Building a Private Credit Secondaries Investment Team: How to Find the Skillsets for a Nascent Industry?

Opportunity Set

• Private credit secondaries are split between LP-led and GP-led transactions.
• LP-led deals have high volume are often less complex to underwrite.
• GP-led deals are less common and often rely on funds extending their life-cycles.

Private credit secondary funds offer attractive, risk-adjusted returns, benefiting from discounted pricing, shorter investment timelines due to later entry points, and access to diverse investment strategies. They are attractive products that offer managers exposure to the large and lucrative private credit market with higher diversification and with greater visibility over asset performance than is possible for a direct lending strategy.

Broadly, deal types can be categorized into LP- and GP-led transactions.

LP-Led Transactions

By pure deal flow, the most common transactions are LP-led deals. The ultimate goal is to provide liquidity to LPs in an otherwise illiquid strategy. The motivations behind this can vary. Pension funds and insurance providers, which make up a substantial portion of LPs, may face liquidity needs requiring them to sell investments to meet obligations. Not all LP-led deals, however, are a result of short term liquidity concerns. They can result from an LP’s overall portfolio rebalancing because of overexposure to certain asset classes or even a lack of conviction in the fund performance.

By their nature, LP-led deals are a simpler product for potential secondaries funds to move into. Most European private credit secondaries strategies either work on more LP-led transactions than GP-led or exclusively look at LP-led. For a tenured secondaries fund, it is rare that they will need to analyse a fund stake from a manager they have not previously covered. While some information gaps exist, most secondary funds can efficiently analyse and price individual fund stakes. For large portfolios of LP stakes, an additional complexity point and opportunity for upside is a result of the ‘aggregation’ phase after the individual stakes have been valued. The secondaries purchaser must bring together a view on the overall portfolio of stakes including which assets they are willing to purchase and if they are able to negotiate more attractive pricings on more desirable assets in return for buying assets that the LP is more desperate to liquidate.

GP-led Transactions 

GP-led transactions include a broad range of deals. For private equity secondaries transactions, there is a large market for solutions to extend assets at the end of a fund. While these exist in credit markets, they are often needed for the opposite reasons, which can make them less attractive. Of course, in private equity, the decision to keep on a number of assets beyond the fund life cycle through continuation vehicles or a ‘fund of one’ is often made because of strong performance and a desire to hold the company for longer to realise more value. For private credit, however, performing assets are expected to fully realise within a set timeline without substantial opportunities to keep generating value from them. Where a credit asset is kept beyond its expected lifecycle, it is traditionally a result of underperformance. More commonly, we have seen GP-led solutions as a result of DPI issues. They can be used to facilitate LP distributions or allow LPs that are invested in old vintages to liquidate and commit to a new fund raise. Secondaries funds can provide solutions to assist with tail end portfolios and the creation of new vehicles through as continuation vehicles, strip sales, and tender offers.

GP-led deals can offer attractive returns but are often more time and work intensive due to the complexity of the vehicles they require. Moreover, given most GP-led solutions happen towards the end of fund life cycles, the relative age of most vintages in European private credit results in less opportunities. As more direct lending funds mature, demand for these transactions is likely to grow.

Which Managers Suit the Secondaries Market?

• Managers may have different benefits and drawbacks to developing private credit secondaries depending on their backgrounds.
• Firms established in Direct Lending will have useful market understandings but may struggle from being blocked due to perceived conflicts of interest.
• Many managers develop broader strategies covering adjacencies such as NAV financings or co-investments alongside secondaries.
• While they do not have the same credit market familiarity, PE secondaries firms may be able to avoid being blocked more easily from deals.
• Secondaries can allow more opportunistic managers exposure to the traditional private credit market without a Direct Lending strategy.

Entering the secondaries market is complex and requires careful navigation. Many of those considering building out a private credit secondaries strategy are already known for their direct lending businesses. For example, Ares and Tikehau have built dedicated credit secondaries strategies. For managers who are already familiar with private credit, it seems a logical area to expand into. Their strong primary knowledge of the space sets up such managers well for executing on secondaries transactions. Given the predicted size of the private credit secondaries market, there is a clear space for asset managers that have successfully built direct lending platforms to scale into.
However, managers in this situation can struggle to close deals independently. Secondary purchasers require access to sufficient confidential fund information to make informed investment decisions. As a result, GPs often have concerns about conflicts of interest, which can lead to secondaries managers with direct investment arms being excluded from deals. Even with official ethical walls between internal teams, it is challenging to offset concerns about sharing sensitive details with a competitor.

