Disappeared premium in Private Credit? Here come the Secondaries!

Private debt has historically offered higher returns than public debt, as it is generally perceived as being riskier. However, the past few years have seen a flood of capital into the private debt market, driving up prices and compressing yields. As a result, the “premium” that investors could expect to earn from private debt has largely disappeared. In this context secondaries investors became more attracted to the private credit market because it offers liquidity, a potential discount to the original investment.

Private debt has become an increasingly attractive investment opportunity in recent years,  however, the market context has shifted, and investors may need to adjust their expectations. 

As we have previously seen, private debt has offered higher returns than public debt, as it is generally perceived as being riskier. In the recent past however, we have seen a great pool of capital flood into the private credit market, raising prices and lowering returns. As a result, the expected premium that investors were expecting has largely disappeared.

Despite this – according to Rothschild – allocators are still showing interest in private debt, albeit with some caveats. For example, some are looking to diversify their portfolios by investing in niche areas such as distressed debt or private real estate lending, where the risk-reward profile may be more attractive. 

Big institutions like BlackRock, Rothschild, etc. who are said to be well positioned on the private credit landscape are also not immune to the challenges facing the market. These firms may need to adjust their investment approach to account for the lack of a premium in the current market context. This could involve seeking out higher-quality borrowers, negotiating better terms with lenders, or exploring new or previously less typical investment strategies altogether. 

Among those other investment strategies are the secondaries which have emerged as a new hot topic. This market offers investors the opportunity to purchase existing investments in private debt from other investors, rather than investing in new deals.

While the premium on new investments may have disappeared, the market for private credit secondaries remains strong.  Secondaries investors are attracted to this market because it offers liquidity, a potential discount to the original investment. By purchasing existing investments, investors can access a diversified portfolio of private credit investments without the need for extensive due diligence on each individual deal.

The demand for private debt shows no signs of abating, and as the market continues to evolve, new opportunities will arise. Private credit secondaries are a prime example of this, and institutional investors seeking to diversify their portfolios and achieve higher returns should consider this market carefully.

In conclusion, private debt remains an attractive investment opportunity in the current market context, but investors may need to adjust their expectations. While the premium on new investments may have disappeared, the secondaries market remains strong and offers liquidity, potential discounts, and a diversified portfolio of private credit investments.. However, by diversifying their portfolios and focusing on niche areas, investors can still find attractive risk-reward profiles.