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Transformations in private credit and the role of secondaries
The world of private credit is experiencing significant transformations, particularly regarding secondaries. These transactions enable investors to buy and sell existing interests in funds or loan portfolios, providing a crucial avenue for liquidity. This growth reflects the evolving market, but it also raises concerns about the viability of exit opportunities within private markets.
Traditionally, secondaries represented a niche segment; however, they have become essential to portfolio management strategies.
As interest rates increase, they offer enhanced yield potential while also delaying new deal activity and extending fund durations. This complexity poses challenges for liquidity, leading institutional investors to reassess their approaches to private credit.
The expanding role of secondaries in private credit
Private credit secondaries currently represent a modest 1% to 3% of total allocations within this asset class. However, projections indicate a significant increase, with expectations for growth from $6 billion to an estimated $11 billion. Notably, Evercore anticipates a remarkable 70% growth, reaching $18 billion by the end of the year. Despite this expansion, private credit still accounts for less than 10% of the overall secondary market.
This rapid increase can be attributed to several factors. A primary driver is the substantial rise in assets under management (AUM) in private credit, which has doubled since 2018. Additionally, the current economic climate, characterized by elevated interest rates, has attracted yield-seeking investors who recognize the benefits of floating rates associated with direct lending.
Investor behavior and market dynamics
The secondary market for private credit is undergoing significant changes, leading to the emergence of a distinct group of investors dedicated to these transactions. This investor base encompasses a variety of private credit opportunities, including consumer lending and specialized financial services. Some investors use secondary markets to manage risk and explore niche credit strategies.
In the context of selling limited partner (LP) interests, transactions often occur directly between sellers and secondary buyers. Discounts on these sales can vary, generally being lower for diversified, early-stage fund positions and higher for tail-end or concentrated investments. Additionally, transactions initiated by general partners (GPs) are on the rise. These include continuation vehicles, which enable GPs to recapitalize loan portfolios and provide liquidity to existing investors, thus increasing their popularity.
Market trends and future outlook
The private credit secondaries market is experiencing a notable trend: the narrowing of discount rates. Over recent years, average bids for quality credit funds have increased from approximately 90% of net asset value (NAV) to the mid-90s, with some bids approaching 100% of fair value. This development is largely due to the yield cushion provided by credit, which offers immediate income and reduces uncertainty.
Negotiations in private credit secondary transactions often focus on payment structures. These may involve deferred payments, such as 20% of NAV paid upfront. Such arrangements can improve internal rates of return (IRR) and clarify the allocation of accrued fees. This process determines how interest accrued between reference dates and the closing date is distributed.
Innovations in liquidity solutions
Recent developments highlight the emergence of evergreen and semi-liquid vehicles designed to channel capital into private credit secondaries. Leading secondary firms are projected to launch funds tailored specifically for the wealth management sector. These funds aim to balance periodic liquidity with attracting a diverse range of investors, particularly those seeking income and downside protection.
Additionally, the gradual easing of regulations in various jurisdictions is allowing more investors to access private markets through structured liquidity options. This trend towards democratization reflects a rising demand for private investments, indicating a shift in market accessibility.
Looking ahead, the rise of trading platforms and data services is expected to reshape private credit transactions. While a dominant exchange has yet to materialize, technological advancements may foster more efficient and transparent secondary transactions, potentially introducing elements of standardization.
The future of private credit secondaries
By late 2025, the global market for private credit secondaries is poised for significant growth, with transaction volumes expected to reach unprecedented levels. This market has evolved from primarily one-off limited partner sales to a more complex landscape characterized by general partner-led restructurings and innovative liquidity solutions, reflecting the sector’s dynamic nature.
Several factors contribute to this trend. The expansion of private credit, heightened investor demand for liquidity, and favorable interest rates indicate that secondaries will play an increasingly crucial role in the financial ecosystem. Forecasts suggest that annual transaction volumes could surpass $50 billion.
As the market matures, new participants—including specialized funds and crossover investors—are likely to emerge. This development will encourage greater integration across secondary markets, which encompass private equity, credit, and real assets. The future of this market promises improved standardization and transparency, which will ultimately create a more robust investment environment.
