Why it’s hard to form a view of credit secondaries

Nearly all the indicators seem to be going one way only: increased appetite for private credit secondaries. In this context, the record $1.4 billion fundraising for Coller Capital’s Credit Opportunities I fund this week was no great surprise. The vehicle raked in almost double the $750 million it set out to achieve in May last year.

As reported by our colleagues on Secondaries Investor, this was far from the only significant private credit secondaries announcement of recent times. Coller was also involved in the largest deal in the market in 2021 when it invested $580 million for a portfolio of interests from Chinese insurer Ping An. It was also the year in which fund management giants Ares and Apollo made big strides into the private credit secondaries space.

Readers will have noted that the opening sentence included the word nearly. As yet, private credit dealflow is still surprisingly small, with a disclosed figure of around $2 billion per annum. But the significant thing here may be what’s undisclosed. In our February 2022 issue, an article from Daniel Roddick of advisory firm Ely Place Partners suggested that much of the dealflow is accounted for by unreported transactions such as co-investment portfolio financing and the sale of warehoused assets into separately managed accounts. Add in these deals and the total rises to around $10 billion-$15 billion a year, he thinks.

Perhaps more of a puzzle is to be found within our LP Perspectives Study, also part of our February edition. The study canvasses the views of well over a hundred investors and discovered that only 7 percent were planning to invest in private credit secondaries funds over the next 12 months. This represents a decline from the 12 percent planning such investment at the beginning of 2021 and a high of 15 percent at the start of 2020.

Part of the explanation for the thus-far stunted growth of the market may be private debt’s self-liquidating nature. Contrary to other types of alternative asset, loans last for fixed terms before being repaid or refinanced. Debt fund lives are also typically shorter, lasting six to eight years as opposed to private equity’s 10 to 12, so there are fewer natural sellers. It may also be that LPs are expecting a quiet period for fundraising following the leaps forward over the past 12 months.

So far, at least, we have arrived at a rather odd-looking state of affairs: a market where the largest fundraising announcement so far coincides with a reluctance from LPs in general to throw their weight behind it.

Write to the author at andy.t@peimedia.com