Published On : 06/13/2023

How we can rebalance the private debt secondaries market

By Christoph Gugelmann, Founder & CEO of Tradeteq

Superficially, the private debt secondaries market seems to be in good health. Trade volumes in second-hand stakes of private debt reached $17 billion in 2022 – thirty times larger than they were in 2012.[i] Yet, there exists a widening gap between the robust demand for deals and withering supply of capital to service them. The answer? A centralised marketplace for participants in the private debt secondaries market.

There exist a number of explanations for the growth of the private debt secondaries market. First, new financial regulations put in place after the 2008 financial crisis have made public credit harder to access, driving firms to private credit as an alternate means to fund projects, mergers, and acquisitions.[ii] Second, the era of low interest rates – which has only recently ended – has made private debt an attractive investment for over a decade. Even the sudden end of this era last year has done little to dampen interest, as this asset class has proven not as vulnerable to the vicissitudes of inflation, interest rate rises, and the effects of the war in Ukraine.[iii] The demand for private credit has, in turn, created a healthy secondaries market, where the debts themselves are bought and sold.

Not a drop to drink

In practice, the growth of this alternative asset is being held back by one major problem. For years now, the market has struggled to attract enough liquidity to service this growing demand. There is a lack of capital relative to the volume of deals being made; it has been claimed by the private equity house Coller Capital that “dry powder held by buyers of private debt secondaries is only about half of the annual deal volume.”[iv] Recently, a number of financiers have stepped up to the plate to try to bridge the gap: in March of this year, Mubadala and Ares Management launched a joint venture to invest in the secondaries market.[v] This was followed closely by Pantheon Ventures, which announced a new tranche of investment in this asset class in May.[vi] But overall, the story is one of arrested development – and the imbalance remains. Ed Goldstein, chief investment officer for Coller Capital’s credit secondaries business, spoke for many when he described the market as still “very immature”.[vii]

Growing pains

There are a number of reasons why liquidity has not proven forthcoming. For one, there is a problem with information flow. Private credit is – by definition – not cleared on any kind of central exchange, and instead takes the form of a direct relationship between borrower and lender. This makes the market more opaque than others. It is often too expensive and time-consuming for smaller borrowers and lenders to carry out the due diligence necessary to trade in this market with confidence. The knock-on effect of this will, of course, affect volumes in the secondaries market. Another reason is reputation: the asset is still unfairly viewed by many fund and wealth managers as an obscure one; a desperate recourse for cash-strapped borrowers.[viii] As we have seen, this is a highly outdated view – yet it persists. Indeed, the secondaries market largely relies on specialised brokers to spread the word about available investments.

Modernising the secondaries market through technology

To advance any further, the private debt secondaries market will have to close the gap between demand and supply. To do so, it must become more open, transparent, and rationalised. This will do much to attract the liquidity that the market needs. Tradeteq is on a mission to achieve this through technology.

Tradeteq provides a centralised online dashboard and marketplace for participants in the private debt secondaries market. It allows users to broadcast their offers to the marketplace, track negotiations with buyers and sellers, analyse their portfolios, and to automate legal documentation and asset selection. Moreover, Tradeteq can offer a number of services to market actors, such as introductions to investors, guidance on market positioning, and operational support. Tradeteq’s digital platform aims to reduce cost and complexity, opening up the market to a greater number of participants.

In an era of economic uncertainty, private debt and its secondaries market is proving to be a safe harbour for many firms and funds. It now just needs a technological jolt in the arm to reach its full potential.

To find out more about Tradeteq and book a software demo, please visit our website.

[i] Why secondaries are in the spotlight (privatedebtinvestor.com)

[ii] Private Credit: Evolution and Opportunity in Direct Lending – Insights & education – BlackRock

[iii] Private credit – from niche to mainstream? (mandg.com)

[iv] Private debt secondaries flooding the market overwhelm limited capital | PitchBook

[v] Mubadala and Ares form joint venture to invest in secondary private credit market deals (thenationalnews.com)

[vi] Pantheon hits $3bn for credit secondaries as latest program tops target | Business Wire

[vii] Private debt secondaries flooding the market overwhelm limited capital | PitchBook

[viii] PDI_May_2023_Coller_Capital_credit_secondaries_Q_A.pdf (pardot.com)

Jessica Weisman-Pitts

Jesse Pitts has been with the Global Banking & Finance Review since 2016, serving in various capacities, including Graphic Designer, Content Publisher, and Editorial Assistant. As the sole graphic designer for the company, Jesse plays a crucial role in shaping the visual identity of Global Banking & Finance Review. Additionally, Jesse manages the publishing of content across multiple platforms, including Global Banking & Finance Review, Asset Digest, Biz Dispatch, Blockchain Tribune, Business Express, Brands Journal, Companies Digest, Economy Standard, Entrepreneur Tribune, Finance Digest, Fintech Herald, Global Islamic Finance Magazine, International Releases, Online World News, Luxury Adviser, Palmbay Herald, Startup Observer, Technology Dispatch, Trading Herald, and Wealth Tribune.