The debate around debt secondaries

The credit fund secondaries market could be huge. The question is ‘when?’

Readers of Secondaries Investor will know we’re constantly on the lookout for the next big innovation in the market. One of these developments is the opportunity for credit fund secondaries, an area that has received much attention of late.

Pantheon, for example, reportedly began speaking to investors as early as November last year about a dedicated debt secondaries fund. This week the London-headquartered fund of funds said it had hired a former managing director from credit-focused Star Mountain Capital as a partner and global head of private debt as part of its dedicated credit practice, which focuses on secondaries, co-investments, select primaries and special situations.

Paris-listed Tikehau Capital has also thrown its hat in the ring with the hiring last month of a StepStone executive to develop its debt secondaries business.

Clearly, some firms believe there’s an opportunity waiting in the wings.

Yet not all agree that now is the time to capitalise on that opportunity, as we discovered this week. According to Strategic Partners’ global head Verdun Perry, debt secondaries is a strategy that is 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.

Are debt secondaries too nascent a strategy to be taken seriously? Their proponents say it is inevitable that the market will open up. In a recent guest commentary with sister title Private Equity International, Pantheon partner Francesco di Valmarana and principal Toni Vainio argue that strong primary private fundraising activity will naturally lead to a secondaries market in which 1-2 percent of AUM changes hands each year. They admit, however, that dealflow is dependent on proactively reaching out to credit GPs and that a lot of explaining will be required.

Canadian insurer Manulife’s secondaries team – spearheaded by former heads of illiquid financial assets at Houlihan Lokey, Jeff Hammer and Paul Sanabria – believe the opportunity for credit secondaries is “massive” and could potentially dwarf the $75 billion private equity secondaries market. Much capital has been raised for direct lending, business development companies and collateralised loan obligations. Hammer and Sanabria believe that when the credit market turns, investors will look to the secondaries market for active portfolio management.

One comparison that helps put things in perspective is the growth of private funds GP-led processes. According to Greenhill, these are expected to have doubled to 40 percent of total secondaries deal volume this year when compared with 2015. Four years ago, firms raising dedicated GP-led restructuring funds had to contend with scepticism that such a strategy would ever fly. Today, some of those firms are raising their third vintages – food for thought in a market that continues to deliver surprises.

What’s your outlook for the credit secondaries market? Let us know: