An influx of new players into the private credit secondaries market has changed competitive dynamics, according to Fabian Körzendörfer, partner at StepStone.
With around $65bn (£48.4bn) of capital and deploying $12bn each year, StepStone is a quiet giant in private credit, and a major player in particular in co-investments and secondaries. Körzendörfer sits within the group’s private debt research team and focuses on direct lending strategies in the US and Europe.
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He has witnessed changes in the market amid increased competition.
“When it comes to items like discounts, there are more and more things that are going on from a structuring perspective,” he said. “While there were more traditional discounts in the past, more and more discounts are created through the distance to the reference date or staggered payments of the purchase price, creating an uplift to NAV.”
He says that some of these techniques, although have been used before, are not that commonly known, as they do not exist in the private equity secondary market. They can be used in private credit because of the income-generating nature of the asset class.
“The discount is not only because you buy an asset at 92/93 instead of 100 – but also because you’re getting interest income between the date you buy and the date you close the transaction,” he said. “A typical reference date now can be 30 September or end of December, and as a result of that you would have, for a given quarter, two to four per cent of income that can create additional economics for a secondary buyer.”
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The purchase price is also frequently more staggered, with half paid now and half paid in a years’ time, making IRRs even more attractive, he said.
Körzendörfer is upbeat about the opportunity set in both secondaries and co-investments, saying that over the last 12 months, the team has seen 700-800 transactions in the market. And in terms of the group’s existing portfolio, there is a team that is monitoring it for any signs of stress.
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While Körzendörfer believes that private credit could benefit if inflation spikes due to the tariffs, leading to higher base rates, he still underlines the importance of being selective.
“Cov-lite and PIK are trends we’re largely avoiding to avoid risk,” he added. “[Higher rates] can absolutely put pressure on borrowers, this is the reason selectiveness in the underwriting process is absolutely key.”
