{"id":12643,"date":"2022-11-15T21:45:39","date_gmt":"2022-11-15T22:45:39","guid":{"rendered":"http:\/\/www.stepstonegroup.com\/news-insights\/private-debt-secondaries-and-horse-races\/"},"modified":"2023-06-27T03:09:53","modified_gmt":"2023-06-27T10:09:53","slug":"private-debt-secondaries-and-horse-races","status":"publish","type":"post","link":"https:\/\/www.stepstonegroup.com\/news-insights\/private-debt-secondaries-and-horse-races\/","title":{"rendered":"Private Debt Secondaries and Horse Races"},"content":{"rendered":"<h6>November 15, 2022<\/h6>\n<p><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"2\" data-page-index=\"0\">There is a sense of inevitability around the emergence of private debt secondaries. After all, such a market has <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"3\" data-page-index=\"0\">existed for decades in private equity and real estate. However, only now has this investment style reached the <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"4\" data-page-index=\"0\">financial media and thus \u201cnormalized\u201d in the eyes of investors. Quick to take up the mantle, investment managers <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"5\" data-page-index=\"0\">have responded with dedicated investment vehicles. We ask ourselves, why now?<\/span><\/span><\/p>\n<p><strong>Benign to Dislocated\u00a0<\/strong><\/p>\n<div class=\"infogram-embed\" data-id=\"6caf5b29-2df7-48f9-bf03-ad5aa27bea4c\" data-type=\"interactive\" data-title=\"PD Secondaries | Fig 1\"><\/div>\n<p><script>!function(e,i,n,s){var t=\"InfogramEmbeds\",d=e.getElementsByTagName(\"script\")[0];if(window[t]&&window[t].initialized)window[t].process&&window[t].process();else if(!e.getElementById(n)){var o=e.createElement(\"script\");o.async=1,o.id=n,o.src=\"https:\/\/e.infogram.com\/js\/dist\/embed-loader-min.js\",d.parentNode.insertBefore(o,d)}}(document,0,\"infogram-async\");<\/script><\/p>\n<p><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"8\" data-page-index=\"0\">Since the height of the Global Financial Crisis, the world\u2019s credit markets have been remarkably benign. The sub-<\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"9\" data-page-index=\"0\">investment grade market grew threefold (Figure 1), perhaps assisted by post-GFC bank consolidation, and the <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"10\" data-page-index=\"0\">combination of high economic growth rates and low interest rates resulted in low loss rates. Owing to these <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"11\" data-page-index=\"0\">tailwinds, investors assembled portfolios of maturing private debt managers and healthy underlying loans. Loss <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"12\" data-page-index=\"0\">rates in a low interest, high growth environment were suppressed. And while generating strong and stable current <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"13\" data-page-index=\"0\">income why would anyone opt to sell their portfolios without compelling alternatives? Many believed doing so <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"14\" data-page-index=\"0\">would require a \u201cpar\u201d or premium. This line of reasoning recognizes the value of a fully ramped, income-generating <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"15\" data-page-index=\"0\">portfolio, but perhaps betrays a myopic view of subjective loss rates, moving interest rates and economic <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"16\" data-page-index=\"0\">dispersion.<\/span><\/span><\/p>\n<p><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"17\" data-page-index=\"0\">In other words, there was too little disagreement. To paraphrase Mark Twain, disagreement makes horse races.<\/span><\/span><\/p>\n<p><strong>Then what?\u00a0<\/strong><\/p>\n<p><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"19\" data-page-index=\"0\">Covid roiled the global economy, creating, among other things, short-term liquidity needs and variance in investor <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"20\" data-page-index=\"0\">behavior. Public and private actors alike quickly intervened to provide liquidity. But a fundamental weakening in <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"21\" data-page-index=\"0\">economic conditions, investor confidence and geopolitical risk now gives us all a reason to be subjective. Investors <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"22\" data-page-index=\"0\">may be dealing with:\u00a0<\/span><\/span><\/p>\n<div class=\"PSPDFKit-Spread\" data-spread-index=\"0\">\n<div>\n<div>\n<div>\n<div>\n<section class=\"PSPDFKit-Page PSPDFKit-Page-Rotation-0-degree PSPDFKit-5e6tnwkxw9ka415svsdkkptcvx PSPDFKit-5scxecvmyvz7wahnvpvhqf1u6n\" data-page-index=\"0\" data-page-is-loaded=\"true\">\n<div>\n<div class=\"PSPDFKit-2z5hjphww7fvh1z69wxptsw1b9\">\n<ul>\n<li