How a Recession Could Impact Private Credit—and Heron Portfolios

After President Trump’s Liberation Day, market volatility surged. The CBOE Volatility Index (VIX) jumped above 50—levels only seen during the Global Financial Crisis (GFC) and the COVID-19 crash. 

As recession talk gains momentum, many of our investors are asking:

“How would private credit—and Heron portfolios—hold up in a downturn?”

Here’s our answer…

Table of Contents:

• Heron’s Secret: High-Quality Diversification
• Experienced Private Credit Managers Are a Must in a Recession
• A Stress Test: Private Credit in the Global Financial Crisis
• Today’s Private Credit Market Is Structurally Stronger
• First Lien Loans = Capital Preservation
• What a Recession May Look Like for Heron Portfolios

Heron’s Secret: High-Quality Diversification

Even if a 2025 recession hits, most forecasts expect it to be less severe than the GFC. But we still need to be prepared to weather a storm. 

At Heron, our portfolios are positioned to handle short-term turbulence while protecting investors’ capital.

These four factors are our foundation for strong performance through market downturns:

1. First lien loans are our core focus. First lien lenders are repaid ahead of other creditors in a liquidation.
2. We maintain low loan-to-value (LTV) ratios. A low LTV generally means there is substantial credit enhancement from first loss capital, offering lenders a cushion against potential losses.
3. Assets are diversified across 12 fund managers, 3000+ loans, and 11 GICS sectors. A highly diversified portfolio lowers concentration risk compared to investing in a single sector, fund, or loan.
4. We provide exposure to experienced, well-resourced credit managers. The majority of private credit managers have not navigated a true downturn, but managers on the Heron platform have decades of experience.

In this article, we explore these factors, looking at past performance to help understand how high-quality private credit may respond to a future recession.

Experienced Private Credit Managers Are a Must in a Recession

More than 90% of today’s private credit firms were founded after the GFC. Many of these fund managers have not truly been tested by a major downturn.

That’s not the case with the fund managers we have on the Heron platform. 

Our fund managers have:

• An average of 20+ years of lending experience
• Navigated funds through multiple credit cycles 
• Proven ability to generate steady income and minimize realized losses
• Average net realized credit loss of 0% since inception across all Heron funds, compared to approximately 1% for the industry

We only select the top-performing funds from the best-in-class private credit managers from firms like Apollo, KKR, Ares, Blackstone, and more.

A Stress Test: Private Credit in the Global Financial Crisis 

To assess how a potential recession might impact Heron portfolios, it’s useful to revisit how private credit performed during the GFC. 

• Between Q3 2008 and Q1 2009—a period when credit and equity markets plunged more than 20%—first lien loans (Heron's primary focus) declined by only 3%.
• In contrast, private credit funds that were focused on riskier parts of the capital structure performed poorly, tracking more closely to the underperformance seen in high yield bonds and leveraged loans.
• Suffering the worst, equities lost nearly 40% and took years to recover.

Sources: Private Credit performance based on NAV (not market prices) changes and cumulative distributions of 23 credit funds (not annualized); “Private Credit - First Lien” performance based on funds with more than half of the portfolio in first lien loans; “Private Credit - Junior Debt” performance based on funds with less than half of the portfolio in first lien loans; performance of Leveraged Loans, High Yield, and Equity based on Morningstar LSTA US Leveraged Loan Index, HYG ETF, and SPY ETF, respectively.

Today’s Private Credit Market Is Structurally Stronger

Private credit as an asset class has evolved dramatically since 2008:

• Higher percentage of first lien loans: First lien loans now make up ~90% of most portfolios (vs. 33% in 2008). 
• Lower loan-to-value ratios: Average LTVs have dropped from ~67% in 2008 to ~41% today.
• Increased borrower quality: Additionally, the average borrower size and creditworthiness have increased.

At Heron, we select only the highest quality funds for our platform—our funds average 95% first lien loans and 42% LTV.

Sources: GFC 2008 data based on 23 credit funds, as of 12/31/2008 for first lien loans, and as of 2007 for LTVs (based on S&P LCD data); “Private Credit Funds - 2024” data as of 12/31/2024 based on 58 credit funds managed by firms with approximately $1.5 trillion in aggregate private credit AUM; funds with more than half of assets in first lien loans are considered "Senior Debt Fund" in this analysis (otherwise, "Junior Debt Fund”).

First Lien Loans = Capital Preservation

In a downturn, first lien position is critical to preserving capital, benefitting from:

• Generally higher recovery rates: First lien creditors typically achieve recovery rates of 60–70% of loan principal—the highest among all tranches of the capital structure.
• Equity cushion against losses: With today's lower LTVs across loans generally, there is even more equity cushion protecting lenders. Collateral values would need to decline by more than 60% before loan positions would begin to experience losses.

What a Recession May Look Like for Heron Portfolios

If a recession does hit, we expect that covenant breaches would rise, loan amendments and forbearances would pick up, payment-in-kind (PIK) would increase, and there might be a temporary period of negative performance marked by unrealized losses.

However, while a recessionary environment may create short-term pressure on loan portfolio values and returns, we believe—with the right managers—any drawdowns would likely be modest and temporary, with recoveries likely occurring within a few quarters, as history has shown for first lien-focused portfolios.

We can’t predict if or when a 2025 recession might happen, but our approach remains the same:

• Focusing on first lien loans
• Maintaining strong credit enhancement through low LTVs
• Diversifying across best-in-class, cycle-tested fund managers

If a recession hits, we expect limited credit losses—just as we’ve seen in past downturns.