Private Credit vs Public Credit: Who Holds It, Who Wrote It

A traded bond is held by whoever bought it last, on terms nobody in that transaction negotiated. A privately negotiated loan is held by the lender that wrote it, on terms that lender agreed with that borrower. Everything else follows from those two facts, and the difference bites hardest when the terms have to change: one side needs a conversation, the other needs a process.

Start with something familiar. A neighbour lends Rs 50,000 to the man who runs the tea stall outside the gate. The two of them settle it across a table in about ten minutes: how much, by when, and what happens if a month comes in thin. The neighbour holds that loan. Nobody else does. If the fourth month is bad the borrower walks over, the two of them have a conversation, and between them the terms can become different terms. The two people who made the terms are the two people standing there. Now suppose that same lender had instead bought a bond. The holding would be a claim whose terms were settled years ago by people the holder has never met, and the person who could change those terms is neither that holder nor any other single holder. The difference between those two holdings is the whole subject here. Every other difference follows from it.

The label most people carry into this subject is that private credit is negotiated and public credit is traded. The label describes the common case rather than the mechanism, and it fails the first time a real position turns up. One invented loan book below is where the failure happens. The mechanism is narrower and far more useful than the label. The holder of a listed instrument can sell it to somebody else at a price a market sets. The lender under a privately negotiated loan generally cannot, and holds it. Sit with that difference. Who negotiated the terms, what happens when something goes wrong, where a price comes from when nobody is trading and what the holder gets to see are not four separate facts to memorise. All four fall out of the one about selling.

What is actually different, once the credit question is taken out of it?

Both sides are the same act. Somebody hands over money now and expects it back later with interest, on terms written down somewhere. Whether the borrower can actually pay it back is a completely separate question. Judging that is credit assessment. Credit assessment is covered separately and is used here without being explained. With all of that off the table, something narrow is left standing. The narrowness is exactly what makes it worth studying. Strip out the credit question and the only thing left that differs is the holder: how many of them there are, and whether the holder is the party that wrote the document.

The worked instance throughout is Nilgiri Direct Lending Fund I, invented, a private credit fund managed by Nilgiri Alternatives Advisors Private Limited, invented. The fund has Rs 3,00,00,00,000 of commitments and eight positions costing Rs 2,40,00,00,000 between them. Those eight positions are 80.0 per cent of the commitments. Three of those eight positions carry three different holder structures, and that is the reason this book is worth walking through rather than a tidy pair of columns. If the tidy version were true, all eight positions would look the same as each other and different from a bond, and they do not.

The diagram above carries the shape of the whole argument. There is one fact at the top and four boxes underneath it, and the arrows only run downwards. Nothing in the four boxes is an independent difference to be learned separately. Each one is what follows from asking what must be true, given who is holding the thing. A reader who memorises the four boxes has four facts that will fall out of their head by next week. A reader who can rebuild the four boxes from the one sentence at the top has something usable on a document never seen before.

So five questions follow, in an order that matters, each answered on both sides. Who holds it, and how many of them are there. Who wrote it, and who was in the room. The third is what happens when the terms have to change. The fourth is what a price means, and whether one exists at all. The fifth is what happens when the borrower gets into trouble. Two of those five turn out to be the structural facts and the other three turn out to follow from them. Two facts are a much smaller thing to carry than five differences.

Question one: who actually holds it, and how many of them are there?

Take the private side first and in full. A bilateral loanOne negotiated between a single lender and a single borrower. has exactly one lender in the document. Position 6 of the invented book is one: Rs 25,00,00,000 lent to one borrower at a contracted 14.0 per cent a year, that rate being this invented fund's own and nothing at all about what borrowing costs anybody in India. There is no other lender named anywhere in the paperwork. If the borrower wants to talk about the loan, there is precisely one telephone number, and the person at the other end of it is the person who wrote the terms in the first place.

Now the same book, one position along, and the picture changes without leaving private credit at all. Position 7 is a participationA share of a syndicated facility held by one of the lenders. of Rs 20,00,00,000 in a syndicated facilityOne loan shared across several lenders under a single set of documents. of Rs 4,00,00,00,000 shared across six lenders. One set of documents, one borrower, six holders. Rs 20,00,00,000 divided by Rs 4,00,00,00,000 is 5.0 per cent, so this fund holds 5.0 per cent of that facility and brings 5.0 per cent of the vote to any decision the holders take together. The other Rs 3,80,00,00,000, being 95.0 per cent, sits with five other lenders, and this record does not fix how that 95.0 per cent is split between them, so the split is unknown. How a syndicate is assembled and how its mechanics work is covered separately.

