The landscape of private credit is experiencing a significant transformation, particularly with the rise of secondaries as a key investment strategy. This shift presents both opportunities and challenges. On one hand, it provides vital liquidity for both limited partners (LPs) and general partners (GPs). On the other hand, it raises concerns about the sustainability of exit opportunities within the market.
In the realm of private credit, secondaries refer to the buying and selling of existing fund interests or loan portfolios.
This creates a resale marketplace that enables investors to adjust their exposure and secure liquidity before the funds mature. Once a niche segment, secondaries have become a fundamental component of effective portfolio management. The prevailing interest rate environment, marked by higher yields, is attracting investors while complicating new deal activities, which in turn is tightening liquidity across the private credit sector.
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The rapid expansion of the secondary market
Private credit secondaries currently represent only 1% to 3% of total allocations within the asset class. However, this figure is rapidly evolving. Projections suggest an increase from $6 billion to an estimated $11 billion. Analysts at Evercore predict further growth of approximately 70%, potentially elevating the market to around $18 billion. Despite this upward trend, private credit accounted for less than 10% of the total secondary market volume.
Factors driving growth
The rise in private credit secondaries is driven by several interconnected factors. Notably, the total private credit assets under management (AUM) have doubled since 2018. Current macroeconomic conditions, characterized by rising interest rates, attract yield-seeking investors who take advantage of the floating rates associated with direct lending. This high-rate environment is also hindering new deals for direct lenders, resulting in extended fund liquidation processes.
As the secondary market gains momentum, a dedicated group of investors is emerging, directing their capital toward these transactions. This investor base includes a variety of private credit opportunities, such as consumer finance and specialty lending. For many, secondaries act as a means to mitigate risk while exploring niche credit strategies.
Transaction dynamics and market developments
The sale of limited partnership (LP) interests has historically been the backbone of private credit secondary transactions. These deals typically occur through direct sales to secondary buyers. The discounts associated with these transactions can vary widely. Early-stage diversified fund positions generally see smaller discounts, while tail-end or concentrated positions tend to face larger markdowns. Moreover, general partner-initiated transactions, such as continuation vehicles, have gained traction. These vehicles aim to recapitalize older funds by acquiring a portfolio of loans, thereby providing liquidity to investors.
Improving market conditions
A notable trend in private credit secondaries is the tightening of discount rates, contrasting with private equity. Bids for quality credit funds and loans have increased from approximately 90% of net asset value (NAV) in previous years to the mid-90s, approaching 100% of fair value. This enhancement is largely due to immediate income generation, which lowers buyer uncertainty and allows targeting returns in the low-teens range, such as an 8% to 10% coupon at 90% to 95% of NAV.
Negotiations are crucial in private credit secondary transactions, especially regarding payment structures and the allocation of accrued fees. Transactions frequently involve deferred payment arrangements, where 20% of NAV is paid upfront, while the remaining 80% is settled later, thereby optimizing the internal rate of return (IRR).
Emerging trends and future outlook
Emerging trends in private credit investment
Another notable trend is the introduction of evergreen and semi-liquid vehicles that channel capital into private credit secondaries. Several prominent firms have launched funds targeting the wealth management sector. These funds are designed to provide periodic liquidity, balancing flexibility with a broader investor base, particularly among private wealth clients who seek consistent income and protection against market downturns.
Furthermore, innovative trading platforms are beginning to emerge, aiming to enhance the efficiency and transparency of secondary transactions in the private credit sector. Although no single dominant exchange currently exists, advancements in technology could lead to improvements in standardization and overall market accessibility.
By late 2025, the global private credit secondary market is poised for significant expansion, achieving record deal volumes. This market is becoming a standard component of portfolio strategies. The transition from one-off limited partner sales to more intricate general partner-led restructurings and innovative liquidity solutions highlights the market’s evolution. Key drivers include the growth of private credit, heightened investor demand for liquidity, and favorable interest rates. These factors suggest a promising trajectory, with annual volumes potentially surpassing $50 billion.
