Where Does Private Credit Fit? Start With Correlation

In 2022, the S&P 500 fell 18.11%. The US Aggregate Bond Index fell 13.01%. The S&P High Yield Index fell 11.27%. Three asset classes typically treated as distinct exposures, moving together under the same pressure, in the same year.

When different categories share the same driver

Exposure to interest rates, credit spreads, and market sentiment doesn’t respect asset-class labels. Equities, investment-grade bonds, and high yield credit are three distinct categories, but all three are ultimately priced off the same set of forces. 2022 is a well-documented instance of that exposure asserting itself, but it is not the only one.

Each of these asset classes has also gone through extended stretches of underperformance on its own, with no comparable move in the others. A prolonged rate cycle has weighed on bonds for years at a stretch. Equity drawdowns have taken multiple years to recover. Credit cycles have widened high yield spreads independent of what equities were doing at the time. The common driver, exposure to rates, spreads, and sentiment, doesn’t require a single dramatic year to matter. It can just as easily erode a return over a long, quiet stretch, one asset class at a time.

2022 is a useful illustration because it compressed that same underlying exposure into twelve months, across all three asset classes simultaneously. The lesson isn’t specific to that year.

A portfolio is only as diversified as the return drivers underneath it, whether that shared exposure gets tested all at once, as it was in 2022, or tested separately, asset class by asset class, over years that never make a memorable headline.

What actually drives a Garrington return

Garrington’s strategy is built around a different set of return drivers: the ordinary financial activity of real businesses. The repayment of invoices. The turnover of inventory. The refinancing of working capital tied to specific, contractual cash flows. These are short-duration, self-amortizing loans, secured by tangible collateral, repaid on the operating timeline of the business that borrowed the money.

A loan is repaid when a business collects on a receivable or sells inventory it already holds, a process that runs on its own schedule, largely independent of equity valuations, interest rate expectations, or investor sentiment in public markets. The underlying businesses still operate within the broader economy, but the mechanism generating repayment is transactional, not sentiment driven.

This shows up directly in measured correlation. Garrington’s strategy has historically exhibited a correlation of approximately 0.030 to the S&P 500, -0.046 to the US Aggregate Bond Index, and 0.117 to broader direct lending benchmarks, correlations close enough to zero that the return can reasonably be treated as independent of those markets.

The same year, a different result

Over that same 2022 period, in which all three asset classes declined together, Garrington’s strategy returned +10.30%. That result doesn’t mean the strategy carried no risk. Every loan carries the risk that a specific borrower underperforms, that a receivable collects late, or that collateral is worth less at recovery than it was at origination. Garrington prices and manages that risk directly: average loan-to-value has historically run in the 50 to 65 percent range, currently near 55 percent, and leverage is targeted at 0.5 times, currently below that target at 0.44 times. Those are the risks built into the strategy. They are not the risks that moved equities, bonds, and high yield credit together in 2022.

One year is not a track record, and 2022 shouldn’t be read as proof that Garrington’s strategy is immune to every kind of stress going forward. But for an investor who held public equities, investment-grade bonds, or high-yield credit that year, and held an allocation to Garrington, the difference between a double-digit loss and a double-digit gain was the return actually realized, not a hypothetical. The same independence would apply just as well to a slower, multi-year stretch where only one of those asset classes struggled, since what drives a Garrington return doesn’t depend on which kind of environment the broader market happens to be in.

+10.30% Garrington 2022 Return

~0.03 Correlation to S&P 500

What this means for portfolio construction

What matters for correlation is what generates a return. Garrington’s low correlation to public and private market benchmarks is a consequence of its underwriting structure: tangible collateral, short duration, and repayment tied to real operating cash flow.

For an investor or advisor building a portfolio, the relevant question is whether the return underneath a new allocation is exposed to a different set of forces than what’s already held, in a dramatic year like 2022 or in the quieter, multi-year stretches that don’t make headlines. 2022 applied that standard to every asset class at once, whether investors had thought to ask the question in advance or not. Applying it deliberately, in every kind of environment, is the more useful place to start.

In the next piece in this series, we look at the other half of the portfolio-fit question: what a monthly income stream from this strategy looks like in practice.

No predictions. No complexity. Just disciplined underwriting against real collateral.

If you’d like to discuss, please feel free to contact us:

investors@garringtonprivatecredit.com