The thing worth noticing is an uncomfortable one: the fund's larger position is the one where it holds the whole conversation, and its smaller one is the one where it holds a twentieth of a vote. Rs 25,00,00,000 in position 6 gives it every seat at the table. Rs 20,00,00,000 in position 7 gives it 5.0 per cent of a table with five other people at it. Size did not decide that. The document did, on the day it was written, and that is the first hint that the number of holders is doing more work here than any amount of money is.

A listed bond is covered separately, so the listed side answers this question in a single sentence: a listed bond is held by whoever bought it last, in whatever quantity they chose, alongside an unknown number of other holders who bought theirs at other times for other reasons. The contrast ends there. The private side ranges across that same axis by itself. One holder, six holders, and, as position 8 shows, a holder who bought from somebody else. The number of holders is a dial, not a switch, and private credit sits at more than one setting on it.

Question two: who wrote the document, and who was in the room?

Who wrote the document is the second structural fact, and it is not the same as the first. The two travel together most of the time. Ask it about position 6 of the invented book. The fund and the borrower sat down, worked out what the money was for, what would be pledged, what the borrower had to keep doing and what happened if it stopped, and then somebody typed it up. The lender that holds that loan is the lender that negotiated it. Every clause in it exists because one of two parties asked for it and the other agreed, and both of those parties are still there.

Follow that through to a consequence people usually miss. A lender that wrote its own document knows why every line of it is there. The lender knows which clause it fought for, which one it conceded, and which one the borrower's own bank asked for. The advantage is not a small one when something needs interpreting three years later. The drafting history is sitting in the same building as the loan, so there is nothing to reconstruct.

The listed side, again in one sentence: the current holder of a traded bond did not negotiate one word of it, and the terms were settled before that holder existed as a holder at all. Everything else about the listed instrument is covered separately.

Here is where it gets honest, though. Inside the same invented book, position 8 was not written by this fund either. The fund bought position 8 from somebody else who already held it. So the fund holds a claim on terms it never negotiated. A bondholder is in exactly that condition, and here the holding sits in a private credit fund. So "the holder wrote it" is a fact about a particular position and not a fact about a whole asset class, and any sentence that treats it as a class-wide property has already made an error that can be pointed at inside one book.

Question three: what happens when the terms have to change?

Now the consequence that actually matters in practice, and the one most comparisons skip because it is less photogenic than a price. An amendmentA change to the terms of a loan after it has been made. is a change to what was agreed, after it was agreed, and loans need them constantly for reasons that have nothing to do with anybody being in trouble. A borrower wants to buy a building. A borrower wants to sell a division. A definition in the paperwork turns out to catch something nobody meant it to catch. Terms are written by people, at a moment, about a future that then does something else.

Ask who has to say yes. For position 6, one lender. The borrower calls the fund, the fund considers what it is being asked for and what it wants in exchange, and the two parties who wrote the terms write different ones. The result is a negotiation between two people about a document those two people already understand. The negotiation might be hard, it might be refused, and the fund may want something for it, but structurally it is a conversation.

For position 7, six holders. The fund brings its 5.0 per cent. Somebody has to gather agreement from holders of the other 95.0 per cent, under whatever the facility's own paperwork says about how the holders decide together, and this record does not state what that threshold is. A fund holding 5.0 per cent of a facility cannot amend anything by itself and can be carried along by decisions it did not want. The moment there is more than one holder, changing the terms stops being a conversation and becomes a process, and which of the two it will be was decided on the day the loan was written rather than on the day the change is needed.

And on the listed side, in one sentence, the same logic runs to its far end: no single room exists in which to gather a large and shifting set of holders who can sell to each other, so an instrument they hold cannot be amended by talking to them. Whatever machinery exists instead is covered separately. The whole contrast sits in that sentence, and the principle behind it is not a new one. The holder count has simply been turned all the way up.

