Credit Secondaries: Everyone wants a piece of the pie
By my count, there are fewer than twenty people with more than five years of dedicated credit secondaries investment experience, but there are many firms who would like to hire one (or more) of them. . This asymmetry represents an extremely challenging obstacle for those with ambitions of launching their own credit secondaries strategy.
As with other obstacles in life, perhaps the answer might be found in thinking laterally and outflanking the problem, rather than trying to tackle it head on…
SECONDARIES: A PRIMARY FOCUS FOR MORE AND MORE LPS
According to Evercore, credit secondaries transactions amounted to around $6B in 2023, but by 2025, had risen to $20B. Forecasts expect the market to more than double within three years and the key driver is the need for LPs to return capital to their programmes. Sluggish distributions across the board have seen both LPs and GPs look to the secondary market for liquidity. McKinsey data shows that DPI is now the key metric for two and a half times as many LPs as just three years ago.
Even with this high-octane growth, however, credit secondaries remain a relatively small market within the $3T private credit landscape. Private equity secondaries, a mainstay of the private markets for decades, last year broke the $200B barrier. Credit secondaries are sure to play second fiddle for some time yet, but it would be a shock if the growth were not to accelerate further. One thing that might provide some friction is the supply of experienced leadership talent.
LATERAL THINKING
Given the number of firms looking to launch dedicated credit secondaries strategies and the very few individuals who already have, it should be clear that the successful incumbents will be difficult and expensive to attract. Convincing one of the practiced hands to join you may seem the lowest-risk option, but even the most experienced hands in this field are unlikely to have a track record longer than the mandate you are so desperate to hand them. The cost/benefit analysis suggests this may not be the right path. Success is far from guaranteed.
So what do you do? Put simply, alongside the obvious targets, it makes sense to widen the search, to include those with relevant adjacent experience.
In my mind there are three clear avenues to explore:
1. HIRE THE BEST DIRECT LENDER YOU CAN FIND
Given that the significant majority of most credit portfolios is direct lending, a hire who has proven their value in running a direct lending book is a compelling option. This is, indeed, an option that some of the largest platforms have taken.
However, while an expert grasp of direct lending is valuable, it is not the whole story. Secondary investing is a portfolio exercise involving discount, structuring and timing elements that are alien to many vanilla direct lending transactions. Of course, these nuances can be learned but you must be honest with yourself about how long you can allow this to take.
2. HIRE FOR THE MOST COMPLEX PART OF THE BOOK
I find this contrarian strategy perhaps most interesting. While the bulk of the market is direct lending, the least straightforward corners of the landscape (think opportunistic credit and bespoke hybrid structures, complex deals that require real creativity to get over the line) are arguably those that separate the wheat from the chaff. Candidates who have proven their value at the sharper end of the market are unlikely to falter when things become simpler.
While there will be aspects of the secondary game that are less familiar to talent from this part of the market, the creative mindset and ability to work through a sticky situation may indicate strong compatibility.
3. HIRE SOMEONE WHO THINKS IN PORTFOLIOS
The defining skill in credit secondaries is not analyzing an individual credit. Pricing the whole book in the context of your existing portfolio is what moves the needle. Concentration, vintage, correlation, and the interplay of exposures are all important and must be accurately evaluated, and typically at speed.
These skills might be more readily accessible to you if you look at including experienced private equity secondaries investment leaders. Here, the talent pool is deeper but the credit familiarity will likely be more shallow. Perhaps you can compensate with more focused expertise in more junior ranks? Perhaps you don’t want to take that risk.
In addition, there is a growing pool of GP-stakes investors. Blue Owl, Petershill and others have made significant investments into credit and credit-adjacent firms and have built expertise in pricing these deals on the basis of the current and likely future book. Certainly worth a look…
FINAL THOUGHT
In the end, the best hiring strategy (or strategies) will come down to the specific ambitions and constraints of your firm. Mapping this out with intention and discipline is the starting point for a successful search.