The Rise of Private Credit Secondaries: What is Driving Market Growth

This is Evercore Edge. Evercore's thought leader sharing insights on today's markets and events. Welcome to the latest episode of Evercore Edge. My name is Nigel Dawn, I am the head of private capital advisory at Evercore. We're going to talk about private credit secondaries today, one of the fastest growing areas in the secondary market. My patio joins me, who leads private credit secondaries in private capital advisory. Prior to joining Evercore, Mike was a managing director of Blackstone, focusing on private credit investing. So Mike, the first question is, can you talk about the growth of the private credit secondaries market? Yeah, sure. And thank you for having me. I think in terms of understanding why we've seen significant growth in private credit secondaries, it's helpful to give a little bit of a history lesson on the private credit market. As with any secondary market, you need a large primary asset class to develop ahead of that. And so if you think about exiting the global financial crisis, leverage lending standards and Basel III, banks really pulled back from that market, and that was an opportunity for private credit to step in. In 2010, this was a $300 billion asset class growing to sub $1 trillion, around $800 billion by 2018. And what you're seeing today is a $2 trillion asset class. If you think about 2018 to now, the market's grown out of 15% Kager, a market like COVID opened up an opportunity for private credit to step in and displace banks when they pulled back during this period of time. So now you have this $2 trillion asset class, of which a significant amount of capital was deployed from the 2018 to 21 period, 80% of the private credit capital are enclosed and vehicles with finite lives. And so what you're seeing are managers faced with significant assets in these vehicles as you get to the end of their lives and in their harvest periods. And therefore they're looking for liquidity solutions. Notice facilitated the growth in the private credit secondary's market specifically has been the dedicated capital that's been raised around the opportunity set from the buy side. And therefore this is allowed buyers and sellers to finally transact with one another at pretty attractive prices. Terrific. The market is doubled since '23. Why don't you talk a little bit about what's driving the growth in the market and maybe somewhat what you see for the next few years ahead? Yeah. So it's a lot of the themes I just touched on where you have these private credit vehicles are set up. They're five to seven year vehicles. They're investing in five to seven year duration assets with recycling capabilities. So you're then taking capital back in the investments that do perform well and have sponsor exits and you're deploying them into new five to seven year assets. And then you're faced with just normal macroeconomic cycles. In particular, in 2022, the Fed raising interest rates has led to a slower M&A market. So exits are limited from the sponsor perspective. And at the same time, you have LPs with a desire for liquidity. And so therefore this market's developed on the back of the capital formation. I think some of the things that we're seeing more recently in the credit secondary market is an increase in GP lead transactions. If you look at the market historically, it's mainly been driven by LPs, LPs lead transactions up until earlier this year or late last year. And now you have two thirds of the market transactions are GP lead and our expectation is that will continue to be the case. Terrific. The private equity secondary market has been around for a long time. Private credit secondary market is failing you. Maybe you want to point out some of the differences between the two markets. Sure. So I think structurally the technology and the vehicles you're setting up, the continuation vehicle type technology, those are largely similar. And I actually think the proliferation of private equity, single asset or multi asset CVs has led to the growth in private credit because you're just porting over that technology into this market. I'd say a major structural difference or just the underlying composition of what is being sold into a continuation vehicle. In private equity, you're largely seeing single asset or multi asset continuation vehicles. So one to a handful of assets. Whereas what's happening in the credit world, these are diversified portfolios of private credit assets. So they could be 40 investments or they could be 100 investments. So you have a further diversified pool of credit assets. As it relates to the risk, you're obviously taking credit risk versus equity risk. So investing in a different part of the capital structure. Although in the equity world, they're identifying high performing assets. So the concentration risk is mitigated in that sense. Whereas in credit, you have these diversified pools of assets and you're not going to have assets within that portfolio where you can earn two to three times your money. So it's important to understand the underlying line items and whether there's material downside or principal impairment in any of those. Terrific. Maybe we'll just shift gears, talk about pricing. And back in the day, I remember often credit LP positions traded at Y discounts, which was frustrating to LPs. Maybe talk about the current pricing environment and maybe how that might have changed. Yeah. So if you look historically for credit transactions to happen in the market, you didn't have dedicated credit secondary pools of capital. So therefore you had equity buyers that were looking at these portfolios of assets. They're targeting higher returns than the credit asset class provides. And so the implied discount to actually transact was pretty meaningful as you just alluded to. And now you have dedicated pools of capital that match the returns that the credit asset class provides. And therefore it's allowed for transactions to get done at pretty attractive pricing. And I think that is what's driven a lot of the growth as well is if you can go as a GP to your LPs with an attractive liquidity option. And again, it is an option. Then that makes looking into one of these continuation vehicles that much more advantageous. And so pricing, certainly on the senior secure direct lending portfolios, we're seeing minimal discounts those trade at in the mid 90s to par of fair market value. And again, has led to more deals coming to market. Terrific. Do these transactions ever trade at a premium to NAV because you mentioned sort of mid 90s to par. Is there any reason why they would trade at a premium or is there structural reasons why they wouldn't? Look, from the buyer's perspective, they're trying to earn a net return. So depending on the underlying yield of the portfolio, there are instances where those transactions for a high quality portfolio could trade above par and fair market value. Terrific. Maybe we turn to the buy side right now. And in ever cause, most recent survey, I think we had 21 billion in dry powder for private