class=\"PSPDFKit-7v6us4bgaesz3ux74pvm4adq66\"><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"23\" data-page-index=\"0\"><strong>The denominator effect<\/strong>\u2014A decline in public equity valuations has created a denominator problem in <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"24\" data-page-index=\"0\">ramped private debt portfolios, despite fundamental confidence in the asset class. To remain within their <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"25\" data-page-index=\"0\">policy limits, LPs may seek to rebalance asset allocations via secondaries. <\/span><\/span><\/li>\n<li class=\"PSPDFKit-7v6us4bgaesz3ux74pvm4adq66\"><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"26\" data-page-index=\"0\"><strong>Greater sophistication<\/strong>\u2014If an investor expects loss rates to increase, and the seller has a good sense of its <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"27\" data-page-index=\"0\">cost of capital, then a lower cost of capital with a differing view on outcomes makes a secondary market.<\/span><\/span><\/li>\n<li class=\"PSPDFKit-7v6us4bgaesz3ux74pvm4adq66\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"1\" data-page-index=\"1\"><strong>Wider dispersion in equity valuations<\/strong>\u2014The cost of equity has ballooned, so the comparatively modest <\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"2\" data-page-index=\"1\">increase in the cost of debt may be appealing on the sell-side. If one must sell something, why not sell the <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"3\" data-page-index=\"1\">thing which has not widened too much?<\/span><\/span><\/li>\n<li class=\"PSPDFKit-7v6us4bgaesz3ux74pvm4adq66\"><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"4\" data-page-index=\"1\"><strong>Competitive or privacy concerns<\/strong>\u2014Whether GP- or LP-led, secondaries are often performed bilaterally and <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"5\" data-page-index=\"1\">therefore remain confidential to both buyer and seller. This generates confidence in secondaries as an <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"6\" data-page-index=\"1\">investment style.<\/span><\/span><\/li>\n<li class=\"PSPDFKit-7v6us4bgaesz3ux74pvm4adq66\"><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"7\" data-page-index=\"1\"><strong>The positive interventions of brokers<\/strong>\u2014Placement agents offer transaction-driven, unbiased advice. They <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"8\" data-page-index=\"1\">reduce transaction risk and aggregate information.<\/span><\/span><\/li>\n<li class=\"PSPDFKit-7v6us4bgaesz3ux74pvm4adq66\"><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"9\" data-page-index=\"1\"><strong>Specialization and Integration<\/strong>\u2014Some participants offer specialization, often derived from years in investing <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"10\" data-page-index=\"1\">in private equity secondaries, with positive and consistent outcomes for LPs. Others, including ourselves, <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"11\" data-page-index=\"1\">integrate secondaries into their broader private debt programs, mixing primary, secondary and co-<\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"12\" data-page-index=\"1\">investment allocations to optimize deployment, diversification and strategy expansion.<\/span><\/span><\/li>\n<li class=\"PSPDFKit-7v6us4bgaesz3ux74pvm4adq66\"><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"14\" data-page-index=\"1\"><strong>Information advantage (and its perils\u2026)<\/strong>\u2014Contractual cash flow is not equivalent to guaranteed cash <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"15\" data-page-index=\"1\">flow. Evaluating prepayments, defaults and losses is highly subjective; the ability to make these judgements, <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"16\" data-page-index=\"1\">is more art than science. Knowing a manager well can lead to an idiosyncratic view. Familiarity may result in <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"17\" data-page-index=\"1\">overly precise or punitive assumptions, while other buyers may be oblivious to the risks. This creates higher <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"18\" data-page-index=\"1\">transaction risk for informed market participants.