The realm of private credit has experienced a significant transformation, particularly with the emergence of secondary markets. These markets facilitate the buying and selling of existing fund interests and loan portfolios, enabling investors to adjust exposure and access liquidity without waiting for the fund’s maturity. While some view the growth of secondaries as a positive development, it raises questions about the health of exit opportunities within the private market sector.
As the need for liquidity intensifies among both limited partners (LPs) and general partners (GPs), understanding the implications of this evolving landscape becomes essential. Currently, private credit secondaries account for only 1% to 3% of total allocations. However, projections indicate significant growth, with anticipated increases from $6 billion in 2025 to $11 billion and further estimates reaching approximately $18 billion. The secondary market is thus becoming an integral component of private credit.
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The impact of market conditions on private credit
The surge in private credit secondaries can be attributed to several interlinked factors. A pivotal driver is the substantial increase in primary private credit assets under management (AUM), which has doubled since 2018. Additionally, the current macroeconomic environment, characterized by higher interest rates, appeals to yield-focused investors. As these rates rise, they enhance returns for investors engaging in direct lending while simultaneously slowing new deal activity, prolonging the duration of funds and constraining liquidity.
Investor behavior and evolving strategies
As the secondary market gains traction, a dedicated cohort of investors emerges, with funds specifically allocated for secondary transactions. This trend reflects the diverse nature of private credit opportunities, ranging from consumer lending to specialty finance. For some investors, secondaries serve as a strategic tool for risk management, allowing access to niche credit strategies without excessive exposure to certain sectors.
The nature of transactions in the private credit secondary market often entails LP interest sales, typically conducted directly to secondary buyers. Discount rates in these transactions vary; early-stage and diversified fund positions generally command smaller discounts, while concentrated or tail-end positions may attract larger discounts. Additionally, GP-led transactions, including the establishment of continuation vehicles, are gaining popularity. These vehicles allow GPs to recapitalize loan portfolios and provide liquidity options to investors, leading to increased volume and frequency.
The distinction between private credit and private equity secondaries
The landscape of private credit secondaries exhibits notable differences compared to private equity (PE) secondaries, particularly regarding the tightening of discounts. Average bids for quality credit funds and loans have shown significant improvement, climbing from roughly 90% of NAV a few years ago to the mid-90s, approaching 100% of fair value in 2025. This shift can be attributed to the yield cushion offered by credit funds, providing immediate income and reducing uncertainty, ultimately targeting low-teens returns.
Negotiation dynamics in secondary transactions
In secondary transactions, negotiations often center around payment terms, which may include deferred structures such as an upfront payment of 20% of NAV, with the remaining 80% settled later to enhance internal rate of return (IRR). Additionally, the allocation of accrued fees becomes a critical aspect, determining how interest accrued between the reference date and closing is distributed among the parties involved.
Another notable trend is the introduction of evergreen and semi-liquid vehicles designed to channel capital into private credit secondaries. Major secondary firms have launched funds targeting wealth management channels, structured as interval or tender-offer funds. These vehicles aim to provide periodic liquidity while appealing to private wealth clients seeking income and downside protection, reflecting the growing demand for investment opportunities.
Technological advancements and future outlook
As the private credit secondary market continues to evolve, technological innovations are beginning to emerge. Some firms are exploring the development of trading platforms—more accurately referred to as marketplaces—for loan portfolios. While a dominant exchange has yet to materialize, advancements in technology could enhance the efficiency and transparency of secondary transactions over time, potentially leading to a more standardized process.
Looking ahead, the private credit secondaries market is poised for exponential growth, with deal volumes expected to reach unprecedented levels. As the market structure shifts from predominantly LP sales to GP-led restructurings and innovative liquidity solutions, factors such as expanding private credit, investor demand for liquidity, and favorable interest rates will solidify the role of secondaries in the financial landscape. Projections suggest that annual volumes could exceed $50 billion, paving the way for new entrants and a convergence of secondary markets across various asset classes.