credit secondaries. Maybe you want to talk a little bit about the buy side, how it's changed, and maybe what is driving the change in the buy side. Yeah. So the biggest change has been the dedicated pool of capital. As you alluded to, we estimate 21 billion dollars of dry powder out there in the market, looking for private credit opportunities. Of that 21 billion dollars, we estimate two thirds are looking for senior secured, neutron type portfolios, with the balance one third targeting opportunistic and junior lending type vehicles. So certainly, the market from a buy side perspective has gotten increasingly competitive. I think there is significant room for more capital to come into the market as we expect deal volume to grow pretty significantly. I think where there's limitations are, there's only about a handful of buyers that can write a half a billion dollar to a billion dollar check in any one given transaction. So I think you're limited in that sense from an anchor investor perspective, but I would expect that that part of the market continues to develop as well as these large, historically equity buyers also raise dedicated credit vehicles. And so I think that market will get more competitive. I'd expect the unitronch, firstly, and senior secured deals to remain pretty competitive as well, and where there might be a void from the capital or an undercapitalization are on the more opportunistic distress, special situations, types, private credit portfolios. Good. It's still a relatively new asset class in terms of private credit secondaries. Talk about maybe some of the misconceptions the LPs and GPs may still have regarding this asset class. Yeah. I think historically that the connotation with a credit secondary transaction has been, I mean, the end of the life of the fund, I have very few assets left. It's the bad assets. This is a distress transaction. That mindset is certainly changing. I think there's a recognition now that the buyer capital is there, that this market will be utilized as a portfolio management tool and a way for GPs to manage their overall fund complex. And so therefore, what you're seeing come to market are higher quality transactions, portfolios that are more diversified. These aren't the bad assets that are left in a fund that you can't get out of. And you're utilizing the market as an overall liquidity management tool for your LPs and for your end of life liquidity fund solutions. Terrific. We're still in a higher interest rate environment. How do you see that impacting the types of transactions that are likely to come to the market? Yeah. And I think so 2022, the Fed materially started raising interest rates, which I think has helped facilitate the growth in the market in that it's led to a muted M&A environment. And therefore, M&A, which drives private credit deployment, has meant that GPs are left with more assets in their funds than they initially thought. And so, it all ties into a tougher exit environment. And therefore, better growth in the GP led private credit secondary market. I think even as you see interest rates come down, we're not going to go back to the zero rate interest environment that there would have already been a proven concept around this market and why it's beneficial to both LPs and GPs. So I don't think that interest rates coming down will necessarily materially affect volumes that you're seeing in the market. With private equity investors, secondaries is now viewed as a fairly standard portfolio management technique. Do you see the same thing happening with private credit and so private credit secondaries? I do. I do. I think this market will evolve such that both LPs and GPs alike view it as a portfolio management tool. Like from an LPs perspective, they are constantly changing the mix of GPs that they have exposure to. So I think this market will get utilized to make a more concentrated GP base for LPs. I think they'll look at it as a portfolio management tool when they want to shift strategy, for example, if there are changes in leadership on the LPs side, that sometimes leads to a change in strategy and a use of this market. And from a GPs perspective, I think where we're seeing GPs really lean in and utilize the market is again, for an end of fun life liquidity solution. They're also looking to extend duration for their portfolios. We hear a lot around how can I expand strategic LP relationships throughout this process and bring in new investors to the CV. And also, at the end of the lives of these vehicles, leverage has come down and they're utilizing the market to relever the vehicles, which again, can enhance returns on the other side. And lastly, to refresh, go forward economics, and potentially raise incremental capital to deploy. Terrific. So let's look ahead and what catalyst or changes do you think are required to make this into, let's say, a $50 billion market? Yeah. I think we're starting to see early signs of it, but it's a broad-based adoption and a recognition of what this market can be used for, which are a lot of the themes I just hit on, which is, this is a portfolio management tool. This is, market is part of the prudent strategy for GP as you think about end of life solutions. And then I think second, which has also been a reason the growth today has been facilitated, is just continued capital formation around the opportunity set. Again, I expect that that $21 billion continues to grow and you'll see more and more traditional private equity secondary buyers get into the credit strategy from a dedicated pool of capital, and that should continue to facilitate transactions as the market is transacting at prices that are pretty attractive. Terrific. One last question from me. How important do you think the growth of the wealth management opportunity will be for the private credit second just market? Yeah, that ties into the incremental capital chasing the opportunity set. A lot of these wealth management vehicles are in perpetual type structures and therefore looking to deploy. And so I think it's just another incremental pool of capital to look at these types of opportunities. And certainly the wealth management channel, it's been proven that private credit is an asset class where there's a desire to deploy capital. And so I think it'll just help continue to facilitate the growth in this asset class. Terrific. And before we wrap up, is there anything else? Finally, you want to say on private credit second, there's been a fascinating discussion but anything else? Yeah, no. Look, I think there's more to come where obviously really excited about the growth here. I think it's a perfect storm of factors that is leading to the growth in the market. And I think the more GPs that continue to utilize this market and prove the concept, you'll see it continue to grow and expect it to be a large market with a lot to do going forward. That's terrific. Well, thank you Mike for joining me today on this episode of Everco Edge. And thank you everyone for joining us today. We look forward to seeing you next time. Copyright 2025 Evercore, All Rights Reserved.