Private credit secondaries: A Q&A with Rick Jain, Global Head of Private Credit, Pantheon
In the ever-evolving landscape of private credit, secondaries have emerged as a compelling opportunity for investors seeking liquidity and portfolio diversification. As the market matures, the dynamics of private credit secondaries are becoming increasingly complex, driven by factors such as changing interest rates, regulatory shifts, and the growing demand for flexible financing solutions. Ahead of SuperReturn Private Credit US, Rick Jain, Global Head of Private Credit, Pantheon, explores private credit secondaries' role in enhancing liquidity, the strategies employed by investors to capitalise on these opportunities, and the potential risks and rewards that lie ahead.
What are the key drivers for the boom of the private credit secondaries market in recent years?
The private credit secondaries market has experienced significant growth since Pantheon began tracking it in 2017 and launched the first dedicated credit secondary fund in 2018. Key drivers include the maturation and expansion of the private credit asset class, now valued at approximately $1.7 trillion and expected to grow by 11-15% annually over the next five years. Strong capital formation, with over $200 billion raised annually, and increasing fund complexity, with over 1,100 credit managers competing globally, also contribute to this growth. Additionally, there is increased investor adoption of private credit across various types and structures. Other factors driving growth include secondary market dynamics similar to those in private equity, where LPs use the secondary market to rebalance portfolios, adjust strategic allocations, manage exposures, increase liquidity, or address regulatory concerns.
How do private credit secondaries compare to private equity secondaries in terms of risk and return profiles?
Private credit secondaries, including senior secured (direct lending) and more opportunistic strategies (special situations, distressed debt, subordinated debt, venture/growth lending), typically offer attractive risk/reward profiles compared to other alternative asset classes. They generally have lower risk profiles with correspondingly lower absolute returns compared to private equity secondaries specifically. Credit portfolios benefit from income streams (interest and principal repayments), substantial diversification (by company, industry, and sponsor), and shorter durations due to the contracted nature of investments. These benefits also apply to credit secondaries, offering attractive returns with unique risk mitigation.
What are some key attributes and benefits of private credit secondaries?
Key attributes and benefits of private credit secondaries include the potential for attractive entry prices compared to net asset value; near- or fully funded portfolios generating immediate yield; diversification across companies, sectors, vintage years, and GPs; and shorter investment durations compared to newly issued assets.
How do you see the private credit secondaries landscape evolving for the foreseeable future?
The growth in credit secondaries correlates strongly with the growth in the private credit asset class, as well as the evolution and maturity of other secondary asset classes, such as private equity and infrastructure. We also believe there will be continued expansion as the adoption and penetration rates of secondary solutions become more familiar to market participants. Providers with scale, experience, and strong track records with GPs and LPs, like Pantheon, are well-positioned to grow and compete over time.
