Investors are more switched on than ever to the opportunities available in private credit secondaries, according to affiliate title Private Debt Investor’s LP Perspectives 2024 Study.
In all, 21 percent of LPs now plan to commit capital to secondaries funds in private debt over the next 12 months, the highest proportion ever seen in the survey and up from 7 percent as recently as 2022.
“There is an awareness now that credit secondaries is a product that people can invest in, which wasn’t the case three or four years ago,” said Michael Schad, partner and head of credit secondaries at Coller Capital. “If those 21 percent come through that would mean significant amounts of capital flowing into the asset class, which would help us create more of a market and would benefit everyone because the more liquidity, the better.”
“People like the risk-return proposition. As a product, this is significantly more diversified than you would get by committing to a bunch of direct lending funds, which is how most investors go into credit. LPs are now a bit more concerned about manager selection in credit, so this provides diversification through managers and also through vintages, which is particularly interesting for those just coming into the asset class.”
Moving up the agenda
Credit secondaries also offer LPs a different entry point into the asset class, with portfolios already fully ramped up, allowing for quicker deployment than other routes into private debt.
Cécile Mayer-Levi, head of private debt at Tikehau Capital, said credit secondaries are rapidly moving up the agenda for LPs and anticipates the market following in the footsteps of the more mature private equity secondaries space.
“LPs are now more educated about the credit secondaries asset class and they are attracted by the returns as well as the ability to access an extremely diversified pool of underlying assets,” she said. “We were one of the first movers in that market and, just like in private equity secondaries, we are now seeing more and more managers coming in to join the crowd.
“In a way, the growth is volume-driven and is a natural evolution of the underlying market becoming more mature, with longer hold vintages and fewer exits than planned driving a need for LPs to find liquidity.”
As interest rates surged and fundraising slowed, “the whole machinery of private credit from an LP perspective has ground to a bit of a halt”, Mike Hacker, global head of portfolio finance at Carlyle’s AlpInvest Partners, told PDI in December. “Credit secondaries are part of how investors are starting to relieve the friction.”
When asked whether they plan to buy or sell in the private debt secondaries market in the coming year, some 22 percent of LPs will be buying, 8 percent plan to sell and 2 percent expect to both buy and sell. In 2022, 10 percent of LPs said they would sell back in and 6 percent were buying, representing a sizeable uptick.
Scaling secondaries
“Within private credit, we saw a couple of things in the past year that motivated people to sell,” said Schad. “We quite often saw flow where people decided between selling private equity assets or private credit and went with private credit because discounts were better. Also, regulatory change is continuous, particularly in private credit, and we saw a lot of investors with regulatory constraints because so much money comes from insurance companies.”
He says the percentages talking about coming into the market could represent a significant scaling of the credit secondaries environment. “We define the private credit market as a $3 trillion market right now, so if 1-2 percent of that was to come to market, in line with equity secondaries, that would mean the secondaries market growing by significant multiples,” Schad said.
Dave Schwartz, head of credit secondaries at Ares Management, said: “The credit secondaries market is meaningfully undercapitalised relative to the significant transaction volumes we see.”
Anticipating the trend for secondaries, Ares paid more than $1 billion in 2021 to acquire Landmark Partners, which at the time managed $18.7 billion of secondaries in private equity, infrastructure and real estate. Ares launched its credit secondaries business last year, quickly followed by a $1 billion credit secondaries joint venture anchored by sovereign wealth fund Mubadala.
One in three investors now say that they invest in GP-led secondaries funds, which are yet to emerge as a feature of the credit market. Still, Schad believes 2024 might be the year when GP-leds take off in private debt.
“The equity secondaries market is quite mature already and you have a lot of market participants, but it is still driven by mainly dedicated fund managers and large institutional investors that do the bulk of the volume,” Schad said. “The same will be true in credit secondaries. The secondaries asset class has matured, so LPs are getting up the curve quicker than was the case in equity secondaries and we are seeing market developments that took 15 years in equities taking two years in debt.”
“Next year could be the year where the GP-led market in credit really gains traction. The way I define that is good quality GPs looking for a liquidity solution for funds that are well diversified and still have good quality credits in them. There haven’t been many transactions like that so far, but they could be an interesting option for investors looking for liquidity and for GPs looking to offer that.”
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