The amendment question therefore separates the sides more sharply than the price question does. Most readers find that surprising: price feels like the obvious difference. A price can turn up on either side, as position 8 is about to demonstrate. But the ability to sit across a table from every holder of a document and rewrite it is either available or it is not, and what decides that is nothing but how many holders there are.

Question four: what does a price mean, and is there one at all?

A price is not a property an instrument has. A price is the record of something that happened: one holder wanted out, one buyer wanted in, and the two of them agreed a number. The definition stops there, and held properly it takes the mystery out of the question. Where holders can sell to each other, transactions happen, and every transaction leaves a number behind. Where the only holder is not selling to anybody, no transaction happens, and there is no number to leave behind. A price is not missing from a privately negotiated loan because somebody forgot to publish it. Nobody has bought or sold the loan, so the price has not been made yet.

Think about the scooter parked downstairs. Everybody in the building has a view on what it is worth and none of those views is a price. The owner finds out what it is worth on exactly one day: the day somebody makes an offer and the two of them either shake hands or do not. Until that day there is no number. The number is not hidden and it is not lagging. Nothing has happened to make one.

So the private lender holding position 6 has a different pair of numbers to work with than a holder who can watch a screen. The document says what is owed, so the lender knows the face valueThe amount an obligation says is owed, regardless of what it changes hands for.. The lender knows what it has been paid. The lender does not have a number produced by somebody else being willing to buy. How an unsold position is carried at a value in a fund's own books, who strikes that value and what it is not, is a whole subject of its own and is covered separately.

The listed side gets its one sentence: a traded bond has a price because holders trade it with each other, and the number on the screen is the record of somebody else's transaction rather than a statement of what is owed. The mechanism is the same one, not a different one. Both sides have a face value written in a document, and a price exists on either side exactly when somebody buys and somebody sells.

Which is why the tidy version of this comparison is about to break. If a price is simply the residue of a transaction, then nothing stops a transaction happening in a privately negotiated obligation. Somebody who holds one and wants out can find somebody who wants in. The place where an existing obligation changes hands between holders, rather than being made fresh between a lender and a borrower, is the secondary marketWhere an existing obligation changes hands between holders., and private credit funds appear in it on both sides. One of the eight positions in this invented book came from exactly there.

Question five: what happens when the borrower gets into trouble?

Trouble is the sharpest consequence of who holds the document, and two very different events get called by that one word. One is the borrower failing to do something the document told it to keep doing, with every payment still arriving on time. The other is the borrower missing a payment. The two events are not the same and they do not lead to the same conversation.

Take the first. Position 3 of this invented book is mezzanine debt of Rs 30,00,00,000, and its borrower breached a leverage test at a quarterly measurement while continuing to pay in full. The fund and the borrower then agreed a set of changed terms before anything was missed. Such an agreement is a workout, and its mechanics are covered separately and in full. The workout appears here for one narrower reason. The conversation was structurally available because one lender held the document and could sit across one table from the borrower and agree that it would say something else.

Now run the same event against a widely held instrument, in one sentence of contrast: the table would need every holder at it, and an obligation whose holders are many, unknown to each other and free to sell to each other cannot be renegotiated across such a table. Whatever happens instead is covered separately. None of that is a claim about which outcome is better for anybody. The claim is about which conversations are physically available, and it follows from the holder count and from nothing else.

Two limits sit here and they are not decoration. The first: what a claim gets back when a borrower fails depends on rank and on what was pledged, both covered separately in full. A recovery figure is the most consequential number in the subject, and nobody can supply one for an invented borrower. The second: a lender who can renegotiate is not thereby better off than one who cannot. A renegotiation is a conversation becoming available, not an outcome improving, and treating the availability of a conversation as a result is precisely the error to avoid. Treating a bought-in obligation and a borrower in difficulty as objects worth analysing at all is the framing of Moyer, Distressed Debt Analysis, 2005.

What do three positions in one invented loan book actually look like?

Everything so far has been mechanism. The book the mechanism was derived from follows in full, and the numbers give it something to sit inside rather than beside. Nilgiri Direct Lending Fund I, invented, holds eight positions. Their costs are Rs 50,00,00,000, Rs 45,00,00,000, Rs 30,00,00,000, Rs 35,00,00,000, Rs 20,00,00,000, Rs 25,00,00,000, Rs 20,00,00,000 and Rs 15,00,00,000, in that numbered order. The addition is worth doing before the picture below is read.

