The landscape of private credit is continuously evolving, with secondaries emerging as a prominent investment strategy. This market segment allows for the buying and selling of existing fund interests or loan portfolios, creating a dynamic resale environment where investors can adjust their exposures and free up capital before funds reach maturity. Once considered a niche component of private markets, secondaries are now deemed critical for effective portfolio management.
Amid rising interest rates, the appeal of private credit secondaries has intensified.
This environment enhances yields while constraining new deal activity, leading to extended fund durations and tighter liquidity. As institutional allocators increasingly recognize the importance of this market, the focus shifts from whether a secondary market will develop to how swiftly it can evolve and influence price discovery.
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Growth of private credit secondaries
Secondaries currently account for a mere 1% to 3% of total allocations within the private credit sector. However, projections indicate a surge in this figure, with expectations of growth from $6 billion to an anticipated $11 billion. Analysts foresee a remarkable trajectory, suggesting that the market could reach approximately $18 billion. Despite this rapid expansion, private credit still represents less than 10% of the overall secondary market volume.
Factors driving expansion
Several elements contribute to the rapid growth of private credit secondaries. A significant factor is the substantial increase in primary private credit assets under management (AUM), which has doubled since 2018. Additionally, the current macroeconomic climate—with higher rates—attracts yield-seeking investors eager to capitalize on the floating rates associated with direct lending deals. This high-rate environment simultaneously curtails new deal flow for direct lenders, leading to slower fund liquidations.
Moreover, the rise of secondaries has fostered a dedicated investor base focused on these transactions. This group spans various private credit opportunities, from consumer lending to specialized finance, as some participants employ secondaries as a means of mitigating risks while gaining exposure to niche strategies.
Transaction dynamics and investor strategies
The majority of private credit secondary transactions have traditionally involved the sale of limited partner (LP) interests directly to secondary buyers. Discounts on these transactions can vary; however, they tend to be less pronounced for early-stage, diversified fund positions and more substantial for tail-end or concentrated holdings. General partner (GP) initiated transactions include the establishment of continuation vehicles, newly formed entities that acquire portfolios of loans from older funds. Such vehicles serve as a favored solution for GPs seeking to recapitalize loan portfolios while providing liquidity to investors. Recent trends indicate that the volume of continuation vehicles is surpassing that of LP-led transactions.
Market dynamics and pricing trends
The private credit secondaries market is witnessing a tightening in discount rates, distinguishing it from private equity secondaries. Average bids for high-quality credit funds and loans have risen from around 90% of net asset value (NAV) to mid-90s, approaching 100% of fair value. This shift can be attributed to the yield cushion provided by immediate income generation, thereby reducing uncertainty and allowing for targeted low-teens returns. For instance, an 8% to 10% coupon at 90% to 95% of NAV illustrates this phenomenon.
Negotiations within private credit secondary transactions often include payment terms, which may involve deferred structures—such as an upfront payment of 20% of NAV with the remaining 80% paid later—to enhance internal rate of return (IRR). Additionally, the allocation of accrued fees becomes a point of discussion, determining which party benefits from interest accrued between the reference date and closing.
The future of private credit secondaries
Looking ahead, the emergence of evergreen and semi-liquid vehicles is noteworthy. Major secondary firms are launching funds specifically targeting wealth management channels, structured as interval or tender-offer funds. These innovative structures offer periodic liquidity while aiming to expand the investor base, particularly among private wealth clients seeking income and protection against downside risks. This trend signifies a growing demand for investment and a gradual easing of regulations in various jurisdictions, enhancing access to private markets.
Technological advancements are also shaping the landscape of private credit secondaries. Emerging platforms and data services are being developed to facilitate trading among loan portfolios. Although a dominant exchange is yet to be established, the potential for technology to streamline secondary transactions and increase transparency is promising, hinting at future possibilities such as standardization, albeit concepts like blockchain may remain aspirational for now.
Amid rising interest rates, the appeal of private credit secondaries has intensified. This environment enhances yields while constraining new deal activity, leading to extended fund durations and tighter liquidity. As institutional allocators increasingly recognize the importance of this market, the focus shifts from whether a secondary market will develop to how swiftly it can evolve and influence price discovery.0
