Credit fund secondaries has been attracting more attention in recent months, with firms including Pantheon and Tikehau Capital plotting forays into the strategy.
For Strategic Partners’ global head Verdun Perry, debt secondaries is a strategy still too immature for serious consideration.
“If you look at the size of [the credit market] and the ageing of that strategy, it’s not quite ripe for secondaries yet – certainly not for a dedicated programme of size,” Perry told Secondaries Investor in an interview at the firm’s New York headquarters.
“The question that I ask myself is: will there be a time and, if so, when will it be right for a dedicated secondaries programme focused on credit funds? We’ll see. It’s unclear, but today it’s not the time. It’s still relatively small.”
The Blackstone unit has previously acquired stakes in credit funds, and Perry said the private debt market could mature to a point where a dedicated strategy was warranted: “It wouldn’t surprise me if the market for secondaries in credit funds gets to a point where you could see dedicated programmes focus exclusively on that space.”
In March, Pantheon emerged as lead backer of a GP-led process on credit-focused Avenue Capital Group’s 2011-vintage Europe Special Situations Fund II, as Secondaries Investor reported. The firm has been speaking to investors about raising a dedicated credit secondaries fund, and on Tuesday appointed a global head of private debt.
Last month, France’s Tikehau hired Olga Kosters from StepStone Group to launch its debt secondaries business.
Blackstone chief financial officer Michael Chae said on the firm’s third quarter earnings call in October that Strategic Partners had had a “standout quarter”, with appreciation of 9.6 percent. The $34 billion secondaries business grew 60 percent year-on-year and has generated 14 percent returns annually since its inception.
On the same call, president and chief operating officer Jonathan Gray said: “There is a structural shortage of capital in secondaries, creating enormous opportunities for deployment.”
Perry said the secondaries unit can invest in deals as small as $100,000 and as large as $5 billion. Its median deal size is $4 million – a surprisingly small figure, given that the firm is the third-biggest player according to the SI 30 ranking of secondaries fundraisers and considering its $11.1 billion haul for Fund VIII in September.
“Some of these funds we have purchased multiple times,” Perry said. “We know the fund names, the portfolios, the assets, the GPs. We can take advantage of all those years of knowledge and those relationships and execute on a wider size range. We can price in significantly less time than others and can close in significantly less time than others. It’s much lower friction.”
Perry, an almost two-decade veteran of Strategic Partners who joined the firm when it was part of investment bank DLJ in 2000, declined to comment on what the next big development in the secondaries market would be: “While I won’t talk about what I think the next innovation will be, what I will share is that there will absolutely be innovations over the next few years in this market.”
Perry said the amount of unrealised value that trades on the secondaries market per year is about 2.5 percent of the overall primary market, meaning there is room for continued growth. He added that the biggest threat to this growth would be a pullback.
“Typically, the bid-ask spread widens and volumes decline during downturns. It’s a short-term threat during downturns, but the volume decline usually doesn’t last long. I think over the long term this market will continue to grow significantly.”