While secondary sales have been increasing of late, restricted-buyer lists threaten to hobble efforts to make private credit more liquid. Giant insurance and pension firms have been piling into the asset class recently, prompting worries at the Bank of England, European Union and International Monetary Fund about how easily they'd be able to sell out of their exposure in a crunch.
Private credit investors need the consent of a fund's manager — known as the general partner — before they can sell their holding. But some GPs have been reluctant to let close rivals buy stakes because they fear it would allow them too good a view of the inner workings of their portfolios.
"Presumably this is meant to protect proprietary information," says Craig Bergstrom of Corbin Capital Partners, which invests in secondary private credit funds. "But lists of approved buyers can be quite short."
GPs and secondary buyers often come from the same small pool of top private credit firms, ratcheting up the competitive tension. The limits echo the "whitelists" used in the buyout industry, where GPs can stop lenders to their companies from selling out to undesirable buyers.
A few private credit GPs such as Fortress Investment Group have even asked that any sales by their investors be effectively offered to them first, according to several of the people familiar, who wanted to remain anonymous discussing commercial matters. Such limits could make it harder to get auctions going.
Despite these tactics, Cecile Mayer-Levi, Tikehau's head of private debt, argues that the situation is starting to improve. "Blocking, once an entrenched practice, is gradually yielding to a more progressive attitude," she says.
Ares, Apollo and Fortress declined to comment.
Some fund managers say this initial butting of heads is all part of the normal development of a nascent asset class, and that similar problems bedeviled the early stages of private equity's secondaries market. Business remains brisk, they say, as demand for these second-hand stakes is still outstripping the supply from investors, known as limited partners.
"We're definitely seeing more activity in private credit secondaries as investors look to exit due to needing more liquidity, or because they realize they were overallocated," says Madelyn Calabrese, a partner at law firm Haynes Boone.
However, having extra hurdles on who they can sell to will be a concern for the biggest investors in private credit funds, especially insurers and pensions. Secondary stakes already sell at an average discount of about 10% on the price the buyer paid, according to Corbin's Bergstrom.
Although investors understand this asset class is by its nature illiquid — usually involving closed-end vehicles with caps on withdrawals that make private corporate loans — the promise of a robust secondary market has reassured some that their exposure can be better managed.