality shift. As of late 2025, over 50% of the high-yield market was composed of BB-rated bonds. The trailing 12-month high-yield bond default rate declined to 2.8% as of November 2025. Industry forecasts place U.S. high-yield defaults in the 2.5–3.0% range through 2026, with U.S. speculative-grade defaults projected to decline to approximately 3.0% by late 2026. (see Figure 6 on next page)

Figure 5: Trailing 12-month default rates

Liability management and creditor risk

As refinancing conditions have tightened, aggressive liability management exercises (LMEs) have become more prevalent across the credit landscape. These transactions—including uptier exchanges, asset drop-downs, and out-of-court restructurings—allow borrowers to secure new liquidity, sometimes at the expense of existing lenders. While LMEs were originally concentrated in the broadly syndicated loan market, they have migrated into larger private credit “club” deals, introducing a form of creditor-on-creditor risk that is still being absorbed by the market.

Recent court decisions have broadly upheld the enforceability of these maneuvers where documentation permitted them, leaving minority lenders with limited legal recourse. For public credit investors, the implications are more contained: the broader and more dispersed creditor base in syndicated markets, combined with more standardized documentation and established legal precedent, provides a more predictable framework for navigating distressed situations.

Transparency as a portfolio management advantage

Public credit provides continuous price discovery through secondary-market trading, such as TRACE reporting and Bloomberg pricing. Investors can observe changing conditions in real time, differentiate between stronger and weaker issuers, and act when spreads or fundamentals shift. That transparency is not merely informational—it is a portfolio management advantage that enables earlier identification of deterioration and more timely risk management.

The distinction is particularly important in the current environment. Public markets benefit from SEC-mandated disclosures, continuous rating-agency surveillance, and standardized reporting. These mechanisms allow allocators to monitor risk with a level of precision and timeliness that is unique to publicly traded instruments. When the April 2025 tariff shock hit markets, public credit prices adjusted within days, enabling informed reallocation. Private credit valuations—which rely on quarterly or less frequent mark-to-model estimates—operate on a different timeline, and may not reflect comparable economic changes for months.

This valuation lag has drawn increasing attention from regulators, who have renewed their focus on valuation practices at private funds and the consistency of NAV reporting. For allocators, the takeaway is practical: governance and fiduciary obligations are easier to meet when portfolio marks reflect current market conditions, and public credit provides that visibility by design.

Key Point

Mark-to-market is not the same as economic risk. It is the mechanism through which risk becomes visible soon enough to be managed. A portfolio that marks to model may appear less volatile, but the underlying cash flows and credit quality are the same. The difference is when—and how precisely—the investor can observe and respond to changing conditions.

The strategic value of liquidity

Liquidity is often characterized as a defensive feature—a way to exit positions in a downturn. That framing understates its value. Liquidity is also what gives investors optionality: the ability to raise cash, rebalance exposures, add risk on weakness, and rotate across sectors as relative value changes. In a higher-dispersion environment, that flexibility is a source of alpha, not merely a safety valve.

Public credit provides that flexibility across the full market—investment grade, high yield, bank loans, municipals, and securitized credit can all be accessed, resized, or exited on any trading day. The April 2025 tariff-related volatility illustrated this clearly: public credit spreads widened and then recovered, rewarding investors who had the liquidity to act. Investors in less liquid structures may have faced the opposite experience—watching opportunities emerge without the ability to capitalize on them.

The liquidity challenge in semi-liquid vehicles

The growth of semi-liquid private credit vehicles—including interval funds and non-traded BDCs marketed to the wealth channel—has introduced an additional dimension of liquidity risk.

These vehicles have grown rapidly, with unlisted semi-liquid fund AUM exceeding $500 billion (see Figure 8). They offer periodic redemption windows, typically capped at 5% of NAV per quarter, but the underlying assets remain fundamentally illiquid.

Figure 8: The scale of liquidity mismatch: unlisted semi-liquid fund AUM | $billions, 2022-2025

In early 2026, redemption requests across private credit products rose sharply, with some of the largest direct lending evergreen funds receiving requests well in excess of their 5% quarterly liquidity provisions. Several managers activated gating mechanisms, limiting withdrawals during a period when investors may have preferred greater flexibility. These structures have never been tested through a prolonged economic downturn, and the current episode is the first significant stress event for private credit’s semi-liquid vehicles since their rapid growth beginning in 2021.

The contrast with public markets is instructive. In a public bond or loan fund, liquidity is provided by the market itself—buyers and sellers transact on an exchange or through dealers, and the fund manager bears no obligation to maintain cash for redemptions. In a semi-liquid vehicle, the fund manager must constantly manage cash reserves against quarterly redemption windows, creating a tension between liquidity provision and capital deployment that can weigh on performance. The structural elegance of public credit is that investors can enter and exit at market-determined prices on any trading day, without imposing cash management demands on the portfolio.

This structural difference has a practical corollary in the market today. Because public BDCs offer genuine market-provided liquidity, their prices adjust in real time to reflect sentiment and selling pressure — which means they can trade at meaningful discounts to NAV during periods of stress. Public and private BDCs managed by the same firm often hold 70–80% of the same underlying loans, yet the public vehicle currently offers investors access to a substantially similar loan book at a lower effective entry price, with daily liquidity and no redemption caps.

Portfolio construction and implementation

Public markets allow allocators to diversify across issuers, sectors, ratings, maturities, geographies, and structures. That breadth gives managers multiple ways to seek income and manage risk without concentrating exposure in a single financing channel or borrower type.

For institutional investors, governance is a practical consideration as much as a return consideration. Public credit is scalable, benchmarkable, and straightforward to explain to boards and investment committees. Pricing is visible. Risk can be monitored continuously. Positions can be resized efficiently if the institution’s cash needs, risk tolerance, or investment views change. These attributes simplify the fiduciary process in ways that matter for plan sponsors, insurers, and endowments with regular reporting and liquidity obligations (see Figure 9).

Figure 9: A practical comparison

Conclusion

The structural advantages of public credit—transparency, liquidity, diversification, and governance simplicity—are always relevant. But they are particularly valuable in the current environment, where higher rates have compressed the illiquidity premium, credit conditions require closer monitoring, and the premium on real-time information and portfolio flexibility has increased.

For allocators, the case is grounded in data: public credit offers competitive income, favorable default experience, higher-quality borrower composition, and the ability to monitor and reposition in real time—all measured with a consistency and transparency that is inherent to public markets. The illiquidity premium that once justified the trade-offs of private credit has narrowed to levels that warrant reassessment. In that context, public credit is not simply the more liquid choice—it may also be the more efficiently compensated one.

In today’s market, adaptability may be the most valuable quality of all. Public credit delivers it—with income, transparency, and governance that serve institutions well across the cycle.