Market Commentary

The Potential Path to Portfolio Diversification

Published on
October 2, 2025
Read time
published by
AVANA Companies
Category
Private Credit

Stock and bond markets crashed in 2022, exposing the vulnerability of the classic 60-40 portfolio. As investors reevaluate what real diversification means, private credit has emerged as a compelling alternative.

Protection Against Public Market Volatility

Traditional asset classes tend to move in lockstep during periods of market stress. Private credit, however, stands apart.  Because these investments don't trade on exchanges, they've demonstrated significantly lower monthly spread volatility than high-yield bonds or senior secured loans, providing structural insulation from daily market fluctuations.

Morgan Stanley research shows private credit has historically shown less correlation with public markets. In some cases, private credit has demonstrated negative and low correlations to U.S. Treasuries and investment-grade bonds, respectively.  When equities tumble, private credit holdings typically maintain their value, anchored by borrower performance, rather than market sentiment. 

Rate Protection in a Rising Rate Environment

Most institutional investors learned painful lessons in 2022, but floating-rate structures work differently. SOFR-linked private credit investments adjust upward automatically when the Federal Reserve tightens policy, offering a layer of inflation protection that fixed-rate bonds cannot match.

StepStone Group found that the contractual nature of private credit payments leads to more reliable income than discretionary dividend-paying equities. For CIOs managing duration risk, this structure eliminates exposure while maintaining attractive absolute yields.

Unlocking Middle-Market Real Estate Access

Real estate exposure through private credit offers institutional access to the $1.7 trillion middle-market commercial real estate debt market. This segment has been largely abandoned by regional banks following the implementation of Basel III, creating opportunities in stabilized multifamily properties, hospitality projects, and light industrial assets that require financing of $5 million to $50 million.

Since 2020, community banks, which historically provided 60% of commercial real estate lending under $25 million, have reduced originations by roughly 40%. Private credit managers have stepped in, structuring deals with loan-to-value ratios of 65%-75%, while earning SOFR + 400-600 basis points.

Gaining Structural Protection with Senior Positioning

Senior secured positioning isn't just theoretical when markets turn volatile. StepStone Group's examination of Cliffwater Direct Lending Index data during the Global Financial Crisis showed that private direct lending experienced a peak-to-trough loss of just 7.7%, compared to 30% for high-yield bonds and 26.7% for leveraged loans.

During the initial market impact of COVID-19 in Q1 2020, private credit declined by only 7.6% compared to 19.6% for the S&P 500. This resilience stems from senior secured structures, combined with maintenance covenants and asset-based collateral, providing lenders with early warning systems and workout capabilities that junior capital lacks.

Achieving True Diversification with Private Credit

According to McKinsey's latest Global Private Markets Report, 46% of institutional investors plan to increase infrastructure allocations, with private debt remaining a central strategy. Since 2020, private credit assets under management (AUM) has grown from $1 trillion to $1.5 trillion today.

As investors seek true portfolio diversification, private credit offers quantifiable benefits:

    • Equity-like returns (8%-12% annually)

    • Lower volatility

    • Negative correlation to Treasuries

    • Senior positioning in the capital structures

Additionally, the illiquidity premium compensates for three to seven-year lock-ups, while providing access to middle-market opportunities unavailable in public debt markets.

How AVANA Can Help

As investors seek smarter diversification, AVANA provides access to quality commercial real estate deals through our private credit platform. Our team brings hands-on experience across hospitality, multifamily, and industrial properties, creating financing that protects capital while delivering consistent income.

For information on AVANA's investment opportunities, visit www.avanacompanies.com or contact Cathy Ellsworth, EVP-Investors Relations (cathy.ellsworth@avanacompanies.com).

Investments in private credit carry risks. Past performance is not indicative of future results.

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