Analysis

E X P E R T Q & A

As a range of institutional investors and GPs start using the secondary

market to manage portfolios, further growth is on the horizon,
say Rakesh ‘Rick’ Jain and Toni Vainio of Pantheon

Private debt secondaries:

An evolving opportunity
Q How would you describe
the private debt
secondaries market in 2021
SPONSOR

PANTHEON
better yields going forward, but on the
other we can potentially also anticipate
more losses and defaults based on com-
and what are the key themes pany performance. The beauty of be-
you are seeing so far in 2022? part of 2022 has also been marked by ing a secondary buyer is that you can
Rick Jain: The main theme is that significant LP dealflow and a number look at portfolios and identify those
dealflow is strong and growing. 2021 of liquidity solution opportunities in that should do better in this environ-
was another record year in terms of partnership with GPs. ment in order to potentially achieve a
deal volume for our business, up about higher yield for your investors.
20 percent versus 2020. This was driv- Toni Vainio: What is front of mind
en by a growing market recognition
that private debt secondaries can be an
effective tool to manage liquidity and
with regards to the current macroeco-
nomic situation is how potential inter-
est rate increases are going to affect the
Q Who are the sellers of
secondary interests on the
LP side, and why?
portfolio construction, especially for ability of borrowers to pay their inter- RJ: LP sellers are as varied as the in-
LPs. Growth in our deal volume and est and how inflationary pressures are vestors in the asset class. They include
closed investments was also a function going to affect the margins of business- pension plans, endowments, asset man-
of our growing capital base, which can es and their ability to pay. agers, insurance companies, banks, as
target both US and European oppor- On the one hand, because this is a well as high-net-worth individuals and
tunities across all strategies. The early floating rate investment, we should see family offices. They sell for a variety of

24 Private Debt Investor • May 2022

 Analysis

reasons, which may include the need to attractive credit metrics and shorter we have completed include acquiring
better manage portfolio construction, durations than what they might expe- portfolios of loans from legacy vehi-
eliminate unfunded exposure, address rience with other private credit invest- cles into an SMA (whole or strip loan
regulatory pressure or to lock-in per- ment options. sales), providing capital to deleverage
formance. Some sell because they are Investors also like that we can pro- and support portfolio growth with
strategically going in a new direction vide a range of liquidity and creative new capital, and creating continuation
and some are looking to trim the num- solutions to both credit GPs and LPs, funds to better align portfolio manage-
ber or style of manager they are invest- which creates more sourcing and selec- ment and GP /LP interests.
ed in. Going forward, we expect to see tivity of investment opportunities. We
more non-traditional selling counter-
parties given the proliferation of vari-
ous alternative investment vehicles en-
see an increasingly high level of inter-
est in credit secondaries from investors
– we’ve grown from a standing start
Q How do you expect the
secondary market for
private debt interests to mature
tering private credit. in 2019 to approximately $3 billion of and develop? What will this
AUM today. space look like in five years?
TV: On the LP side, occasionally you TV: Current assets under management
have some highly motivated sellers who TV: One of the overriding drivers of in closed-ended credit funds are esti-
need liquidity, but more often than not dealflow is just the size and scale of the mated to be around $1.2 trillion. If you
the rationale is around rebalancing private debt market, with not only il- add in BDCs and separately managed
portfolios in response to team changes liquid closed-ended funds but also sep- accounts it is substantially more. Some
or changes to asset allocations decided arately managed accounts and investors sources suggest that could double in
at board level. The secondary market is in vehicles like BDCs, both public and the next five years, so the secondary
becoming a normal route to rebalance private, currently driving a turnover market being a derivative of the prima-
one’s portfolio and the turnover rate of rate of assets under management of be- ry market could also double or even see
assets under management is increasing tween 1 and 2 percent just on the LP a higher level of growth given the po-
year-on-year. side. You also have significant activity tential for an increasing turnover rate
At the GP level, pressures around on the GP side that falls outside those and more GP-led solutions.
fund terms and funds reaching maturi- figures. Within a growing private credit
ty with quite large portfolios left means market, we expect secondaries to be
managers are looking for proactive
ways to manage assets with the help of
the secondary market. There is also al-
Q Why and how are GPs
using the secondaries
market to manage their credit
an important tool for the large and
growing number of investors coming
into the asset class to rebalance their
ways an element of denominator effect portfolios and balance sheets? books.
in the secondaries market, whereby if RJ: GPs are increasingly looking at a
public markets are falling then illiquids range of liquidity solutions in part- RJ: The macro environment for credit
increase as a percentage of portfolios nership with capital providers such as secondaries will continue to be favour-
and some investors sell to rebalance Pantheon – half of our closed invest- able and we expect continued growth.
their exposure. ments have been in this category – so, a There are thousands of credit manag-
partnership orientation and significant ers operating globally and the trends

