The secondaries market within private credit is experiencing significant growth, fueled by a series of macroeconomic factors and evolving investor needs. Secondaries involve the resale of existing fund interests or loan portfolios, providing liquidity for both limited partners (LPs) and general partners (GPs). While the current environment of higher interest rates enhances yields, it has simultaneously slowed new deal activity and prolonged fund durations, complicating liquidity for investors.
In 2024, secondary transactions in private credit are projected to increase dramatically, rising from $6 billion to an estimated $11 billion. Forecasts suggest an even further escalation to approximately $18 billion, although private credit currently makes up less than 10% of the total secondary market volume. Notably, the surge in secondaries is linked to an expanding primary private credit market, which has doubled since 2018.
Investor behavior is evolving. A dedicated group of investors is forming, specifically targeting secondary transactions as a way to mitigate risk while gaining access to niche credit strategies. The nature of these transactions is changing, with a growing prevalence of GP-led continuation vehicles that allow GPs to sell portions of portfolios from older funds, thereby providing increased liquidity options for investors.
Moreover, there has been a noticeable tightening in the discounts on private credit secondaries. Bids for quality credit funds are now approaching 100% of net asset value (NAV), reflecting the attractiveness of floating rates and potential income.
As the private credit secondary market continues to grow, further innovations are expected. New structures, like evergreen and semi-liquid vehicles, are emerging to attract private wealth investors, and technological advancements may eventually lead to more efficient and transparent transactions.
Why this story matters: The growth of the secondaries market signals changing dynamics in private credit that may benefit liquidity and investor accessibility.
Key takeaway: The secondaries market in private credit is poised for substantial growth, driven by higher demand and innovative investment strategies.
Opposing viewpoint: Critics argue that the expansion of secondaries may mask underlying issues in liquidity and could lead to problems down the line if haven’t been fully addressed.
