Institutional investors have had access to a robust secondary market for stakes in private equity funds. Now, a confluence of factors has made the market for secondaries in private credit much more attractive for buyers and sellers.

Secondhand stakes in private debt funds worth an estimated $17 billion changed hands in 2022 – 30 times higher than in 2012, according to Coller Capital.

“In 2022, LPs’ [Limited Partners’] private capital portfolios delivered strong returns while their public market counterparts came under pressure, leading to their asset allocation becoming unbalanced,” says Daisy Huang, investment principal on the Coller Capital Investment Team. “Coupled with a general need for liquidity due to lower distributions from their GPs [General Partners], some of these investors turned to the secondary market to sell assets.”

The Coller team expects rapid growth in this niche. Private credit transaction volume is on track to grow to $50 billion by 2026, according to their estimates. “Private credit has become one of the most dynamic areas of private markets, with the highest growth of all alternative assets,” says Huang. “We believe LPs are increasingly likely to use the secondary market to reposition their credit portfolios, leading to strong growth in private credit secondaries.”

The London-based private equity firm raised its first credit secondary fund, Coller Credit Opportunities I (CCO I) last year. With commitments of over $1.4 billion, CCO I could be the largest fund focused on private credit secondaries in the world, according to Preqin data.

While sellers seek liquidity and convenient exits, buyers seek attractive returns. The private secondaries market is still relatively “undiscovered,” according to Morgan Stanley, which means discounts to net asset value are much more attractive than the private equity secondaries market.

From the sellers’ perspective, liquidity is the primary benefit. The zero-interest rate “easy money” environment has ended recently which has drained capital from the limited partners that usually finance mergers and acquisitions. Selling stakes in private loans and credit funds creates liquidity for these LPs and allows them to reshuffle their portfolio and redirect capital to new buyout deals.

The need for liquidity in a quantitative tightening environment will continue to drive buyers and sellers to the private credit secondaries market.

Vishesh Raisinghani