Private credit managers are increasingly turning to the once-unthinkable: Trading in and out of loans to dump troubled assets and hunt for bargains amid the industry’s first stress test after years of breakneck growth.
A number of business development companies are looking to trim software exposure as concern mounts over AI-driven disruption, according to people with knowledge of the matter. Others are moving in the opposite direction, building positions in discounted loans that rarely traded hands in the past.
Apollo Global Management Inc. and KKR & Co. are among the firms that have been active in the market in recent weeks, the people said, asking not to be identified because the information is confidential. Even more opportunistic players like Diameter Capital Partners are jumping in, scooping up assets as sellers emerge.
The change underscores how rapidly conditions are shifting in the $1.8 trillion private credit industry. Until recently, many managers viewed trading loans to new investors as almost taboo, arguing it threatened the tightly controlled lender groups and price stability that helped distinguish direct lending from public markets.
But as funds grapple with surging redemption requests and banks mark down loans pledged as collateral for financing facilities, some are re-thinking those long-held views.
“Secondaries are something you’re going to hear a lot about for the next few years,” Scott Goodwin, co-founder of Diameter, said last week on stage at the Sohn Investment Conference.
He added that Diameter has completed 15 trades in the past two months alone, and anticipates between $150 billion and $200 billion of selling across the secondary private credit market. The opportunity set “is going to be expansive,” he said.
Representatives for Apollo and KKR declined to comment on their loan trading activity.
As the market evolves, firms are increasingly acknowledging the change publicly. Managers for a Goldman Sachs Group Inc. publicly listed BDC known as GSBD said earlier this month that they’re looking to trim their exposure to so-called ARR loans, which are underwritten against software companies’ annual recurring revenue rather than profits.
“We are proactively managing our legacy ARR positions through strategic exits or by facilitating conversions to Ebitda based loans,” Vivek Bantwal, global co-head of private credit at Goldman Sachs’ asset management unit, said during the BDC’s most recent earnings call.
Banks are also taking on a larger role matching buyers and sellers. JPMorgan Chase & Co. recently said that it had already traded $2 billion of private credit loans this year, more than in all prior years combined.
Secondary trading of private credit is on track to more than double last year’s record volume, according to HarbourVest Partners’ Greg Ciesielski. “Through the first quarter we’re run-rating above $50 billion this year,” the firm’s head of credit secondaries said earlier this month on the Bloomberg Credit Edge podcast.
Still, at exactly what level many of these assets are trading remains opaque, as deals are struck privately and prices rarely disclosed, even as funds continue to lower valuations on struggling credits.
Increasingly, loans are being shopped through processes akin to so-called bids-wanted-in-competition, or BWICs, in which debt of varying quality, along with equity stakes, are bundled together into portfolios that potential buyers bid on as a whole, according to people familiar with the matter.
That can help obscure the value of weaker assets and limit pressure for markdowns, the people added, noting that such portfolios are mostly changing hands only slightly below par.
“Our view is that secondary private transactions, whether through partial or full portfolio sales, will reshape the private credit landscape as certain market participants look to optimize their asset portfolio or satisfy liquidity demands,” Armen Panossian, co-chief executive officer of Oaktree Capital Management, said on the most recent earnings call for its BDC, Oaktree Specialty Lending Corp.
Apollo, KKR
Still, the sale process can be onerous, which is one reason volumes pale in comparison to the broadly syndicated market, where billions of dollars worth of loans change hands every day.
Money managers are often required to sign non-disclosure agreements before bidding on portfolios, with some documents threatening financial penalties for violations.
Even for trades involving individual loans, sellers typically need to get sign off from multiple parties, including private equity sponsors and the agent lender that helped administer the original deal.
That helps explain why many trades are still taking place within existing lending groups or to limited partners with co-investment agreements, where approvals are often unnecessary. Some lenders looking to exit positions have also appealed directly to sponsors to help facilitate transactions, many of which have trading desks of their own.
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Apollo, for its part, has bought more private loans in secondary deals than it’s sold in recent months, according to a person with knowledge of the matter.
KKR has also sold loans from the BDC that it co-manages with Future Standard, another person said.
But lenders are also trying to balance the need for liquidity with a reluctance to part with prized assets.
Earlier this year, Blue Owl Capital Inc. sold a $1.4 billion portfolio comprising slices of loans held across several funds. Unlike some outright asset sales, however, the firm continued to manage the loans through non discretionary accounts, without the ability to trade positions, according to a person familiar.
New Mountain Capital took a different approach when it sold a roughly $480 million loan portfolio earlier this year from its BDC, ceding control of the underlying assets.
Representatives for Blue Owl and New Mountain declined to comment.
“We’ve seen a pickup of secondary activity in recent years, and BDC and interval funds are adding a new layer of activity today,” said Ed Goldstein, chief investment officer at Coller Credit Secondaries. “There’s more activity and conversations happening today than there were a year ago.”
Deals
- Doug Ostrover, the billionaire co-founder of Blue Owl Capital Inc., is selling his stake in the NFL’s Washington Commanders back to the Josh Harris-led ownership group
- Direct lenders including Blackstone Inc. and KKR & Co. are set to take control of struggling dental business Affordable Care and slash about 70% of the debt as part of a restructuring agreement
- German-Italian auto supplier Adler Pelzer Holding GmbH said it’s in advanced discussions with a group of backers on a private credit package that would allow it to pay off its current debt load
- Citigroup Inc. and BlackRock Inc.’s private credit unit HPS Investment Partners have struck an agreement to collaborate on direct-lending deals across Europe, targeting as much as $17.5 billion of financings over the next five years
- The United States Tennis Association is in talks with institutional investors to borrow at least $400 million of private credit to refurbish New York’s Arthur Ashe Stadium
Bloomberg News is tracking corporate loans originated by private credit firms around the globe in the Private Credit Loan Monitor.
Fundraising
- India’s 360 ONE Asset Management is seeking to raise as much as $500 million for its sixth private credit fund, underscoring sustained investor appetite in the country even as fundraising slows elsewhere
- Barings closed over $19 billion in committed capital for its global direct lending strategy after a two-year fundraising period
- A Blue Owl private credit fund sold a $400 million investment-grade bond, a month after a debt sale to bond giant Pacific Investment Management Co. helped ease capital-access worries
Job Moves
- KKR has hired Morgan Stanley Investment Management’s Masahiro Shuto as a managing director and head of its Japan capital markets business
- Credit-market veteran Naz Majidi is launching a new advisory firm to help asset managers tap fund finance, a market worth more than $1 trillion
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