Some managers have found success by co-investing with secondaries-focused funds that GPs already trust. Moreover, they can improve deal access by targeting a private debt market distinct from their core lending strategies. LGT’s Credit Solutions Group, for example, has found traction by focusing on the larger cap market while their Private Debt team targets direct transactions in the traditional mid-market. Similarly, GIC’s secondaries strategy finds deals in the mid-market where the direct investment team is more large cap focused. GPs are more likely to allow secondaries funds into a deal when they do not view them as competitors in primary transactions.

In the US market, where both private credit and private credit secondaries are less nascent it has been easier for secondaries arms of broader managers to find traction on deals. With fewer deals and fewer market participants, it remains a challenging landscape in Europe. However, as the secondaries market becomes more established, engagement with GPs will increase and it is the incumbent secondaries managers that will likely have the most success. Moreover, as more GP-led solutions are needed, it is possible that the complexity and relative lack of managers that focus on GP-led transactions could make it easier for these secondaries strategies to access deals. It may be challenging for these managers with direct investing arms to focus on high volume LP-led flow mandates due to a higher

rate of being blocked. However, by focusing on fewer, larger GP-led transactions, offering attractive pricing and a complexity premium, these managers could improve their chances of success.

European secondaries strategies are still in their relative infancy. Many teams that invest in private credit secondaries have broader mandates looking at adjacencies in the market such as co-investments and NAV financings. This can allow them to test the waters of the market to develop a track record and proof of concept before building a dedicated team. Similarly, several large direct lenders are exploring the secondaries space using their established direct investing team. In the long term, maintaining broadly focused teams is unlikely to be viable for scaling private credit secondaries. However, for managers facing deal access challenges without a secondaries track record, a gradual approach using existing teams may be a practical interim strategy.

The most natural managers to enter the market are the firms that do not focus on direct lending investments. In Europe, managers including Coller, Pantheon, StepStone, AlpInvest, and Allianz have developed private credit secondaries strategies. Unlike managers with a direct lending strategy, they do not face the same conflict-of-interest concerns, making both deal flow and subsequent fundraising more accessible. While many traditional managers best known for their direct investing strategies are likely to continue looking at private credit secondaries as a potential growth area, perhaps the biggest firms to watch are the remaining equity secondaries specialists that have yet to expand. Many of these established managers have looked at potential private credit secondaries transactions but have not yet dedicated teams or capital to them as a strategy. As the market grows these firms may explore a credit secondaries strategy, leveraging their broader secondaries specialisations and industry relationships.

Additionally, private credit secondaries offer opportunistic credit investors exposure to the direct lending market. Due to the saturation of investors in the primary markets, developing a traditional senior secured lending strategy can be challenging. However, secondaries offer an alternative route to access performing private credit. Managers without an established direct lending mandate face fewer concerns regarding conflicts of interest. Moreover, given the relative complexity of opportunistic credit deals, these managers may be well-positioned to execute bespoke GP-led transactions. This shift towards secondaries not only reduces competition but also aligns well with the expertise required for GP-led transactions. The main challenge is a lack of familiarity with the direct lending universe. However, overcoming this hurdle could open up a compelling expansion opportunity.

European Strategies

• Not every manager has seen the need to open European teams to develop European secondaries investing.
• The institutional nature of secondaries investing may make it more accessible without proximity.

Private debt in Europe has grown significantly over the past decade. Naturally, there is a lag between the growth of the primary market and the development of a secondary one. While deal flow seems likely to continue to increase, there is a question about how essential it is for managers to have secondaries investment teams based in Europe to access the opportunities.

