Armen Panossian, Co-Chief Executive Officer and Head of Performing Credit, and Danielle Poli, CAIA, Managing Director and Assistant Portfolio Manager at Oaktree Capital, believe that investors can benefit from holding a combined portfolio allocation of public and private credit.
In the most recent edition of the Oaktree Credit Quarterly, Panossian and Poli present their case for integrating public and private credit into a single portfolio. Larger borrowers have the option to seek financing from either the direct lending private credit market or the publicly traded, broadly syndicated loan (BSL) market, both of which offer floating-rate loans.
As of March 2025, the global market size is relatively similar across the high-yield bond, senior loan, and private credit sectors, with private credit reaching $1.7 trillion in AUM. Borrowers can switch between the public and private markets to meet their financing needs based on liquidity conditions. While many borrowers left the BSL market to seek financing from private credit lenders in 2022 and 2023, improving financing conditions in the public markets led to a relatively equal number of borrowers switching between the private credit market and the BSL market in 2024 and 2025. Panossian and Poli view the flexibility of accessing credit across public and private markets as a positive for borrowers, who can seek financing in the private credit market when liquidity conditions are tight in the public market, or the other way around. While private credit is typically more expensive for borrowers, the availability of credit during tight markets is crucial, especially for borrowers with lower credit ratings.
There are several benefits to combining public and private credit in a single portfolio, allowing investors to blend yield, liquidity, and volatility. Private credit is designed to generally deliver higher yields, while public credit is designed to offer investors enhanced liquidity and portfolio flexibility. Credit spread differentials can vary across public and private markets, with a compression of spread differentials between the two markets in 2024 and 2025. As credit spreads widen, investors may be able to put money to work more quickly at higher yields in the public markets. Without a regular mark-to-market process, private credit has lower volatility than public bonds with minimal opportunities for investors to generate liquidity. Private credit funds tend to be more concentrated, while public credit funds tend to offer a greater degree of diversification. While public and private credit offer diversification opportunities, asset-backed finance, collateralized loan obligations (CLOs), real estate debt, and sectoral private credit niches may offer diversification opportunities that are accretive to returns.
The credit market remains strong, with B- and BB-rated loans trading tighter than their long-term median spreads. The market, however, has a limited appetite for lower-rated CCC loans, which trade at wider spreads than the long-term median.*
Against this backdrop, Panossian and Poli predict a strong demand for both public and private borrowings, as refinancings, capital expenditures, and merger activity are all set to accelerate in the coming years.
*Bond ratings are grades given to bonds that indicate their credit quality as determined by private independent rating services such as Standard & Poor’s, Moody’s and Fitch. These firm evaluate a bond issuer’s financial strength or its ability to pay a bond’s principal and interest in a timely fashion. Ratings are expressed as letters ranging from ‘AAA’, which is the highest grade, to ‘D’, which is the lowest grade. Credit ratings are subject to change.
IMPORTANT DISCLOSURES
All investing involves risk. The value of an investment will fluctuate over time, and an investor may gain or lose money, or the entire investment. Past performance is no guarantee of future results.
Private credit securities are subject to greater levels of credit risk, call risk and liquidity risks, which may cause their values to decline. Private credit securities are complex investments and they are not suitable for all investors. Diversification does not guarantee a profit or protect against loss.
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