How Private Credit Can Help Investors Weather Volatile Markets

Markets are growing increasingly shaky, with the S&P 500 reporting nearly a 6% loss in the first quarter of 2025. In this environment, we often hear from accredited investors and RIAs we speak with at Heron, asking us how private credit performs in volatile markets. 

Here’s a quick guide based on industry data.

How Does Private Credit Perform in Volatile Markets?

Historically, private credit shows resilience through bumpy markets:

• During the Global Financial Crisis of 2008-09, private direct lending experienced a peak-to-trough loss of 7.7%, substantially less severe than the 27% drawdown suffered by high-yield bonds and better than the 8.6% loss for investment-grade corporate bonds.¹
• When COVID-19 struck the market (Q1 2020), private credit fell only about 7.6%, compared to 19.6% for the S&P 500.²
• In 2022, when stocks and bonds both declined, private credit again showed defensive characteristics. As the S&P 500 fell 18% (its worst year since 2008), direct lending strategies had essentially no negative quarterly drawdown.​ By contrast, public high-yield bond indices saw drawdowns of nearly 15% in 2022, and investment-grade bonds fell over 19%.³

What are the Benefits of Private Credit During Volatile Markets?

Here are three key benefits that make private credit a defensive portfolio allocation during volatile markets.

Benefit 1: Low Correlation to Public Markets

Private credit offers a low correlation to traditional public markets, providing genuine diversification. It reduces portfolio volatility because its performance relies more on the fundamental health of borrowers than market sentiment. However, it's important to note that during prolonged recessions, which we are not seeing today, private credit could still experience meaningful losses.

Benefit 2: Strong Risk-Return Profile

Private credit generally offers attractive total returns (8%-12%+ annually) with lower volatility than equities. Historical data shows private credit providing equity-like returns with significantly lower volatility. In fact, according to 2023 research by T. Rowe Price, private credit delivers nearly the same returns as U.S. stocks with 75% less volatility. Yet, default risks exist—particularly in severe economic downturns—so choosing experienced fund managers is crucial.

Benefit 3: Illiquidity Premium

Private credit comes with a trade-off: generally, private credit is illiquid. For many private credit allocations, investors should plan for multi-year holding periods with limited or no redemption possibilities. This makes private credit suitable mainly for investors comfortable locking away capital long-term to earn higher yield. This “extra yield” is what's called illiquidity premium. An illiquidity premium is the additional return investors demand for holding illiquid assets, like non-traded loans, which cannot be easily converted to cash.

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Why Does Private Credit Outperform Other Asset Classes in Volatile Markets?

Private credit's resilience is due to its unique structure that makes the asset class less sensitive to market fluctuations. 

1. High-quality Loans: Private credit is primarily focused on first lien loans, which are less affected by a downturn compared to riskier investments such as junior debt or stocks. Also, the recovery rates on first lien loans tend to be in excess of 60% in a default, much higher than high yield bonds or junior debt.
2. Not Publicly Traded: Private credit is not publicly traded, meaning it is not marked to market and therefore much less affected by market sentiments, and tends to exhibit less extreme short-term swings.
3. Contractual Cash Payments: Private credit is often a contractually cash-paying instrument that, absent underlying fundamental credit deterioration, still allows investors to receive monthly cash distributions throughout periods of heightened market volatility.
4. Structural Protections: Private credit generally offers structural protections such as maintenance covenants and security interests that allow lenders to tightly manage downside scenarios.

Private Credit: A Portfolio Allocation for Consistent Income

Private credit can be an effective diversifier for accredited investors and RIAs seeking added stability during market volatility. It can offer steady income via attractive yields, along with downside protection. Yet, careful consideration of liquidity needs, manager selection, and understanding the risks involved are essential.

At Heron, for investors and RIAs looking for private credit exposure to generate consistent yield, we offer exposure to:

1. High-quality private credit managers: Private credit managers on the Heron platform generally have 10+ years of experience and oversee multi-billion dollar portfolios with diversified investments. We give you exposure to industry-leading credit fund managers like Apollo, Ares, and KKR.
2. Diversification of managers, sectors, and loans: At Heron, our portfolios provide exposure to 12+ fund managers, all 11 GICS sectors, and thousands of loans.

By investing in high-quality diversified private credit, you can add portfolio stability to weather dramatic shifts in the global market.

Ready to invest in one of the world’s most diversified private credit portfolios?

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Data Sources:

¹ AAM Company. (2024, December 4). The rise of private credit. https://aamcompany.com/insight/the-rise-of-private-credit/

² StepStone Group LP. (2023). Relative attractiveness of direct lending: liquidity, volatility and drawdowns. https://www.stepstonegroup.com/wp-content/uploads/2023/05/Relative-Attractiveness-of-Direct-Lending-Liquidity-Volatility-and-Drawdowns.pdf 

³ T. Rowe Price. (2023). What is private credit? https://www.troweprice.com/content/dam/trp-sites/cobrand/oha/files/Intro_to_Private_Credit_White_Paper.pdf