Ares believes that increasing the available capital to purchase secondary credit investments – and the proficiency to underwrite them – should help drive buyers and sellers to utilize this market as a potential liquidity solution. In fact, it’s already underway. "We've reviewed a significant number of transactions and believe the market could double in the near term," said Dave Schwartz, a Partner and Head of Credit in the Ares Secondaries Group.
Numerous other current factors are also driving the growth in this market. For LPs, the broad drop in equity valuations and a weak exit environment have thrown some institutional portfolios out of balance. This so-called denominator effect means private holdings have increased as a proportion of total portfolio value, which may put pressure on LPs to seek liquidity options to rebalance their portfolios.
Similar to other secondary markets, GP-led transactions have further supported the growth of the credit secondaries market. These transactions typically involve GPs creating structures known as continuation vehicles, where a GP transfers existing assets into a newly created entity. Existing investors are offered the option to either cash out their holdings or to take an equivalent interest in the newly established vehicle. Secondary investors such as Ares can provide capital to fund such transactions.
Such a solution can be beneficial to all parties: (i) the LP receives the option to either liquidate its holding or participate in the new vehicle, (ii) the GP is able to raise capital to address its liquidity needs, and (iii) the secondary buyer is able to acquire attractive portfolios, typically at a discount to NAV.
GPs take comfort in continuation vehicles because they have witnessed the structure successfully executed in other secondary asset classes. Given the recency of these vehicles in the credit sector, specialists who have scaled capital and existing relationships with those GPs can have an advantage in completing the transaction.
