Understanding private debt secondaries

Secondary market transactions, often referred to as “secondaries,” involve the trading of existing investment fund shares. These shares offer intriguing opportunities for investors to enhance their portfolio returns.

The allure of secondaries – potentially higher returns

In general, secondary programs target 200-400 bps higher than primary investments in similar funds. The potentially higher returns are achieved via discounts on net asset value (NAV) that are negotiated during the deals. These discounts, frequently in the double-digit range (around 15%1 ), surpass those found in the private equity secondary market due to liquidity constraints. Beyond the initial negotiated discount based on the portfolio’s NAV, the effective discount depends on ‘post-account’ cash flows until closing. 

Post-account cash flows refer to the cashflows received between the reference date (the defined date whose NAV is used for signing the deal) and the closing date. For example, let’s say the reference NAV is 30 June 2023 and the closing date is 20 December 2023. The underlying funds keep on calling capital to make new investments and distributing proceeds from realised assets between the reference date and the date the deal is closed. These intermediary cash-flows are called ‘post-account cashflows’ and are netted from the price paid by the buyer.

J-curve mitigation – early yields and distributions

As the portfolios being purchased under secondary deals are usually already fully invested or significantly invested, the J curve effect is minimised. Investors receive yield and distributions much faster than similar primary investments.

 TWO TYPES OF SECONDARY MARKET TRANSACTIONS 

1) LP-led secondaries
These transactions occur when Limited Partners or LPs (fund investors) seek liquidity in the short or medium term or wish to rebalance their portfolios. They offer their fund units on the secondary market.

2) GP-led secondaries
Fund managers (General Partners or GPs) initiate GP-led secondaries by offering portions of their portfolios that haven’t been liquidated as expected. This may happen, for instance, when closing funds and distributing returns to investors. Notably, “tail-end” transactions often arise during GP-led secondaries, involving the sale of a fund’s last remaining portfolio companies. Rigorous screening is essential here, as these companies may have specific reasons for not being liquidated earlier.

Potential for better risk-adjusted returns
Secondary market allows investors to reduce blind pool investment risk substantially. Secondary portfolio buyers generally evaluate each underlying deal in a portfolio and price it appropriately. This allows the potential for better risk-adjusted returns vs. similar primary investments. 
Players in secondaries

The Private Debt Secondaries segment consists of a small number of different players. 

  • Fund-of-funds secondary strategies: They have been the most successful players in the secondary market. Specialised teams within these firms can move fast and underwrite deals under tight timelines, which is an essential component of the secondary underwriting process. Successfully navigating the secondary market business also requires a robust network. A strong position in the primary market, an expansive international network, and in-depth market knowledge empowers assertiveness in negotiations. Therefore, deal sourcing and consummation of deals becomes a challenge for players who are not specialists.
  • Opportunistic investors or private equity secondary funds that buy up loan portfolios: These players usually have capital costs that are too high to operate successfully in this segment. 
  • Real money investors: These are typically sovereign wealth funds and sometimes pension and insurance funds who also run secondary programs. The secondary processes run under very tight timelines. Therefore, these players tend to act very opportunistically, generally focusing on very large deals in funds that they are already invested in.
  • Direct lending managers: Large direct lending platforms face challenges in scaling their secondary strategies. In general, it is seen that GPs whose shares are being sold tightly control who the new buyer(s) will be. GPs do this to avoid disclosing sensitive information such as names of borrowers, terms of the loans, etc. to direct competitors.
Key insights

As the portfolios being purchased under secondary deals are usually already fully invested or significantly invested, the J curve effect is minimised. Investors receive yield and distributions much faster than similar primary investments. 

Growing market and presence

Secondaries are gaining prominence and are starting to feature in more institutional portfolios. According to S&P’s private markets outlook, both GP-led and LP-led secondary strategies will remain in high demand in 2024. 

Quicker allocation to private markets

Attractive returns, accelerated capital deployment, and broad diversification make secondaries a valuable addition to rapidly expanding portfolios. They facilitate quicker allocation to private markets compared to primary fund investments. 

Strong market opportunity

The current market volatility and shifts in target allocation within private market portfolios have led more LPs to explore exit options via private debt secondaries. Simultaneously, secondaries are gaining traction on the GP side. 

Growing importance of Private Debt Secondaries

Against the backdrop of economic uncertainty and banks’ reluctance to lend, the private debt market assumes a pivotal role for institutional investors. The turnover of private debt secondaries currently stands at approximately 1.7% of assets under management (AUM)2 per annum, in contrast to the 5% turnover observed in private equity. Following the trajectory seen in private equity, turnover of private debt secondary transactions is expected to accelerate over the coming years. GPs and LPs alike explore secondary solutions for liquidity reasons. Industry experts predict that the volume of secondary market transactions in private debt will continue to surge, potentially reaching USD 50 billion by 2026. As AUM continue to expand structurally, private debt secondaries are poised to become a significant asset class in themselves.

1 Source: Campbell Lutyens – 2024 Secondary Market Overview
2 Source: Prequin, PitchBook, Allianz Global Investors, 2024

 

 

 

  • Disclaimer
    Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

    The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication’s sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced, except for the case of explicit permission by Allianz Global Investors. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional /professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors UK Limited, authorized and regulated by the Financial Conduct Authority; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).

    AdMaster: 3526374

Recent insights

Embracing Disruption

The “Internet of Things” (IoT) has made strong progress over the past decade, with connected devices now commonplace across both households and industry. However, in terms of the promises of IoT translating into tangible productivity gains, we have seen some bumps in the road to wider adoption, not least among systems providers seeking sustainable models for monetizing this quickly developing technology.

Discover more

Navigating Rates

Many of the major central banks (excluding Japan) are beginning or set to begin interest rate-cutting cycles this year. Here are four fixed income themes we believe could present investors with opportunities during the remainder of 2024.

Discover more

Modi’s victory, and the continuation of the reform agenda his government has embraced, should further strengthen the trajectory towards an ‘Emerging New India.

Discover more

Allianz Global Investors

You are leaving this website and being re-directed to the below website. This does not imply any approval or endorsement of the information by Allianz Global Investors Asia Pacific Limited contained in the redirected website nor does Allianz Global Investors Asia Pacific Limited accept any responsibility or liability in connection with this hyperlink and the information contained herein. Please keep in mind that the redirected website may contain funds and strategies not authorized for offering to the public in your jurisdiction. Besides, please also take note on the redirected website’s terms and conditions, privacy and security policies, or other legal information. By clicking “Continue”, you confirm you acknowledge the details mentioned above and would like to continue accessing the redirected website. Please click “Stay here” if you have any concerns.