Five of those eight are the subject of other treatments entirely. Each of those five, what it is, how it is secured, where it sits relative to other creditors and what happens to it when things go wrong, is covered separately and in full. Positions 1 to 5 cost Rs 1,80,00,00,000 between them and appear here only as the part of the book that belongs to another subject. The three that belong here are positions 6, 7 and 8, and they are here for one reason: they carry three different answers to the question everything here is built on.

Position 6 is one lender and one borrower. Rs 25,00,00,000 at a contracted 14.0 per cent a year, this invented fund's own rate, with no other lender in the document at all. Position 6 is the shape people mean when they say private credit, and it genuinely is one of the shapes.

Position 7 is one document and six holders. Rs 20,00,00,000 of a Rs 4,00,00,00,000 facility, being 5.0 per cent of it and 5.0 per cent of the vote. The loan was privately negotiated and is not traded on any exchange. Five other lenders are inside the same paperwork, so the fund holding it cannot rewrite a line by talking to the borrower.

Position 8 is an obligation this fund never wrote. The fund bought it from a holder who wanted out, at a price the two of them agreed, and the borrower was not a party to that transaction at all. Position 8 is the one that makes the comparison honest, and the block below is about it.

One more thing, and it is a gap rather than a fact. The record fixes what is pledged for some of the eight positions and states nothing either way for positions 6, 7 and 8. Nobody reading the record can say what secures those three. A plausible invented security package would be indistinguishable from a real one, so where a record does not fix something, the correct move is to say so and stop rather than fill the gap.

Why is a position bought in a market sitting inside a private credit book?

Because it is in the book, and leaving it out would make the account tidier than the truth. Position 8 is a distressed purchaseBuying an obligation for less than its face value.: an obligation with a face value of Rs 30,00,00,000, bought in the secondary market for Rs 15,00,00,000. Two numbers about one obligation, and here is the sentence that matters most in this block. Both of them are facts, they are answers to different questions, and a reader who collapses them into one number has lost the ability to read the position at all.

Rs 30,00,00,000 is what the obligation says is owed. The face value was fixed by a document somebody else negotiated, and it did not move when the position changed hands. Rs 15,00,00,000 is what this fund handed over to the previous holder. The price was fixed by two parties agreeing, on one day, in a transaction the borrower took no part in. Dividing the second by the first gives 0.50, conventionally stated as 50 paise in the rupeeThe share of face value that something changes hands at or recovers.. The number states what happened in one transaction and nothing about what will happen in another. The arithmetic is what was paid over what is owed.

Now the discipline that goes with holding two numbers about one thing. Asking what share of this book position 8 represents requires saying which number is being divided. Rs 15,00,00,000 of cost against the book's Rs 2,40,00,00,000 of cost is 6.25 per cent, stated unrounded because it lands exactly on a half and the two ordinary rounding habits disagree about which way to send it. Rs 30,00,00,000 of face against the same Rs 2,40,00,00,000 is 12.5 per cent. Both divisions are correct and they answer different questions, and quoting either one without saying which number is on top is how two people end up disagreeing loudly while both being right.

So what does this position do to the comparison? Position 8 puts a private credit fund on the buying side of a market price. The fund ends up with a holding whose terms it did not negotiate, whose drafting history it does not have, and whose previous holder it may never meet again. On every one of the five questions except the first, position 8 answers the way the listed side answers. And it is a perfectly ordinary thing for a private credit fund to hold. A private lender can meet a traded price, and a comparison that pretends otherwise has drawn a wall where there is a gradient.

What does the holder get to see, and does anybody else see it?

Information is not in the list of five questions and belongs here anyway. The question rides on exactly the same two facts, and it is the difference readers feel first when they move between the two sides. Asked mechanically, it runs: who is the information going to, and can that person sell what they are holding to somebody who has not seen it?

A document with one named lender in it can require that lender to be sent things, and the requirement works because the recipient is a named party under a contract. The two parties wrote down what is sent, how often and how fast when they negotiated. The record does not fix that schedule for positions 6, 7 or 8, so the schedule is unknown. The structural point survives without the schedule. The information goes to the holder because the holder is named in the document, and nobody outside the document sees any of it.

