What is driving the private credit secondaries market?

Sellers: The private credit asset class has undergone explosive growth over the past 10 years. In fact, the market has grown from just under $0.5 trillion in 2014 to over $1.5 trillion in 2023. Moody’s projects that the private credit market will grow to nearly $3 trillion by 2028. Private credit secondaries turnover (the % of private credit that is brought to the private credit secondaries market) has historically been between 1.0% - 1.6% annually. With a conservative base case scenario of a 1.0% private credit secondaries turnover rate and using Moody’s 2028 private credit market estimates, SOC anticipates that we will see a minimum of $30 billion worth of annual private credit secondaries turnover by 2028. In fact, as the buyer pool continues to mature (more on buyers below) many market participants believe that the private credit secondaries turnover rate will increase above the 1.0% . SOC believes this could drive the private credit secondaries market to nearly $50 billion by 2028.

Buyers: Given the nascency of this asset class, there are not a lot of buyers (dedicated pools of capital) in the private credit secondaries space; however, we are seeing tremendous demand from investors and co-investors looking to gain more exposure to the asset class. Unfortunately, many of these investors and co-investors have limited means to access private credit secondaries. Many dedicated pools of capital in private credit secondaries consist of very large institutional investors. Additionally, given the tremendous size of some of these pools of capital, (Coller Capital Raises Record $6.8 Billion for Private Credit Secondaries Platform) many of the relatively smaller $1-50 million private credit secondaries deals fall below the radar of buyers. In many cases, these deals end up not being transacted upon. SOC is in a unique position to capitalize off of this seller/buyer (supply and demand) imbalance and provide solutions for both buyers and sellers in this smaller segment of the market.

What are some driving forces of sales in the private credit secondaries market?

SOC sees a number of different reasons that sellers are transacting in the private credit secondaries space. We have listed a few below:

1. Winding down of strategy

   1. A private credit fund of funds strategy may be nearing its end of fund life and it may need to sell positions to wind down the strategy

2. New CIO and long-term planning

   1. An institution or family office may have brought in a new CIO, they want the new leadership to have a clean slate, and they are focused on the next 10, 15, 20 years vs the current year

3. Portfolio Management

   1. An entity may have a strategic shift in strategy that calls for less private credit exposure

   2. The denominator effect may cause the need to trim down private exposure

   3. Liquidity needs due to slower DPI

Southern Oak Capital Difference

Southern Oak Capital focuses first and foremost on bottom up fundamental credit analysis. We leverage our deep understanding of credit, stemming from our experience in both the high yield and leveraged loan markets, to analyze and price private credit secondaries positions. Additionally, we couple this experience with our experience as a fund manager to understand the complex fund structures that can be involved in a private credit secondaries position. Lastly, we have positioned ourself in the private credit secondaries market to capitalize off of the below underserved segments of the market.