The relatively small universe of credit secondaries investors has demonstrated the ability to invest in European opportunities remotely. With the bulk of deal flow in the US and origination through large institutional LPs and GPs, some managers have not yet found it necessary to establish European teams. Apollo’s S3, for example, has flexible capital for investing across American and European secondary transactions, however they have not built out a team in Europe. Even managers with European teams reflect the reduced importance of geographical focus. For example, the team at Coller Capital is fairly equally split between London and New York, however, both groups work on opportunities in both markets.

Moreover, it must be considered to what extent local origination is required. By its nature, the secondaries market is heavily institutional. Given that most major managers and LPs are global and well-connected firms, some argue that it is not necessary to be based in the same region to be invited to participate in new deals. It may be possible to invest in the European private credit secondaries market from another major institutional hub, provided a firm has the necessary reputation and relationships. Particularly if Europe is a smaller part of the mandate and full market access is not a priority, it may be possible to leverage broader institutional relationships from afar to access many transactions without requiring new European hires.

It should also be noted that the type of mandates a manager focuses on also factors into the origination capacity and thus location. Given the less bespoke nature of most LP-led transactions and their substantial use of brokers, such deals may be less likely to require a local presence. This is especially true where LP portfolios cross geographies. In contrast, managers requiring complex GP led transactions focused on a smaller pool of loans in a single local vintage may have greater desire for a team based in the same region.

While proximity always makes origination easier, questions remain about whether there is sufficient deal flow to justify opening dedicated European offices for managers headquartered outside the region. The largest secondaries investors with teams in Europe, Coller and Pantheon, are headquartered in London, so it is natural for them to have their investment teams based there. As the market expands and the number of potential deals grows, a key consideration will be whether more dedicated European vehicles emerge and whether geographical proximity becomes a necessity for broader teams or only a select group of originators.

The Secondaries Skillset

• It is important for candidates to have robust credit skills.
• Candidates must have the skillset for the portfolio based investment approach.
• It is useful for candidates to have existing familiarity with the private credit market.

While the lack of competitors creates a strong opportunity set, it also provides a range of challenges for building a team. Unlike in more established strategies, there are few candidates with direct experience in similar roles. Even where there are candidates from competitors, it is important to assess which backgrounds best align with a private credit secondaries team buildout. To identify potential fits for a secondaries team, there are three core qualities to consider in candidate backgrounds.

Credit Background

Obviously, private credit secondaries investing relies on an understanding of credit. While secondaries investing exists outside of credit, debt products require a different approach. Investors experienced in other asset classes can develop credit skills but the difference in underwriting and downside protection makes prior credit exposure useful. As a result, teams must consider the prior credit investment exposure of an individual or their ability to develop these skills if they lack experience.

Approach to Investments

Given its focus on portfolios of assets, secondaries roles require a different approach than direct primary strategies. It is typically not feasible for investors to analyse every asset in granular detail within a GP’s portfolio or a portfolio of LP stakes. Even if there was in depth granular information on a portfolio, analysing it all in detail would not be efficient. In practice, secondaries investors often face a knowledge gap, lacking full access to the information they might seek from the GP. As a result, strong profiles will have a more quantitative investment approach and be able to deal well with large datasets.

Familiarity With The Market

In private credit secondaries, it also helps to have had exposure to the primary private credit market. Since these are secondary investments, the underlying assets and portfolios come with existing track records. Given the knowledge gap teams often face, any additional insight an individual brings can be instrumental. As a result, something as simple as having worked on several relevant primary deals, analysed a number of existing credit portfolios before, or knowing the relative health of the portfolios of established managers can be highly impactful. Furthermore, a strong network across buy-side and advisory firms can provide valuable insights into otherwise inaccessible portfolios.

Where to Source Candidates?

• Private credit secondaries investors are the best fitting profile type but there is not a significant number of po-tential candidates.
• Direct Lending candidates are able to provide strong credit skills and market knowledge but can struggle from a change in investment approach.
• Private equity secondaries investors are well set to understand secondaries investing but require training to sup-port a shift in asset class.
• Portfolio investing candidates have significant crossover in skills, investment approach, and may be familiar with the market.
• There are additional profiles to consider that have not been significantly hired from in the past including sophis-ticated LP allocators, advisors, and brokers.

Private Credit Secondaries Investors Obviously, the ideal hires would come directly from other private credit secondaries teams who would bring the most relevant skills and the best ability to ‘plug and play’ with a new setup. However, with few teams operating in Europe and most of these teams remaining small, the pool of potential candidates is limited.