The same arrangement fails on its own logic where holders can sell to each other. If one holder were sent something the others were not, that holder could sell its position to somebody who had not seen it, and the buyer would be transacting against a seller who knew more. An instrument built to change hands cannot deliver information to one holder at a time without breaking the equal footing that lets it change hands. So the listed side gets its single sentence: a traded instrument's holders receive what is published, all of them at the same moment, and everything about what must be published and to whom is covered separately. The conditions attaching to any of that are set by the Securities and Exchange Board of India at sebi.gov.in, they change, and the current text is read there.

One limit to carry out of this block. More information is not the same thing as a better outcome, and the lender who receives a monthly pack does not thereby do better than the holder who reads a published statement. Information is an input somebody still has to act on, and what is described here is what each holder structurally has, not what anybody managed to do with it.

Which of these five differences is structural, and which is only habit?

Now the five collapse. Five questions were asked and answered on both sides, and they are not five independent differences. Two of them are facts about the position, and the other three are what those facts make available.

The two structural ones are question one and question two. How many holders are there, and did the holder write the document. Nothing else here is upstream of those two. Both properties can be established about any credit position, in any country, without knowing what the position is called, and once they are in hand the rest follows by asking what must be true.

The other three are consequences, and they behave like consequences. Behaving like one is the test. Change the holder count and the amendment answer changes, exactly as it does between position 6 and position 7 inside one book. Change whether the holder wrote it and the price answer changes, exactly as it does at position 8. A difference that flips when one of the two underlying facts changes is a consequence of that fact and not a separate difference to memorise, and that is the whole reason all of this can be carried around in two sentences instead of five.

So what is left of "private is negotiated and public is traded"? The phrase is a habit of speech, and a defensible one: the common case really does line up that way. The habit becomes a mistake at the moment somebody treats it as a definition and then meets a position that does not fit. The correct use of a rule of thumb is to expect the common case and to notice immediately when a thing is not it. The incorrect use is to conclude that the thing at hand must be the common case because of what it is called.

One last idea deserves naming rather than smuggling. Readers arriving here often carry the notion that an investor holding something it cannot readily sell is being compensated for that fact. The idea is treated at length in Ang, Asset Management, 2014, where illiquidity is framed as something an investor is compensated for rather than merely as a nuisance. No figure and no direction is attached to it here. Which side pays more is a question about prices rather than about holder structure, and two positions with the same holder structure can pay very differently.

If somebody put a credit document in front of an analyst, what would come first?

More people read about credit positions than ever negotiate one, and here the argument earns its keep. An analyst opening a private credit fund's schedule of positions, a treasury person handed a facility their employer is being asked to join, a student reading a case, and an investor reading a report from a fund they have money in are all in the same situation: a document or a description in front of them, and no author standing beside it. Three questions, in this order, and each one yields something the next one needs.

First, how many holders are in this document. Not the size, not the name, and not the borrower's line of business. One holder, a handful, or many. The holder count settles whether the terms can be changed by a conversation, whether a price is likely to exist, and whether the holder can act on its own judgement or has to carry others with it. If the description is silent, that absence is itself information and it is the first thing to go and find out.

Second, did this holder write it. A lender that negotiated its own terms has the drafting history and knows why each clause is there. A holder that bought the position from somebody else has the terms and not the history, whatever the position is called and whatever kind of fund it sits in. The fund's name says private credit, so the reader stops there and never asks the second question. Position 8 in the invented book is what gets missed.

Third, what does the document say happens when the terms need to change. The third question is about machinery rather than about intentions, and the paperwork answers it. The answer is also predictable from the first two, and predicting it correctly is a good way to check that the first two were read correctly.

The list leaves things out, and the omissions matter too. Nothing about whether the borrower can pay: that is credit assessment, a separate discipline covered separately. Nothing about rank or what is pledged, both covered separately as well. The order in which a capital structure is read is a procedure with its own treatment rather than something to improvise. And nothing at all about whether the position is a good one to hold. A position's structure and a position's merits are different questions.

Back at the tea stall, the household version is the same three questions. Is the neighbour the only person who lent him money, or is his cousin in it too. Did the neighbour set the terms or agree to somebody else's. And if he needs to pay late, who has to say yes. The three questions are the same at either size, and the size never changes which of them matters. Somebody who can answer them about a Rs 50,000 loan can answer them about a Rs 4,00,00,00,000 facility.