\u00a0<\/span><\/span><\/li>\n<\/ul>\n<p><strong>Size of Private Debt Secondary Market<\/strong><\/p>\n<div class=\"infogram-embed\" data-id=\"4478409f-f49b-4e69-853c-f77c5e889e08\" data-type=\"interactive\" data-title=\"PD Secondaries:\"><\/div>\n<p><script>!function(e,i,n,s){var t=\"InfogramEmbeds\",d=e.getElementsByTagName(\"script\")[0];if(window[t]&&window[t].initialized)window[t].process&&window[t].process();else if(!e.getElementById(n)){var o=e.createElement(\"script\");o.async=1,o.id=n,o.src=\"https:\/\/e.infogram.com\/js\/dist\/embed-loader-min.js\",d.parentNode.insertBefore(o,d)}}(document,0,\"infogram-async\");<\/script><\/p>\n<div class=\"infogram-embed\" data-id=\"bf77fdab-704e-41f8-8992-8b52eb36b679\" data-type=\"interactive\" data-title=\"Copy: PD Secondaries:\"><\/div>\n<p><script>!function(e,i,n,s){var t=\"InfogramEmbeds\",d=e.getElementsByTagName(\"script\")[0];if(window[t]&&window[t].initialized)window[t].process&&window[t].process();else if(!e.getElementById(n)){var o=e.createElement(\"script\");o.async=1,o.id=n,o.src=\"https:\/\/e.infogram.com\/js\/dist\/embed-loader-min.js\",d.parentNode.insertBefore(o,d)}}(document,0,\"infogram-async\");<\/script><\/p>\n<p><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"21\" data-page-index=\"1\">The private debt secondary market is in its infancy. Though the data are imperfect, we can infer its size and growth <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"22\" data-page-index=\"1\">potential from its private equity counterpart. Between 2006 and 2020, private equity secondary fundraising, grew <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"23\" data-page-index=\"1\">more than fourfold, from $20 billion to $84 billon.1<\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"24\" data-page-index=\"1\"> This follows a similar trajectory as the overall private equity <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"25\" data-page-index=\"1\">market, where AUM grew nearly 6x over the same period.2 Concurrently, private debt AUM grew 8.6 times, reaching<\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"26\" data-page-index=\"1\">$1.2 trillion in 2020\u2014about one fifth (17.6 %) the size of the private equity market.3 Thus, an established private <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"27\" data-page-index=\"1\">debt secondaries could be as large as $14.8 billion (17.6% of $84 billion); going forward the market could grow at a <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"28\" data-page-index=\"1\">similar rate (10% per year) as has the private equity secondaries market. <\/span><\/span><\/p>\n<p><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"29\" data-page-index=\"1\">In some ways, $14.8 billion may be understated: GP-led secondaries are often not included in market stats. <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"30\" data-page-index=\"1\">However, for the following reasons, we believe private debt\u2019s secondary market will be proportionally smaller than <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"31\" data-page-index=\"1\">private equity\u2019s.<\/span><\/span><\/p>\n<ul>\n<li><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"32\" data-page-index=\"1\">The loans underlying private debt funds are relatively short lived; one can wait longer to rebalance. <\/span><\/span><\/li>\n<li><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"33\" data-page-index=\"1\">The comparatively smaller denominator effect due to lower dispersion in returns and a consequent lower <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"34\" data-page-index=\"1\">pressure to rebalance or to take early profits.<\/span><\/span><\/li>\n<\/ul>\n<p><strong><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"1\" data-page-index=\"2\">Differentiated Transaction Types \u2013 the potential benefits of captive deals<\/span><\/span><\/strong><\/p>\n<p><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"2\" data-page-index=\"2\">Investors can generally access secondaries via two types of processes: competitive and captive. We believe the <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"3\" data-page-index=\"2\">former, while easier to access, are more efficient and, thus, more difficult to arbitrage. Discounts tend to be modest. <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"4\" data-page-index=\"2\">Captive processes, on the other hand, tend to only come about when one has a strong relationship with the <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"5\" data-page-index=\"2\">originating lender. Akin to GP-led deals in private equity secondaries, captive deals are less efficient and can usually <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"6\" data-page-index=\"2\">be purchased at a discount to par. While we use both, the choice, we\u2019ve found, depends on the returns we are <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"7\" data-page-index=\"2\">targeting and the types of assets in question. Figure 3 summarizes our approach.<\/span><\/span><\/p>\n<ul>\n<li><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"8\" data-page-index=\"2\">When purchasing entire portfolios of senior-secured loans, we prefer captive deals. Because these types of <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"9\" data-page-index=\"2\">loans tend to have a more modest return target, minimizing losses is critical; a long-term partnership with <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"10\" data-page-index=\"2\">the originating GP can be helpful in that regard. That said, we will consider purchasing LP stakes if the funds <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"11\" data-page-index=\"2\">are well-ramped.