The development of a private credit secondaries market shows big promise as the asset class becomes more attractive in a higher interest rate environment, according to attendees at the Fund Finance Association’s Global Symposium in Miami Beach in February.
Private credit is “the new hot topic” in the secondaries space, said one panellist at the event, while another, acknowledging that such a market is nascent, said: “We can’t help compare the private credit secondaries market to what the private equity secondaries market was 10 years ago.”
Some argue that a secondaries market in private credit isn’t necessary for investors, given their shorter durations – a measure of an asset’s sensitivity to interest rate risk. But one such potential buyer said that longer durations, and thus higher interest-rate sensitivity, are becoming more common among private credit assets. He also noted that recycling features allowing GPs in need of additional funding to call back distributed cash can increase credit fund duration.
“You’re looking at six, seven years of weighted duration as an LP,” he said, adding that this figure is comparable with PE funds just five years ago.
LPs are now more likely to sell their credit stakes than they were only three to four years ago, the panellist said, adding that the asset class – along with infrastructure – fetches shallower discounts than private equity secondaries are getting.
‘The largest, smallest portion of the market’
“The number of conversations we’re having around credit secondaries far, far surpasses any other conversations we’re having lately,” said one fund financer interested in the private credit space, who added that it represents “the largest, smallest portion of the market”.
But there are challenges when it comes to financing the assets. There are significant variations in seniority level and structure among private credit assets, for one. Credit deals can range from senior secured down to special situations.
As interest rates rise and financing becomes more expensive, the economics of financing become more challenged, since private credit funds generally have lower target yields than their private equity counterparts.
“I think it comes down to the cost of the financing versus the return on the asset,” said an attendee from a large, diversified private asset manager. And the extent to which LPs are more or less sensitive to additional leverage than in private equity hasn’t been fully discovered yet.
But as LPs become more familiar with a private credit secondaries market, they will likely become more at ease with adding leverage, one panellist said, pointing to the growth in recognition of GP-led deals in recent years.