Here’s a fun prediction: The privacy of private credit markets could be eroded by their own success.
As the market grows, investors are more actively trading private credit loans that are halfway to maturity (or longer). Apollo Management , Ares Management and Coller Capital are among the firms that have gotten into the private-credit ‘secondary market’ investment game.
Now CreditSights says that a handful of banks — including JPMorgan, Goldman Sachs and Barclays — are “leading the way” in liquefying the market for these private direct loans. (The Borg has quoted a JPMorgan exec predicting $30bn in secondary-market transactions this year, which would nearly double 2022’s $17bn .)
Having liquidity and a semi-active secondary market would by definition remove some of the privacy from private credit, as both CreditSights and Covenant Review have pointed out in recent notes. From CS, as part of a recent note about its outlook for the market, with our emphasis:
Proponents applaud the development for providing liquidity to allow lenders to better manage and adjust portfolio holdings and increase the ability to extend financing for new deals. However, critics argue that trading private loans could upend the basis of the asset class by reducing yield from the illiquidity premium and eliminate the volatility shield through price discovery.
By “volatility shield”, of course, they mean “ infrequent updates of often-subjective loan marks ”.
To be fair, secondary markets have been an avenue for liquidity in the private equity market for decades, and their existence hasn’t removed the term “private” from that asset class, nor eliminated occasionally creative marking.
And an industry built on opacity-as-a-feature isn’t going to embrace this, even if the convenience is attractive. Alphaville has heard that some dealers have been put in the “penalty box” by big private capital firms if they give on-screen quotes that forces marks down.
Still, CreditSights argues that a private-credit secondary market is very possible in the long run, because the structure of the market for syndicated loans looked similar to private credit’s before the mid-2000s.
Such a change in private credit liquidity would probably happen in response to a market sell-off or structural market changes, the firm says. A boom in private-credit CLOs, for one, would create demand for more frequent liquidity than what’s available from most funds today.
Or, you know, an economic downturn that makes direct lenders want to offload private loans that are looking like they could go bad . . . presumably at a discount. Either way!