Private credit firms are selling stakes of loan portfolios as a way to boost a closely watched measure of how much cash they return to investors such as pension funds and insurance companies.
Lenders have been forced to hold onto their investments for longer, given a lack of mergers and acquisitions has led to fewer opportunities to cash out. As a result, funds are paying out less to investors that have been eager to get their money back before committing to new vehicles.
Most loans held in private credit funds mature within five to seven years, a time frame for when investors should start seeing more returns. But many vehicles formed eight years ago are still lagging on a closely watched metric known as distribution to paid-in capital, which measures how much investors have received compared to what they put in originally.
Funds formed in 2016 reported a median DPI above 1 as of Dec. 31, meaning investors have at least received the same amount they’ve contributed, according to Pitchbook data. Subsequent vintages, however, are still well below that target, with funds formed in 2020 or later showing median DPI of less than 0.6, the data shows.
The market is getting a boost from the fact that private credit funds need to improve investor returns, especially for newer vehicles. Secondary sales allow these firms to offload stakes in a private debt package before the loan matures or is paid off. Many direct loans are provided to private equity-backed firms, meaning lenders can be reliant on buyouts to be paid.
“It’s becoming clear that private credit is not a self-liquidating asset class on the timeline initially expected,” said Greg Ciesielski, a managing director at HarbourVest Partners. “But there’s also a burgeoning awareness among private credit investors on how to utilize the secondary market, which has led to an acceleration in credit secondaries.”
Compounding the pressure to return capital, many credit funds also have debt facilities that are amortizing faster than the underlying assets can be paid off, according to Scott Beckelman, co-head of private capital advisory at Jefferies Financial Group Inc.
Secondary transactions, in which stakes of loan portfolios are sold from one fund to another, have become a popular tool for fund managers to “drive DPI and give LPs a liquidity option now,” said Mike Addeo, who recently joined Evercore Inc.’s private capital advisory group to expand its credit secondaries practice.
Ready to Deploy
Private credit secondaries, once a quieter corner of the broader market for secondhand stakes that’s dominated by buyouts, has become one of its fastest growing segments. Credit secondary volume is set to exceed $18 billion this year, up from $11 billion last year and around $6 billion in 2023, according to data from Evercore.
The private credit world has ballooned to $1.7 trillion in size in a matter of years. The secondaries market could grow exponentially alongside it, according to Rakesh Jain, global head of private credit at Pantheon.
“The credit secondaries market opportunity parallels this primary market size and scope,” Jain said.
Eager to cash into that opportunity, secondary buyers are raising dedicated pools of capital for these transactions. That’s “unlocked” deal flow for such sales, according to Fred Han, who leads private credit secondary advisory at Campbell Lutyens & Co.
Coller Capital Ltd. has pooled $6.8 billion for its second private credit secondaries platform. It raised $1.4 billion for its debut credit fund in 2022.
Ares Management Corp. has so far collected over $3.5 billion for its inaugural credit secondaries fund and related vehicles. HarbourVest has launched two separate vehicles to back credit secondary deals, according to people with knowledge of the matter.
Blackstone Inc.’s secondary fund manager is evaluating launching a dedicated credit secondaries strategy, but in the meantime will continue buying into the market through its flagship vehicle, said separate people, all of whom asked not to be identified discussing private information.
Advisers are hopping on the bandwagon, too. Campbell Lutyens, Lazard Inc., PJT Partners Ltd. and Jefferies all have executives focused on credit secondaries, according to people with knowledge of the matter, who asked not to be identified discussing private information. Houlihan Lokey Inc. and Moelis & Co. are also looking to build out their expertise, they said.
Representatives for HarbourVest, Blackstone, Campbell Lutyens, Lazard, PJT, Jefferies, Houlihan and Moelis didn’t provide comments.
Improved Pricing
While recent exit challenges are contributing to a rise in credit secondaries, there are other factors driving demand, too.
Historically, buyers bought credit stakes from private equity secondary funds that typically have a higher return profile. That led to senior secured debt assets trading at meaningful discounts, Campbell Lutyens’ Han said.
As more money has been dedicated to credit secondaries, prices have tightened, making it attractive for managers to tap the market, Han said.
Private credit managers, known as general partners, are now selling stakes in direct lending portfolios at 95 to 100 cents on the dollar, according to Jefferies.
General partners are pitching multibillion-dollar credit continuation funds to generate liquidity. These allow lenders to roll over existing investments into new vehicles and distribute money to investors in the process. TPG Twin Brook Capital Partners’ $3 billion continuation vehicle has been touted as the largest such transaction in the private credit secondaries market.
For LPs, secondary sales can provide liquidity or allow them to rework their holdings. Investors may also want to reduce the number of private credit managers they are exposed to, especially those that overlap or have similar objectives and outcomes, according to Jain at Pantheon.
“Someone may be looking to liquidate credit positions, or frankly, to reinvest in another asset class that they feel is higher octane or just frankly to lock in gains,” said Verdun Perry, the head of Blackstone’s secondaries business.
Deals
- ID.me raised $340 million across Series E financing led by Ribbit Capital and its recent credit facility, at a valuation of over $2 billion
- InMobi Group, a mobile advertising platform backed by SoftBank Group Corp., is seeking a $350 million private loan ahead of its planned initial public offering in India
- Ugandan conglomerate Madhvani Group is in talks with Cerberus Capital Management LP for a private credit loan of about $190 million to fund its acquisition of distressed glass bottle maker Hindustan National Glass & Industries Ltd
Written by: Preeti Singh @Bloomberg
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