Liquidity Solutions The Growth Drivers of the Credit Secondaries Asset Class
At a Glance
Sizeable Primary Market: The private debt market has expanded meaningfully to $1.9 trillion in AUM1, establishing a scaled base for an active secondary market to exist
Seller Pressures Driving Market Activity: A growing subset of investors are utilizing the secondary market to address a broad range of liquidity and portfolio management needs
Significant Market Growth Potential: The credit secondaries asset class remains underpenetrated compared to more established secondary markets, presenting an attractive future growth opportunity
The private credit market has experienced remarkable growth over the past two decades, growing at a 16% compounded annual growth rate (“CAGR”) to reach $1.9 trillion in assets under management (“AUM”), providing a scaled inventory base for a fruitful secondary market to develop.
While the growth in the primary market has been underpinned by attractive returns and increasing institutional adoption, a growing segment of investors have sought to address their liquidity needs via the credit secondaries market.
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Private Credit AUM Growth1
This trend has been amplified by recent macroeconomic volatility and geopolitical uncertainty, which has supported the broader secondaries market volume to reach record highs in 2024 in excess of $160 billion2, spurred by increased liquidity needs, narrowing bid-ask spreads, robust investor demand for diversified portfolios, and capital availability.
A key metric in assessing the activity of any secondaries market is the turnover ratio – the annual volume of secondary transactions as a percentage of total primary AUM. For private credit, this ratio is estimated at just 1% compared to 2–3% for more established markets like private equity secondaries, suggesting significant room for future expansion.
What Pressures Are Sellers Facing?
Sellers in the credit secondaries market are typically motivated by a range of portfolio management requirements, similar to those in more mature markets such as private equity secondaries, which include liquidity constraints, regulatory pressures, lack of distributions, and strategic shifts or changes in investment leadership.
A persistent theme across private markets has been the slower-than-expected return of capital, leading to lower Distributions to Paid-In Capital (“DPI”). “While yields for direct lending funds have remained attractive, broadly speaking there has been a more limited return of capital than originally anticipated by investors” notes Dave Schwartz, Partner and Head of Credit Secondaries at Ares.
Private Credit DPI Multiple by Vintage2
Lower distribution activity in recent years has propelled secondary market volumes across both traditional LP-led sales, where limited partners sell their fund interests to secondary buyers who become the new LP of record, typically at a discount to NAV, as well as in the growing market of GP-led continuation vehicle (“CV”) transactions, where GPs transfer existing assets or loans into a new vehicle to provide liquidity to existing investors and extend the investment horizon in order to maximize value.
In aggregate, credit secondaries transacted volume surpassed $11 billion in 2024, representing a 5x increase from 2019, as greater awareness and education on the asset class has driven an increasing number of sellers to transact, paired with greater dedicated capital formation.
