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Privacy Within Private Credit May Yield to Meet Liquidity Needs as the Market Expands
Ian Walker, J.D. - Head Legal Innovation, Covenant Review
Andrew Hedlund - Managing Editor, LevFin Insights
Krista Giovacco - Senior Reporter, LevFin Insights
EXECUTIVE SUMMARY
- The U.S. private credit loan market grew to more than $470bn in 2023, with an increasing number of jumbo deals at US$1bn or more. In this article, we explore whether the growth of the private credit loan market will lead to changes that support a more liquid secondary market for private credit loans.
- The development of liquidity in the broadly syndicated loan market provides some guidance on this question. We spoke to experts who have witnessed the development of the broadly syndicated loan market going as far back as the 1980s. Liquidity of the broadly syndicated loan market developed in diverse ways, starting with exogenous events such as economic downturns and structural events such as the change of the investor base from regulated banks to CLOs.
- In tandem with the development of supply, pricing services, liquidity providers and trading platforms all came together to bring the broadly syndicated loan market to its current position. Broadly syndicated loans started out as illiquid assets traded by appointment. Today, a vibrant ecosystem exists that facilitates the trading of broadly syndicated loans.
- The consensus view of our panel of experts is that development of liquidity in the private credit loan market is probable, but not until conditions creating supply occur. As with broadly syndicated loans, exogenous events such as an economic downturn might create an increased supply for the secondary market. Other factors creating increased supply could be a shift in the investor base from BDCs to CLOs, increased transparency as to pricing and terms, third party pricing providers, independent ratings and liquidity providers. Finally, as the size of individual private credit loans continues to reach into the stratosphere, direct lenders could seek to create liquidity for additional investments and thereby contribute to supply for the private credit loan secondary market.
INTRODUCTION
The U.S. private credit market has grown from $60bn in 2014 to more than $470bn in 2023, according to Preqin. This expansion of private credit fundamentally changed the way below-investment-grade capital markets function, giving borrowers both large and small another source of capital beyond the broadly syndicated loan and high-yield bond markets.
Now, the looming question: will the growth of private credit fundamentally change the asset class itself? The next logical step, it might seem after such a drastic increase in the breadth of the market, is the development of a secondary loan trading market.
The talk of established financial firms pushing to create such a secondary loan market gives 鈥渃redence and credibility around the fact that this is a market that is absolutely gaining so much traction and momentum from all forces,鈥� one source who has worked in private credit since the 2000s said. 鈥淪o, it would only make sense that you would start to talk about secondary liquidity.鈥�
We explore the possibilities for development of liquidity in the private credit loan market by first taking a walk down memory lane 鈥� what are the factors that led to development of liquidity in the broadly syndicated loan market, and how did they come about? We also explore the extent to which such factors are present in the private credit loan market. Finally, we conclude that until the need for liquidity becomes an issue for private credit lenders, development of a robust secondary market for private credit loans is not likely.
WHAT DRIVES LIQUIDITY?
We believe that the following factors have contributed to liquidity of the broadly syndicated loan market:
- Investor need for liquidity;
- Transparency for deal terms, pricing, and ratings;
- Rise of liquidity providers and trading platforms; and
- Documentation facilitating trading.
The basic premise of this article is that these or similar conditions are needed to develop a robust secondary market for private credit loans. Let鈥檚 look at each of these factors in turn. Investor Need for Liquidity The need for liquidity caused by external events initially set the stage for the broadly syndicated loan secondary market, according to Steve Miller, a 草莓流氓视频 managing director.1[1] Hung deals in the late 80s, 90s and 2000s; regulatory guidance on highly leveraged transactions; and the rise of defaults in the wake of the Great Financial Crisis were all external events that gave rise to a need for liquidity, according to Miller. Initially, trade activity was scarce, and survey results were the primary gauge of volume. Secondary loan trading volumes were estimated at around $176bn in 2005, according to Refinitiv LPC鈥檚 survey.
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