Q Why are investors turning

to credit secondaries?
RJ: Private credit investors generally
experience is important.
Because GPs manage assets across
a range of vehicles – everything from
to private credit assets under manage-
ment formation are positive.
The GP side alone is vast and under
fall into two categories based on their closed-end funds, SMAs, levered/un- penetrated – expertise and specialisa-
return objectives: those focused on levered, evergreen, offshore/onshore tion in credit, a partnership orientation
stable, consistent yield and those that – you can sometimes get a mismatch of and transaction experience are impor-
desire higher-returning/opportunistic objectives between GPs and LPs and tant factors for success. Manager con-
strategies. a mismatch in fund/portfolio manage- solidation and ownership transition is
We believe that credit secondaries ment. already underway and will be another
achieve these objectives with a number This complexity and the need for a tailwind to credit secondary dealflow
of attractive benefits. Investors obtain partner – who can underwrite, price, and investment opportunities. n
access to highly invested portfolios structure and negotiate an investment
immediately, high levels of diversifi- – has driven GPs to seek any number Rakesh Jain is a partner and global head of
private debt, and Toni Vainio is a partner in
cation across numerous factors (com- of solutions to address these unique cir- the global private debt investment team at
pany, industry, strategy, vintage year), cumstances. Some of the investments Pantheon

May 2022 • Private Debt Investor 25

 Analysis

Important Disclosure
The above is a reprint from the GP-led secondaries special report, Information, opinions, or commentary concerning the financial markets,
published May 2022 by Private Debt Investor. PEI Media has provided economic conditions, or other topical subject matter were prepared,
Pantheon with the permission and authority to make this report available written, or created prior to posting this article on this Site and do not
on Pantheon’s websites and social media profiles. reflect current, up-to-date, market or economic conditions. Pantheon
disclaims any responsibility to update such information, opinions, or
The views and opinions expressed herein by Rakesh Jain and Toni commentary.
Vainio are their own as of the date of the publication, and may change in
response to changing circumstances and market conditions. In addition, past performance is not indicative of future results, future re-
sults are not guaranteed, and loss of principal may occur. This article may
Under no circumstances should these views and opinions in this article include “forward-looking statements”. All projections, forecasts or related
be construed by any reader as investment, securities, legal, or tax advice. statements or expressions of opinion are forward-looking statements.
The information contained herein should not be deemed as a recom- Although the interviewees believe that the expectations reflected in such
mendation to purchase or sell any securities or investments. forward-looking statements are reasonable, they can give no assurance
that such expectations will prove to be correct, and such forward-looking
No representation or warranty, express or implied, is made or can be statements should not be regarded as a guarantee, prediction or defini-
given with respect to the accuracy or completeness of the information tive statement of fact or probability.
in this article. In general, alternative investments such as private equity in-
volve a high degree of risk, including potential loss of principal invested,
are highly illiquid, can charge higher fees than other investments, and
typically do not grow at an even rate of return and may decline in value. Copyright © Pantheon 2022. All rights reserved

26 Private Debt Investor • May 2022