GP-led processes on credit funds shot up in the first half of this year, according to advisor Greenhill.
Credit and distressed funds accounted for 20 percent of GP-led activity over the period by transaction volume, according to the firm’s Global Secondary Market Trends & Outlook published in July. These funds were categorised as ‘Other’ in the 2018 version of the report. The only strategy to account for a higher proportion was buyout at 68 percent.
The growth of credit GP-led deals is a natural extension from their use in private equity and the large amount of primary capital raised for private credit in recent years, according to Francesco di Valmarana, a partner at Pantheon. Private credit funds raised $154.5 billion in 2018 and $130.5 billion in 2017, according to sister publication Private Debt Investor.
“Debt funds can use [GP-led process] to take a vehicle that’s in its twilight years, but still has a bunch of assets [left] and find a new group of interested investors,” di Valmarana told Secondaries Investor. GPs can also use such processes to give liquidity to existing investors so those LPs can re-up into the GP’s latest fund, he added.
“Both [elements] are important in terms of what’s driving the market.”
In June Neuberger Berman closed a GP-led restructuring on two pre-crisis credit funds managed by Bain Capital, Sankaty Credit Opportunities funds I and II. Bain ran the process because it wanted to offer liquidity to LPs in the vehicles, Secondaries Investor reported.
In March, Secondaries Investor reported that Pantheon was to back a GP-led process on Avenue Capital Group‘s 2012-vintage Europe Special Situations Fund II. The process, run by Park Hill, was worth as much as $450 million with the stakes trading at par to net asset value.
The lower return profile of credit makes it unsuitable for most private equity secondaries funds, which could put the brakes on growth. Many PE secondaries funds have to buy credit at a discount to get the desired return, which can be unpalatable to selling LPs.
In November, Private Equity News reported Pantheon was in talks with investors about raising a private debt secondaries fund. Secondaries Investor understands that it is still the only firm with a vehicle dedicated to the strategy, though other multi-platform firms are mulling the idea.
“There’s only a certain amount of dedicated capital that’s been raised to purchase these portfolios,” said a New York-based managing director at an advisory firm. Credit funds account for less than 10 percent of assets available for purchase on the secondaries market, he added.