Not only is the pool of potential candidates small, but motivation to switch employers is also limited. One common motivator is the entrepreneurial appeal of joining a newer team, which offers greater potential for growth. However, with the existing teams and strategies in their relative infancy they all have an aspect of entrepreneurship and the potential upside of joining a team and mandate early. At this stage, it is less likely that candidates feel stuck in an established strategy and are actively seeking a newer entrant.

There may be a handful of situations where mid-seniority candidates can leverage their credit secondaries experience into a significantly more senior role. These would provide an opportunity for the candidate while also adding significant value to a new strategy.

For large managers, hiring experienced private credit secondaries investors could make sense assuming they are able to provide substantial compensation incentives to motivate a move. Compared to other strategies, particularly direct investment, compensation levels within the private credit secondaries specialism are relatively low providing an opportunity to attract talent. However, they are traditionally provided with substantial carry allocations and may require significant compensation increases to leave an established strategy. This then requires a substantial confidence to justify the higher investment. Moreover, as competition for talent increases, this could drive up the compensation for lateral private credit secondaries moves and prompt existing teams to be more cautious in pay and counteroffers.

Ultimately, with the size of the market and the current difficulties attracting candidates, it would be challenging for a newer team to develop relying predominantly on existing private credit secondaries investors. Therefore, they will need to consider a broader set of candidates.

Direct Lending Candidates

For many teams, where candidates are not available from private credit secondaries strategies, they have relied on candidates with Direct Lending backgrounds. Naturally, their experience does not fully align with a secondaries mandate. They will not be as familiar with the product itself, and the investment approach of a single-asset strategy differs significantly from the portfolio-based approach of a secondaries mandate. These candidates are accustomed to lengthy, in-depth, bottom-up analyses of individual corporate names, which contrasts with a secondaries strategy that often lacks both the time and information to build detailed models for each constituent portfolio asset. This does not invalidate candidates with these backgrounds, but some adjustment is required. As a result, adapting to this different investment style is likely to involve a significant learning curve. Managers hiring from these groups must assess candidates' aptitude for a more top-down, quantitative, and portfolio-focused approach.

Nevertheless, many managers prioritize strong credit skills over familiarity with the investment style. Additionally, there is the previously mentioned importance of familiarity with the private credit market. While a former Direct Lending investor may not have the same technical skills, they may have useful insights into the market. Particularly if the GP is withholding information, these candidates' existing market knowledge can be advantageous. Their experience conducting primary due diligence on relevant transactions, assessing portfolio quality, identifying problem assets, and understanding the primary loan environment can provide valuable insights for a secondaries mandate, compensating for the time needed to adapt to the secondaries investment style. Moreover, the networks built by direct lending professionals can be highly valuable. Relationships with PE sponsors and advisors can provide investors with otherwise inaccessible information to inform their decisions. If concerns arise about the health of a portfolio or asset set, they can be mitigated by contacting the relevant sponsor or advisor involved in the deals for additional insights.

A significant portion of private credit secondaries hiring has relied on candidates from a Direct Lending background and this trend is likely to continue. Their credit expertise and market familiarity make them a logical choice; however, the time required to adjust to the investment style must be considered, as they are not necessarily ‘plug and play’ candidates.

Private Equity Secondaries Investment Candidates

Some teams have members with a private equity secondaries background. The attraction of their profiles is the familiarity with the instruments and the investment approach. While not identical, experience in completing secondaries transactions is directly relevant and enables candidates to contribute without needing to familiarize themselves with the product.

However, coming from a different asset class, the potential retraining that is required to develop their credit investment skills must be considered. Many managers see it as an easier prospect to train candidates in a new investment strategy within credit than to shift their mindset across asset classes, especially for more senior profiles.

