Private credit and private equity both put money into private companies, but they are not the same investment. Private credit is lending: you (or a fund you invest in) loan money to a company and earn scheduled interest plus repayment of principal. Private equity is ownership: you buy a stake in the company and earn a return only if it grows in value and eventually sells. That single difference between private credit vs private equity — lender or owner — drives how you get paid, how you’re taxed, how long your money is committed, and what happens if the company fails.
Lender or Owner
A private equity investor acquires shares. Those shares come with governance rights spelled out in a shareholders’ agreement: the power to appoint directors, approve or block mergers, and hire executives. The plan is to increase the company’s value through operational or strategic changes, then sell the stake at a profit.
A private credit investor is a lender. There are no shares, no board seats, and no vote on corporate decisions. The relationship runs through a credit agreement containing covenants — contractual conditions the borrower must meet, such as maintaining certain financial ratios, providing regular statements, or not taking on additional debt without permission. If the borrower breaches a covenant, the lender can declare a default and demand immediate repayment, renegotiate terms, or take other protective steps written into the agreement, even if no payment has actually been missed.1BlackRock. Covenants: Translating Jargon of Private Credit
How Returns Are Paid
The income patterns are almost opposites. Private credit produces a steady stream of payments on a set schedule. Private equity delivers a lump sum, if anything, when the investment is sold.
Private credit returns follow the loan’s payment schedule. The borrower makes regular interest payments at a fixed rate or a floating rate tied to a benchmark such as the Secured Overnight Financing Rate.2Federal Reserve Bank of New York. Secured Overnight Financing Rate Data At maturity, the borrower repays the principal. These are legal obligations, not discretionary payments.
Some private credit deals use payment-in-kind (PIK) interest. Instead of paying cash, the borrower adds the interest to the loan’s principal balance. A $1 million loan at 10 percent with PIK terms grows to $1.1 million after one year, with future interest calculated on the higher balance. That boosts the nominal yield but also quietly increases the borrower’s total debt, which raises risk if performance slips.
Private equity works differently. Returns depend on the company gaining value and then reaching a liquidity event — a sale to another firm, an initial public offering, or a recapitalization. Some portfolio companies pay dividends, but those are at the board’s discretion and not guaranteed. Your total return is the difference between what you paid and what you get on exit, which means a poorly performing company can return less than you invested, or nothing.
Risk if the Company Fails
Bankruptcy is where the practical gap between the two shows up most clearly. Under the absolute priority rule, creditors are paid before equity holders.
Private credit sits near the top of the capital structure. Senior secured lenders are typically first in line, with claims backed by specific collateral such as real estate, equipment, or intellectual property. Perfecting that security interest through a UCC-1 filing gives the lender a legally recognized claim to the collateral ahead of later or unsecured creditors.3Legal Information Institute. UCC Financing Statement
Equity sits at the bottom. Shareholders receive distributions only after every creditor has been paid in full: secured lenders, unsecured bondholders, employees owed wages, and tax authorities. If the company’s assets don’t cover its total debt, equity holders lose everything with no legal recourse. That downside is the trade-off for the uncapped upside ownership can provide.
How Long Your Capital Is Tied Up
Neither asset class offers the liquidity of buying and selling stocks on a public exchange. They differ, though, in whether the timeline is defined.
Private credit loans have a specific maturity date, the deadline by which the loan must be fully repaid. Average maturities have generally been around five years, though individual deals vary. A borrower can sometimes repay early, but credit agreements often include prepayment penalties or make-whole provisions that compensate the lender for lost interest.4Federal Reserve. Private Credit: Characteristics and Risks
Private equity has no fixed maturity. You wait for a liquidity event, and that commonly takes seven to ten years, sometimes longer if market conditions delay a sale. Nothing legally forces the company or the fund manager to exit on a particular date, so the timing depends on the company’s growth and the availability of a willing buyer.
If you need cash before a fund’s natural exit, both private equity and private credit fund stakes can be sold on a secondary market, but usually at a discount to the reported net asset value. Discounts vary with fund age, strategy, and market conditions, and research has shown averages in the range of 10 to 15 percent. Secondary sales are not guaranteed; they require a willing buyer, and the process can take months.
How Each Is Taxed
The tax treatment tracks the ownership-versus-lending split, and it matters for your after-tax return.
Interest income from private credit is generally taxed as ordinary income at your marginal federal rate, which can reach 37 percent for high earners. That’s the same treatment as bank interest or bond coupons. Accrued PIK interest is typically taxable in the year it’s added to principal, even though you haven’t received cash.
Private equity profits are usually taxed at the long-term capital gains rate — 0, 15, or 20 percent depending on your taxable income — provided the investment was held more than one year. High-income investors may also owe the 3.8 percent net investment income tax on top of that.
Fund managers in both strategies often receive a share of profits called carried interest. Under federal law, carried interest qualifies for long-term capital gains treatment only if the underlying assets were held more than three years rather than the usual one. Gains on assets held three years or less get reclassified as short-term and taxed at ordinary rates.5Office of the Law Revision Counsel. 26 U.S. Code 1061 – Partnership Interests Held in Connection With Performance of Services The rule has a bigger practical impact on private credit managers, because many loans mature in around five years and some are refinanced earlier, while private equity holds routinely run seven to ten years.
Who Can Invest
Both are offered through private placements exempt from full SEC registration, so they’re not open to the general public. Most funds require accredited investor status. For individuals, that means a net worth above $1 million excluding your primary residence, or annual income above $200,000 ($300,000 with a spouse or partner) for the prior two years with a reasonable expectation of the same this year.6U.S. Securities and Exchange Commission. Accredited Investors Some professional certifications and institutional statuses also qualify.
Larger and more exclusive funds often require the higher qualified purchaser standard: generally, an individual or family entity owning at least $5 million in investments, or an investment manager overseeing at least $25 million. Those funds operate under a different exemption from the Investment Company Act and can run a wider range of strategies with fewer regulatory constraints.
Fees You’ll Pay
Both types of funds typically layer a management fee on top of a performance-based fee, and those costs reduce your net return directly.
The traditional model, sometimes called “two and twenty,” runs about 2 percent of assets under management each year plus roughly 20 percent of profits as carried interest. Managers with exceptionally strong track records occasionally charge carried interest as high as 30 percent. Nothing about these numbers is fixed across the industry; they’re negotiable and vary by fund.
Many funds also use a hurdle rate, sometimes called a preferred return: a minimum annual return, commonly around 8 percent, that the fund must deliver before the manager collects any carried interest. If the fund doesn’t clear the hurdle, the manager earns only the management fee. Some agreements include a catch-up clause that gives the manager a larger share of profits once the hurdle is cleared, accelerating when the performance fee kicks in.
Private credit funds tend to have modestly lower fees than private equity funds, because lending involves less operational work than buying and restructuring companies. The specifics vary widely, so the fund’s offering documents are where the real numbers live.