Private Credit: An Uncorrelated Asset in a Volatile Market
By James Connor
Today’s increased volatility in the stock and bond markets serves as a painful reminder to many that it is prudent to always have part of one’s wealth allocated to alternative investments with a low correlation to publicly traded stocks and bonds. Private credit as an asset class is one of the pillars of the alternative investments’ spectrum, providing investors increased diversification and capital, and yield stability that is uncorrelated to the daily ups or downs of the publicly traded markets. Not surprisingly, over the last few years private credit has emerged as a compelling alternative increasingly sought by the most discerning institutional and high net worth investors, while it’s accessible to most accredited investors.
Understanding Private Credit
Private credit involves fund managers and non-bank financial institutions providing loans or leases directly to businesses, as an alternative to the conventional channels including banks and credit unions. This asset class has experienced significant growth, expanding from approximately $1.5 trillion in 2022 to an anticipated $2.8 trillion by 2028 (InvestmentNews). This surge is driven by a combination of borrowers seeking alternative and competing sources of credit access and, as stated above, investors’ increased determination to allocate capital to private credit funds as a means of diversifying the portfolios under their stewardship.
The Uncorrelated Nature of Private Credit
While private credit investment values are not totally disconnected from price swings in publicly traded equity and bond markets, they are far less influenced by it, providing a substantial buffer against the expectations of economic contractions which are quickly, and at times severely, reflected in stock and bond prices. During periods of public market volatility, private credit has demonstrated resilience, maintaining stable returns due to its structure and the bespoke nature of its lending agreements.
Furthermore, private credit has proven resilient in the face of economic downturns. The ability to navigate volatile market conditions and provide capital where traditional funding has lessened, brings to focus private credit as a stabilizing force in the financial sector. The agility of alternative lenders, coupled with a focus on risk management, positions them as strategic partners in supporting economic growth and development. This resilience is a key reason why astute investors are increasingly diversifying their portfolios to include private credit instruments.
Performance Amid Market Volatility
In recent years, private credit has showcased robust performance, even as public markets faced turbulence. According to Preqin’s 2024 Global Private Debt Report, private debt performance is expected to be stronger than in the past, with an internal rate of return forecasted to rise to an average of 9.81% from 2022 to 2028 (InvestmentNews). This stability underscores private credit’s potential as a reliable income source, even when traditional assets underperform.
The Power of Relationships in Private Credit and Economic Growth
A key differentiator of private credit is its capacity to make credit accessible with distinctive agility and flexibility resulting in a high-value experience for borrowers and in strong relationships that beget additional future mutual investment opportunities. Private credit lenders recognize that their principal competitive advantage is to reliably enable borrowers to fund business growth plans, and that is achieved by developing a deep understanding of their needs, industry dynamics, and long-term potential, which allows for customized capital-access solutions.
Borrowers benefit significantly from this direct relationship. Instead of navigating a slow-moving and highly regulated borrowing environment, businesses working with private credit sources benefit from a more responsive financing experience. While private credit interest rates may be higher at times, that cost is offset by the value realized from speedier and tailored access to capital, and financing solutions that align with their specific needs.
Private credit plays a crucial role in financing an ample range of businesses, situations and opportunities that are either chronically, cyclically or temporarily underserved or out-of-favor. Often but not exclusively the financing will enable the acquisition or generation of an essential asset such as real estate, equipment, accounts receivable, inventory, proprietary data, among other, of small-middle to multinational corporations. The direct, relationship-driven approach of private credit managers fosters economic expansion by ensuring businesses receive the capital they need to scale operations, hire more employees, and invest in innovation.
How Sygnus Puerto Rico is Leading the Way
Sygnus Capital Puerto Rico has embraced this relationship-driven approach to private credit, successfully deploying nearly $100 million in 2024 across key sectors such as healthcare, hospitality, telecommunications, and real estate. By offering flexible and strategic capital solutions, Sygnus has empowered businesses to expand operations, create jobs, and contribute to Puerto Rico’s long-term economic resilience.
Sygnus plays a catalytic role by providing the credit-capital that propels medical infrastructure projects that ensure broader access to quality healthcare services; investments in boutique hotels and premium hospitality projects that are fueling tourism growth, while funding companies that are strengthening Puerto Rico’s digital infrastructure. Additionally, it has provided credit access for multiple real estate development projects that are contributing to housing expansion, accessibility and urban development.
This direct engagement with businesses has positioned Sygnus as a key partner in economic transformation, helping enterprises overcome financial barriers and drive long-term growth. The Sygnus team is on a mission to accelerate the development of Puerto Rico’s emerging private credit sector, ensuring that more businesses have access to credit, and ultimately unleashing board economic growth and prosperity.
Considerations for Investors
While private credit presents attractive features, investors should carefully assess several factors when considering private credit opportunities. One key aspect is illiquidity, as these investments typically involve longer lock-up periods compared to publicly traded assets. Additionally, private credit deals can be complex, requiring thorough due diligence due to their bespoke nature. While private credit is generally less correlated with public markets, it is not entirely insulated from economic downturns, which may affect borrowers’ ability to meet their repayment obligations.
Looking Ahead: The Future of Private Credit
As businesses seek nimble and customized financing solutions, and investors explore avenues beyond traditional markets, private credit is set to play an increasingly integral role in shaping the future of finance. Its ability to offer flexible capital, navigate economic volatility, and foster direct borrower-lender relationships makes it a key player in driving economic growth and financial resilience.
The rapid expansion of private credit signals a broader shift in how capital flows in the modern economy. Investors are recognizing the long-term potential of this asset class, while businesses are turning to private lenders to fuel expansion and innovation.
It’s an exciting journey, and staying informed is the key to unlocking the full potential of this transformative force in the world of investments.
James Connor
CEO
Sygnus Capital Puerto Rico
Sygnus is a leading alternative investment firm in the Caribbean and Latin America, committed to accelerating economic growth across the region, using innovative and creative financing solutions. Alternative forms of investment such as Private Credit, Real Estate Finance and Private Equity are utilized to satisfy the unmet demands for innovative investment opportunities, unlocking capital for growing companies, and plays a critical role in economic development.
With a dynamic and interconnected ecosystem across all business units, Sygnus is defined by a purpose-driven team that delivers unrivalled regional expertise, all underpinned by a robust foundation of corporate due diligence and internal governance.
