A huge growth in volume, improved pricing and motivated sellers looking to take advantage of the growing pool of capital – our 2024 survey suggests the private debt secondary market will make its mark this year. Daniel Roddick, founder at Ely Place examines what this means for LGPS investors.
The global private debt market stands at an estimated $1.7trn, with some predicting it will double within the next 5 years. Certainly, the LGPS investor community are buyers of the asset class: According to the Room 151 2023 survey, private debt was the most popular asset class with 54% of respondents looking to increase allocations. And according to Private Debt Investor almost 80% of LGPS investors are below their target allocations.
As happened in private equity and infrastructure, the maturation of the primary market led to the rapid development of a burgeoning secondary market, and this is precisely what we are now witnessing in credit.
However, as it remains a relatively nascent market, little publicly available data exists on private debt secondaries. At Ely Place Partners we have been active in this once niche market for several years, observing how it has matured to now feature a number of sophisticated specialist buyers. We therefore conducted our own survey with these buyers to understand its true size, where it is heading and what are some of the trends we should expect to see. The full survey can be found on our website.
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Deep market with 50% to 100% increase expected in 2024 – 2025
One of our first findings was that the market is much larger than had previously been reported. Publicly available figures typically report a market size of $5 to 6bn of closed transactions in both 2022 and 2023. However, the consensus among our respondents was that the true size is in fact as high as $10bn, and expected to grow to as much as $15bn over the year ahead.
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Establishment of a dedicated buy side universe offering fair pricing for credit assets
This growing pool of dedicated buyers has given sellers the confidence to bring assets to market at scale knowing they can achieve a competitive price. There has been particular buy side demand for funds of high-quality senior loans, some of which have been trading at little to no discount to NAV.
Our survey respondents have seen the average price paid for credit secondary assets increase by 2.5 to 5% as a percentage of NAV compared to a year to 18 months ago, driven by fewer concerns about losses, an improvement in liquidity from the underlying funds, and less uncertainty about the macro environment, combined with an increase in buy side capital.
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Implications for LGPS
How can LGPS investors take advantage of this new market?
As LGPS investors look to increase their exposure to private debt, they could of course bid on the many fund portfolios that come to market. Alternatively, they can choose to make a commitment to a specialist private credit secondary investor, or work in partnership with one to help build its target portfolio. This can then enable the LGPS to accelerate capital deployment with appropriate diversification of vintage, strategy and geography.
The emergence of a specialist buyer universe also gives the primary investor comfort that even if it allocates at scale, there is now a source of future liquidity should the need arise to dispose of any holdings.
Finally, the investor can use the secondary market on an active basis as a portfolio management tool. Capital invested with legacy GPs, for instance, can be realised and reallocated to strategic relationships. Or an LP can choose to sell a fund if the rate of distributions is slower than anticipated and it needs capital to meet the drawdowns of other funds. Alternatively, it may take a strategic decision to move up or down the risk spectrum and therefore actively manage its portfolio accordingly.
Whether as buyers or sellers, we expect to see LGPS investors become increasingly involved in this new and exciting market.
About Ely Place Partners
Ely Place Partners is a specialist adviser in alternative assets. It assists GPs raise capital from institutional investors, and acts as a specialist adviser on secondary transactions.
Our full private debt secondary survey and other thought pieces on the private debt secondary market can be found on this link: Private Credit Secondaries Thought Leadership – Ely Place Partners.
