Secondaries struggle to make impact

Investors are unwilling to commit capital, despite huge potential for secondaries.

When Coller Capital, one of the biggest names in secondaries, launched its first credit secondaries fund in 2021 it seemed a clear sign of a maturing in the private credit secondaries market. Coller has had a specialist credit team for a decade and has invested more than $3 billion in the asset class through its flagship funds, but now sees an opportunity to offer sellers a ‘whole portfolio solution’ so that they can offload different types of assets in one go.

Apollo Global Management also launched a credit secondaries business in 2021 with $1 billion to deploy and Ares Management acquired Landmark Partners, identifying credit secondaries as a key area for growth.

But while these vehicles report an overall increase in the number and size of secondary mandates, still only 7 percent of the investors that we spoke to for Private Debt Investor’s LP Perspectives 2022 Study said they plan to commit capital to secondaries funds over the next 12 months, a figure that is down on previous years.

Jess Larsen, founder and CEO of specialist adviser Briarcliffe Private Credit, says: “We find that a lot of LPs are now very interested in private credit secondaries on an intellectual level and want to learn more about it, because there is a feeling that we will have more challenges in some private credit portfolios going forward and it might be interested to trade on the secondaries market. But for now there is not much willingness to commit money to secondaries funds.

“Quite a lot of LPs are willing to do direct deals in the secondaries market, but they are not keen to pay management fees for someone else to manage that for them.”

Falling interest?

Over the past few years, investors have previously shown slightly more appetite for secondaries, with our 2020 survey reporting that 15 percent would commit capital to secondaries funds in private debt that year. Interest has fallen to half that amount since.

When we asked investors whether they plan to buy or sell fund stakes in the secondaries market over the next 12 months, we found only 3 percent were planning to buy and sell, with 6 percent selling and 10 percent expecting to buy.

Jeffrey Griffiths, co-head of global private credit at placement agent Campbell Lutyens, says: “We are seeing a lot of activity and we have advised on some of the largest transactions in private credit secondaries over the last 12 months. Market volume is less driven by LPs selling portfolios of interests to others, although we do see that from time to time. Investors are increasing their allocations to the asset class rather than decreasing them, so we do not see many portfolio sales due to investors exiting the asset class.”

Instead, Griffiths says: “What we are seeing is assets moving around, and these are illiquid assets in private credit funds that need to be sold from one vehicle to another, primarily because of end-of-life situations.

“We are doing a lot of those transactions, selling assets from one fund to another with the same manager continuing to manage the assets, giving LPs the option to cash out or stay in. We expect, given the significant amount of fundraising that took place seven or eight years ago, that as those funds reach the end of their life we will see quite a bit more of this activity.”

Griffiths adds there is no lack of interest on the demand side from investors willing to back bilateral GP-led deals, while the growth of the primary market is ­naturally causing the market to expand.

Still, the appetite for secondaries remains in its infancy. Toni Vainio, partner in the global private debt investment team at Pantheon, told PDI last year: “The technology exists to enable GPs to more actively manage their portfolios and, in some situations, it may make sense to accelerate liquidity for their vehicles. But what has been missing is dedicated pools of capital to partner with both GPs and LPs to help with their liquidity needs.”

Michael Wong, partner at law firm Dechert, advised Ping An on the sale of its credit fund of funds to Coller and another institutional investor last year, at the time the largest private credit secondaries transaction covering 400 positions in over 250 companies.

He says: “We’ve seen the private credit secondaries market grow significantly over the past 24 months in three areas: an overall increase in the number and size of secondaries transaction mandates; a general increase in the number and size of specialised secondary funds that have come to market; and an increase in the prevalence of GP-led secondary transactions as a percentage of overall secondary deal volume in the market.”

Most expect these trends to continue as the market matures going forward.