Private credit, a type of non-bank lending, has become an increasingly viable and popular funding option for a range of companies.
London-based firm Preqin said private credit skyrocketed across the globe from $375 billion in assets under management in 2008 to over $1.6 trillion as of March 2023. BlackRock expects the market could more than double by the end of 2028, reaching $3.5 trillion. Though it represents only a fraction of the U.S. credit market, private credit is continuing to expand.
The private secondary market — a growing sector where investors can trade previously-issued private assets, such as shares of pre-IPO companies — is evolving alongside private credit. Secondary markets have created a place for investors to buy and sell their illiquid private credit fund investments. Below, we’ll explore how the rise of private credit affects secondary markets.
Private credit refers to lending to a company or individual by an entity other than a bank, such as private equity firms or alternative asset managers. Similar to private equity firms, private credit funds raise capital from investors. But instead of purchasing equity in a company, these funds extend a loan.
Historically, private credit has been used most often by small- and mid-sized businesses, which may have a harder time getting credit from banks or the public market. However, that has changed in recent years, as the asset class grew in the wake of the 2008 Global Financial Crisis (GFC).
Banks have cut back on business lending since the GFC as some countries enacted regulatory changes aimed at the banking industry. In the U.S., the sweeping Dodd-Frank Wall Street Reform Act restricted how banks can invest. Banks are generally prohibited from having certain relationships with hedge funds or private equity firms, for example. Private credit lending largely emerged to fill those voids.
Private secondary markets allow investors to buy and sell existing stakes in private companies or funds before a traditional exit event, such as an IPO or acquisition.
Like private credit, the secondary market has grown significantly in recent years. New platforms like Augment* are improving accessibility to the space, enabling accredited investors to make these transactions when they might otherwise be excluded, due to high capital requirements.
Additionally, secondary markets offer a solution to private credit and private equity investors looking to cash in on assets that may find limited liquidity otherwise.
More private credit funds mean more investors seeking to liquify their assets, which is why a secondary market for private credit assets is emerging. These transactions can take a variety of shapes, including the purchase of singular loans or the offloading of entire debt portfolios.
There are both benefits and drawbacks to this growing market.
Private credit funds haven’t been subjected to the same regulatory changes as traditional banks. On one hand, private credit deals may be more customizable and less restrictive than the public debt market. On the other, some say they are far riskier and lack transparency. For instance, unlike banks, private credit firms aren’t required to publicly disclose the value of their loans. Consequently, the pricing and valuation of these arrangements may be more opaque.
Some industry leaders anticipate that the market for private credit secondaries will soon resemble the more mature private secondary market for equities. An April 2024 survey by placement and advisory specialist Ely Place Partners found that $30 billion of deal flow was expected that year. One investor predicted that volume would increase to $50 billion by 2026.
As more buyers and sellers come to the table and more capital is raised, it may only be the tip of the iceberg for this market — and the accompanying investment opportunities.
*Securities transactions are executed on Augment Capital, LLC's ATS and offered through Augment Capital, LLC (member FINRA/SIPC).
Important Disclosures: Investing in private securities involves substantial risk, including the potential loss of principal. Private securities are typically illiquid, have limited pricing transparency, and often require longer holding periods. These investments are available exclusively to qualified accredited investors and offer no guarantee of returns. Additionally, past performance of private securities does not indicate or predict future results.