<\/span><\/span><\/li>\n<li><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"12\" data-page-index=\"2\">When purchasing LP stakes, we are open to competitive processes. Here, because we tend to target higher <\/span><\/span><span class=\"PSPDFKit-8ayy4hjz5h5sb5mqfjxzpc42zw PSPDFKit-3npj2ht4kppfp95hepqhfjb49x PSPDFKit-2tg9p1utsyyke5vpebq5gc3413 PSPDFKit-Text\"><span class=\"PSPDFKit-6fq5ysqkmc2gc1fek9b659qfh8\" data-textline-id=\"13\" data-page-index=\"2\">opportunistic-level returns, we can accept modest discounts and greater risk.<\/span><\/span><\/li>\n<\/ul>\n<div class=\"infogram-embed\" data-id=\"5d6be686-6570-46a2-8b89-d032016e10c1\" data-type=\"interactive\" data-title=\"PD Secondaries:\"><\/div>\n<p><script>!function(e,i,n,s){var t=\"InfogramEmbeds\",d=e.getElementsByTagName(\"script\")[0];if(window[t]&&window[t].initialized)window[t].process&&window[t].process();else if(!e.getElementById(n)){var o=e.createElement(\"script\");o.async=1,o.id=n,o.src=\"https:\/\/e.infogram.com\/js\/dist\/embed-loader-min.js\",d.parentNode.insertBefore(o,d)}}(document,0,\"infogram-async\");<\/script><\/p>\n<h5>1 Preqin, as of June 30, 2022.<\/h5>\n<h5>2 Ibid<\/h5>\n<h5>3 Ibid<\/h5>\n<\/div>\n<\/div>\n<\/section>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<section id=\"fifty-fifty-block_446fd46dbca7b9262825887561c8465e\" class=\"w-block w-fifty-fifty w-fc no-pad overflow-hidden mb-[30px] layout-50-50\">\n  <style>\n    #fifty-fifty-block_446fd46dbca7b9262825887561c8465e {\n              --bg-color-1: #445460;\n                    --bg-color-2: #2f3a42;\n          }\n  <\/style>\n\n  <div class=\"row f-grid\">\n    <div class=\"columns small-12\">\n\n      <div class=\"w-ff-items grid grid-cols-1\">\n                            <div class=\"ff-item type-text text-left\">\n            <div class=\"ff-item__content\">\n              \n                              <h2 class=\"ff-item__title mb-[7px] text-[26px] leading-[1.3] lg:text-[36px] lg:leading-[1.22222] font-light text-white lg:mb-[20px]\">For More Market Research<\/h2>\n              \n              \n                              <div class=\"ff-item__intro mb-[32px] text-[16px] leading-[1.5] lg:text-[24px] lg:leading-[1.5] text-white\"><p>Return to the News &#038; Insights Page<\/p>\n<\/div>\n              \n                              <div class=\"ff-item__cta\">\n                  <a href=\"https:\/\/www.stepstonegroup.com\/how-we-think\/\" target=\"\" class=\"button md-down:w-full md-down:mb-[24px]\">View All<\/a>\n                <\/div>\n                          <\/div>\n          <\/div>\n                            <div class=\"ff-item type-text text-left\">\n            <div class=\"ff-item__content\">\n              \n                              <h2 class=\"ff-item__title mb-[7px] text-[26px] leading-[1.3] lg:text-[36px] lg:leading-[1.22222] font-light text-white lg:mb-[20px]\">Private Debt Solutions<\/h2>\n              \n              \n                              <div class=\"ff-item__intro mb-[32px] text-[16px] leading-[1.5] lg:text-[24px] lg:leading-[1.5] text-white\"><p>StepStone Private Debt targets privately negotiated debt transactions across corporate, real estate and infrastructure debt. <\/p>\n<\/div>\n              \n                              <div class=\"ff-item__cta\">\n                  <a href=\"https:\/\/www.stepstonegroup.com\/asset-classes\/private-debt\/\" target=\"\" class=\"button md-down:w-full md-down:mb-[24px]\">Learn More<\/a>\n                <\/div>\n                          <\/div>\n          <\/div>\n              <\/div>\n\n    <\/div>\n  <\/div> <\/section>\n","protected":false},"excerpt":{"rendered":"<p>November 15, 2022 There is a sense of inevitability around the emergence of private debt secondaries. After all, such a market has existed for decades in private equity and real estate. However, only now has this investment style reached the financial media and thus \u201cnormalized\u201d in the eyes of investors. Quick to take up the [&hellip;]<\/p>\n","protected":false},"author":45,"featured_media":12641,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[424],"tags":[153,251],"coauthors":[638,3],"class_list":["post-12643","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-insights","tag-private-debt","tag-secondaries"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v24.4 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Private Debt Secondaries and Horse Races<\/title>\n<meta name=\"description\" content=\"November 15, 2022 There is a sense of inevitability around the emergence of private debt secondaries. After all, such a market has existed for decades in private equity and real estate. 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