The landscape of secondary markets within private credit presents varying perspectives among industry experts. These markets provide essential liquidity, benefiting both limited partners (LPs) and general partners (GPs). However, an increase in secondary transactions may also signal insufficient exit strategies within the market.
In private credit, secondary transactions involve buying and selling existing fund interests or loan portfolios. This resale market allows investors to adjust their exposure and gain liquidity before their funds mature.
Once regarded as a niche area, secondary markets are now acknowledged as vital for managing investment portfolios. Rising interest rates have enhanced yields but slowed new deal activity, which extends fund durations and tightens liquidity across the private credit sector.
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The evolving role of secondaries in private credit
For institutional allocators, focus has shifted from whether a secondary market in private credit would emerge to how quickly it will expand and influence pricing. Currently, secondary transactions make up a modest 1% to 3% of total allocations in private credit, but their significance is growing rapidly, with projections showing an increase from $6 billion to an anticipated $11 billion. Evercore forecasts this could rise to approximately $18 billion, even as private credit still constitutes less than 10% of total secondary market activity.
Factors driving growth in secondaries
The impressive growth in the secondary market can be attributed to several factors. A significant rise in primary private credit assets under management (AUM), which has doubled since 2018, plays a crucial role. Additionally, current macroeconomic conditions favor investors seeking yield, especially due to floating rates tied to direct lending. However, high-interest rates have also constrained new deal flow for lenders, causing a slowdown in fund liquidations.
Furthermore, the development of a dedicated investor base focused on secondary transactions is noteworthy. Investors increasingly leverage these opportunities to diversify their exposure to various private credit strategies, spanning consumer lending to niche specialty finance.
Transaction dynamics and structures
Traditionally, most secondary transactions in private credit involved the direct sale of LP interests to secondary buyers. Discounts for these transactions vary significantly; earlier-stage diversified fund positions generally attract lower discounts than tail-end or highly concentrated interests. A notable trend is the rise of GP-initiated transactions, especially through continuation vehicles—new funds created to acquire loan portfolios from older funds. These vehicles are becoming popular as a means for GPs to recapitalize portfolios and offer liquidity to investors, with expectations that by 2025, continuation vehicles will surpass LP-led transactions in volume.
Pricing trends and negotiation strategies
A positive indicator of the secondary market’s maturation in private credit is the narrowing discount rates. Average offers for high-quality credit funds and loans have risen from about 90% of net asset value (NAV) to the mid-90s, trending toward 100% of fair value. The pricing differences compared to private equity (PE) arise from the yield advantage, as buyers can earn immediate income, thereby reducing perceived risk.
Negotiations in private credit secondary transactions typically focus on payment structures, which may involve deferred payment arrangements—such as an upfront payment of 20% of NAV, with the remaining 80% paid later to enhance internal rate of return (IRR). Moreover, discussions on accrued fees significantly influence which party benefits from interest accrued between the agreement date and closing.
Innovations and future prospects
Another noteworthy development is the emergence of evergreen and semi-liquid vehicles that channel capital into private credit secondaries. Several leading secondary firms have recently launched funds aimed at wealth management clients, structured as interval or tender-offer funds that provide periodic liquidity. This approach enhances flexibility and aims to attract a broader range of investors, particularly those seeking income and risk mitigation.
As we approach late 2025, the global private credit secondary market is set for significant expansion, with transaction volumes reaching unprecedented levels. The traditional structure, once dominated by individual LP sales, is increasingly defined by GP-led restructurings and innovative liquidity solutions. Factors such as the growth of private credit, heightened demand for liquidity, and favorable interest rates indicate that secondary markets will become even more prominent, potentially surpassing $50 billion in annual volume.
In private credit, secondary transactions involve buying and selling existing fund interests or loan portfolios. This resale market allows investors to adjust their exposure and gain liquidity before their funds mature. Once regarded as a niche area, secondary markets are now acknowledged as vital for managing investment portfolios. Rising interest rates have enhanced yields but slowed new deal activity, which extends fund durations and tightens liquidity across the private credit sector.0
