All You Need to Know About: Private Credit Secondaries

Key Takeaways

• A private credit secondary is typically a transaction where an investor buys an LP position in a private debt fund (taking over the seller’s commitment to the fund).
• The private credit secondary opportunity is large and is expected to grow.
• Compared to primary fund investing, private credit secondary benefits include instant deployment, increased diversification, accelerated returns, and better visibility on investments.

What is a Private Credit Secondary?

A private credit secondary is a transaction where an investor buys a position in an illiquid private debt fund from another investor, typically at a discount to NAV. In other words, a pre-existing private debt investment commitment is sold on to a new investor. This is what is called an “LP-led” secondary and is the most common type of transaction. There are other types of secondary transactions, most notably GP-led transactions where the GP of a fund takes an active role in facilitating the sale of existing portfolio investments to new investors.

How Large is the Private Credit Secondaries Opportunity?

The market for private credit secondaries is large and growing. This reflects recent growth in both private credit and secondaries. More capital deployed in private credit results in more assets available for secondary transactions. Macroeconomic conditions have also spurred secondary activity as a way of generating liquidity for LPs and GPs.

Nor is this opportunity expected to dry up. Between 2012 and 2022, private credit secondary deal activity saw 30x growth.[2] Indeed, according to Coller Capital, private credit secondaries “will be the fastest growing asset class” in private markets. [3]

Who Sells Private Credit Secondaries and Why?

There are two main types of private credit secondary transaction: LP-led, where a Limited Partner sells its interest in a private credit fund; and GP-led, where a General Partner orchestrates the sale of credit assets from a fund it manages. LP-led deals account for the majority of transactions.[4]? LPs and GPs have different motivations for selling private credit secondaries. For instance, LPs may require liquidity or want to reduce their administrative burden. GPs, on the other hand, may be reaching the end of a fund life, or want to develop new product offerings.

Underwriting Private Credit Secondaries

Underwriting private credit secondaries typically involves both top-down and bottom-up analysis. Underwriting seeks to determine the bidding price for a portfolio that is modelled to achieve a given return, net of expected losses.

Why are Private Credit Secondaries Interesting?

Private credit secondaries are an interesting opportunity due to the possibility for performance gains, accelerated deployment and returns, diversification, visibility, and value assessment, as illustrated in the diagram below:

How are Discounts Achieved?

There are multiple components to the aggregate discount on a secondary. As noted above, private credit secondaries are acquired at a discount to NAV and this purchase price discount can drive performance gains.

Timing, a result of structuring, also contributes to the total, or “effective” discount: there is typically a six-month period between the transaction reference date and the closing date, during which all distributions accrue to the buyer. Since debt portfolios produce regular interest payments, this lag can make a material difference.

Conclusion

The market for private credit secondaries, where a primary position in a private debt fund is sold to a new investor, has grown significantly. This growth is driven by the expansion of both private credit and secondary markets. Private credit secondaries provide investors with benefits such as accelerated deployment, heightened visibility of assets, and performance gains due to discounts to Net Asset Value (NAV) on acquisition, thanks to purchase price discounts and transaction structuring, while also enhancing portfolio diversification.

[1] Preqin, Fundraising boom as private equity secondaries market heats up, April 30, 2024. Fundraising boom as private equity secondaries market heats up | preqin.com

[2] Coller Capital, Private credit secondaries, Private credit secondaries | Coller Capital.

[3] Ibid.

[4] Pitchbook, M&A drought spurs nascent private credit secondaries market forward, January 30, 2024. M&A drought spurs nascent private credit secondaries market forward - PitchBook.

This document is meant only to provide a broad overview for discussion purposes. All information provided here is subject to change. This document is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, or as an offer to provide advisory or other services by any of the companies within Troviq Private Markets Group Limited’s group (collectively, or as necessary the relevant subsidiary operating company individually and as disclosed below, “Troviq” or “Troviq Private Markets”) in any jurisdiction. The information contained in this document should not be construed as financial or investment advice on any subject matter.? Troviq expressly disclaims all liability in respect to actions taken based on any or all of the information in this document.