Many private credit secondaries investors with private equity backgrounds joined during the strategies’ early development. Several established European managers developed their credit strategies from existing private equity secondaries teams. Given that these evolved through the equity team developing credit exposure through a small number of transactions, they could spin out having had experience in credit transactions before becoming a dedicated team. New entrants can still use this approach to build a track record with an existing equity secondaries team before committing significant resources to a new team

New teams that are not evolving from an equity strategy may still find value in these candidates. If hiring a senior investor directly from a credit secondaries strategy is not feasible, identifying a team leader with the complete skillset is challenging. Thus, it could make sense to hire two seniors: one with a relevant credit or direct lending background and one with an existing secondaries strategy background. This structure ensures both asset class and market expertise while incorporating secondaries experience for a smoother investment process.

Portfolio and Fund Investment Candidates

A group of candidates who combine credit expertise with a portfolio-focused investment approach come from portfolio financing strategies. Although not directly relevant, experience with NAV facilities, subscription lines, or portfolio asset-backed financings provides highly transferable skills. Recently, established managers have recognized this candidate pool and are increasingly hiring from it as they expand their teams.

As credit-oriented investors, they do not require the same asset class retraining as candidates from private equity secondaries backgrounds. They can be expected to have the required credit skills you would expect from other credit strategies. Moreover, their investment approach may be more relevant to secondaries than that of a direct lending candidate. Rather than focusing on individual direct transactions, these mandates emphasize portfolios and funds from a more top-down perspective. This aligns with the more quantitative approach of secondaries investing where they are restrained by time, number of assets, and limited depth of information and must thus be capable of valuing and creating investment theses within these restrictions.

Depending on their specific background, these candidates may also have valuable experience in the private credit market. If they have provided financing lines to a private credit fund, they will have already analysed portfolios similar to those a secondaries platform might acquire LP stakes from or create GP solutions for. While this experience equips them with relevant skills, it may also enhance their broader market familiarity. Secondaries managers may find significant value in the insights of candidates who have previously conducted due diligence on funds relevant to the secondaries market.

Additionally, many managers are looking to develop portfolio financing or broader asset backed strategies. As a result, these candidates could be preferable for a team that covers several products including secondaries.

A major limiting factor for this candidate pool is the relatively small number of investors in these strategies. Although not as nascent as European private credit secondaries, these strategies remain less common than those in other mandates. As a result, despite being a strong fit, the limited candidate pool may make hiring more challenging. However, these strategies tend to offer lower compensation, potentially making candidates more accessible.

Other Candidates

Beyond these candidate pools, there are several other potential sources for team buildouts.

There is a case to be made for considering candidates from sophisticated investment manager selection and allocation backgrounds. Theoretically, there is a significant overlap between this and the skills of a private credit secondaries investor. Analysing existing private credit funds familiarizes these candidates with assessing the relative health of the portfolios. Moreover, having either worked on allocations for a network of LPs or sat internally within an LP, they may have useful relationships. Particularly, if the secondaries mandate is focused on LP-led opportunities, this could provide a good start for an origination network. These candidates, however, have not historically been hired for this. On paper, there is strong overlap providing both directly relevant analysis skills and an existing understanding of the quality of existing managers and portfolios. So far, we have not seen a substantial appetite for hiring these profiles, but the overall relevance means these candidates are worth consideration.

While there has not been significant hiring from them before, there are also potential candidates from secondary advisory and brokerage firms. Firms such as Campbell Lutyens, Lazard, and Jefferies or specialist companies like Ely Place and PEFox have candidates familiar with private credit secondaries transactions. Some have teams dedicated to credit transactions, while many candidates cover all asset classes. As a result, not all team members will have significant exposure to credit secondaries. Where they do, however, they should understand the deals and the underwriting process from working on transactions in an advisory capacity. To date, investment teams have shown limited interest in candidates from advisory and brokerage firms as there are concerns about the training required to adapt to an investment seat, however, the secondaries specialism may lead to them being considered more actively. Firms can vary in how hands-on they are during due diligence and modelling, which should be considered when evaluating candidates.

Conclusion

The growing market need for private credit secondaries presents a significant opportunity. With few active managers in the European market, it is well-positioned for new entrants to establish a foothold. Managers with existing equity secondary, direct lending, asset backed, or opportunistic credit strategies will be able to capitalise on the opportunity set.

These managers, however, will not have ready-made teams for a credit secondaries strategy. There are solutions to create a strong investment team if managers are sophisticated about putting the backgrounds and skillsets together.