Understanding the dynamics of secondaries markets
The realm of secondaries markets has gained significant attention in discussions about private credit sectors. These markets play a crucial role in providing liquidity for both limited partners (LPs) and general partners (GPs). However, their rapid expansion may also indicate a limited number of viable exit options for investors. Grasping this dual nature is essential for effectively navigating the evolving financial landscape.
The mechanics of secondaries in private credit
In private credit, secondaries refer to the trading of existing fund interests or loan portfolios. This process establishes a resale market, allowing investors to adjust their exposures and enhance liquidity prior to the fund’s maturity. Once a niche area within private markets, the use of secondaries has grown significantly. It is now regarded as a vital tool for effective portfolio management.
The current environment of rising interest rates is improving yields. However, it is also slowing new deal activity and extending fund durations, which has resulted in tighter liquidity conditions across the private credit sector.
Current state and future potential
Institutional investors are now focused on the rapid development of the private credit secondary market and its impact on pricing dynamics. Currently, secondaries account for only about 1% to 3% of total allocations in private credit, representing a small segment of the asset class. However, this is expected to change significantly. Projections indicate an increase from $6 billion in private credit secondary market volume to $11 billion, with potential growth reaching approximately $18 billion thereafter. Despite this anticipated expansion, private credit still comprised less than 10% of the overall secondary market volume.
Driving factors behind the growth of secondaries
The increase in secondary transactions is influenced by several key factors. A major driver is the substantial rise in assets under management (AUM) in primary private credit, which has doubled since 2018. Additionally, the current economic environment, marked by high interest rates, attracts yield-seeking investors who are drawn to the typically floating rates associated with direct lending. This high-rate scenario has also resulted in a slowdown of new deals for direct lenders, leading to a slower liquidation of funds.
Investor behavior and market evolution
A dedicated group of investors is emerging as the market for secondaries gains traction. These investors are allocating capital specifically for secondary transactions. This trend reflects the diverse opportunities available in private credit, including consumer lending and specialty finance. Some investors are using secondaries as a strategy to mitigate risks while gaining exposure to niche credit segments.
Historically, the sale of limited partner (LP) interests has dominated the private credit secondaries landscape, often taking place directly between sellers and secondary buyers. The discounts on these transactions can vary significantly. Typically, early-stage, diversified fund positions command lower discounts compared to tail-end or highly concentrated positions. Furthermore, general partner-initiated transactions, known as continuation vehicles, are becoming increasingly common. These vehicles acquire loan portfolios from older funds, allowing general partners to recapitalize and provide liquidity to investors. As of 2025, these vehicles are seeing a rise in frequency and volume, surpassing LP-led transactions, although they face criticism for potentially delaying necessary portfolio adjustments.
Market dynamics and pricing trends
A significant difference exists between private credit secondaries and private equity counterparts regarding discount rates. Average bids for high-quality credit funds and loans have increased from approximately 90% of net asset value (NAV) in previous years to the mid-90s, nearing 100% of fair value in 2025. This trend reflects the yield buffer in credit markets, where buyers begin earning income immediately. This dynamic reduces uncertainty and enables targeted returns in the low teens.
Negotiations in private credit secondary transactions primarily focus on payment structures. These structures can include deferred payment terms, such as an upfront payment of 20% of net asset value (NAV), with the remaining 80% to be settled later. This approach aims to enhance internal rates of return (IRR). Additionally, the allocation of accrued fees plays a crucial role in these discussions, as it determines how interest accrued between the reference date and closing is distributed.
Innovations in liquidity and market access
The emergence of evergreen and semi-liquid vehicles has recently enhanced access to private credit secondaries. Major secondary firms are now launching funds specifically targeting the wealth management sector. These funds are structured as interval or tender-offer funds, providing periodic liquidity. This approach balances flexibility and accessibility for investors, particularly private wealth clients who prioritize income and risk mitigation. This shift indicates a rising demand for investment opportunities and reflects a gradual easing of regulations, which is broadening market access through defined liquidity options.
Additionally, the growth of trading platforms and data services in private credit is significant. While no dominant exchange exists yet, technological advancements hold the potential to streamline secondary transactions. This development could lead to standardized processes in the future, further enhancing market efficiency.
Analysts predict significant growth in the global private credit secondaries market in the near future. Transaction volumes are expected to hit unprecedented levels. The market is shifting from a focus on singular limited partner (LP) sales to general partner (GP)-led restructurings and innovative liquidity solutions. This evolution signals a bright outlook for secondaries. Factors such as the expansion of private credit, rising investor demand for liquidity, and favorable interest rates are converging. Experts suggest that annual transaction volumes could surpass $50 billion.