This document is confidential and intended for the use of the existing and potential clients and counterparties of Troviq. While some information used in the presentation has been obtained from various published and unpublished sources considered to be reliable, Troviq does not guarantee its accuracy or completeness and accepts no liability for any direct or consequential losses arising from its use.? Thus, all such information isThis document is meant only to provide a broad overview for discussion purposes. All information provided here is subject to change. This document is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, or as an offer to provide advisory or other services by any of the companies within Troviq Private Markets Group Limited’s group (collectively, or as necessary the relevant subsidiary operating company individually and as disclosed below, “Troviq” or “Troviq Private Markets”) in any jurisdiction. The information contained in this document should not be construed as financial or investment advice on any subject matter.? Troviq expressly disclaims all liability in respect to actions taken based on any or all of the information in this document.

This document is confidential and intended for the use of the existing and potential clients and counterparties of Troviq. While some information used in the presentation has been obtained from various published and unpublished sources considered to be reliable, Troviq does not guarantee its accuracy or completeness and accepts no liability for any direct or consequential losses arising from its use.? Thus, all such information is subject to independent verification by readers.

The presentation is being made based on the understanding that each recipient has sufficient knowledge and experience to evaluate the merits and risks of investing in private equity products. All expressions of opinion are intended solely as general market commentary and do not constitute investment advice or a guarantee of returns.? All expressions of opinion are as of the date of this document, are subject to change without notice.

Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments.? Each prospective investor is urged to discuss any prospective investment with its legal, tax and regulatory advisers in order to make an independent determination of the suitability and consequences of such an investment.

Should you make an investment your capital is at risk. The value of your investment may go up as well as down. You may lose all your invested capital. Investments made through Troviq are not covered by the UK Financial Services Compensation Scheme (“FSCS”) or equivalent schemes in other jurisdictions. Investing in Private Markets involves risks, including loss of capital (as outlined above), illiquidity, absence of contro subject to independent verification by readers.

The presentation is being made based on the understanding that each recipient has sufficient knowledge and experience to evaluate the merits and risks of investing in private equity products. All expressions of opinion are intended solely as general market commentary and do not constitute investment advice or a guarantee of returns.? All expressions of opinion are as of the date of this document, are subject to change without notice.

Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments.? Each prospective investor is urged to discuss any prospective investment with its legal, tax and regulatory advisers in order to make an independent determination of the suitability and consequences of such an investment.

Should you make an investment your capital is at risk. The value of your investment may go up as well as down. You may lose all your invested capital. Investments made through Troviq are not covered by the UK Financial Services Compensation Scheme (“FSCS”) or equivalent schemes in other jurisdictions. Investing in Private Markets involves risks, including loss of capital (as outlined above), illiquidity, absence of control, lack of dividends and dilution, and should be done only as part of a diversified portfolio. Investments should only be made by investors who understand these risks and if in doubt should consult a fully qualified independent financial advisor. Tax treatment depends on individual circumstances and is subject to change in future. Past performance is not a reliable indicator of future results. Target returns are not guaranteed and actual returns may vary significantly from target returns. Troviq does not give advice or make investment recommendations to you. No communications made by Troviq should be construed as such.

Troviq Private Markets Group Ltd wholly owns a number of companies:? in the UK (Troviq Invest Ltd); in the Netherlands (Troviq Investment Management B.V.).? Troviq Private Markets Group Ltd is registered in England with registered company number 13859328 and its registered office is at Troviq Private Markets Group Ltd, 7-9 Henrietta Street, London, WC2E 8PS.

Troviq Investment Management is registered in the Netherlands with the Dutch Authority for Financial Markets as an exempt AIFMD manager and has its registered office at Gustav Mahlerplein 109-115, Unit 25-09/10, 1082 MS,? Amsterdam. Troviq Investment Management B.V. is a wholly owned subsidiary of Troviq UK Ltd. Troviq UK Ltd is an Appointed Representative (FRN: 816214 ) of Met Facilities LLP which is authorised and regulated by the UK Financial Conduct Authority (FRN: 587084). Troviq UK Ltd is registered in England with registered company number 11276896 and registered office at Troviq UK Ltd, 7-9 Henrietta Street, London, WC2E 8PS.

?

? 2024 Troviq Investment Management B.V. All rights reserved.

?