Credit Secondaries Market Could Hit $50B Within Five Years

In Brief:

Michael Schad, Partner and Head of Credit Secondaries at Coller Capital, sat down with Fund Shack at SuperReturn Berlin to discuss the explosive growth potential of private credit secondaries. Coller Capital, a pioneer in private equity secondaries with nearly $40 billion in assets under management, has been quietly building positions in credit secondaries since the 2008 financial crisis. Schad argues that the shift from bank lending to private fund lending represents a secular trend that could eventually make credit secondaries larger than private equity secondaries. With private credit funds now carrying 8-9 year durations and creating the same liquidity pressures as traditional PE investments, he predicts the credit secondaries market could reach $50 billion within 3-5 years as institutional adoption accelerates.

Big Picture Drivers:

• Secular Shift: Banks moving away from long-term lending to private fund structures better suited for duration matching

• Duration Mismatch: Private credit funds now run 8-9 years, creating same liquidity needs as private equity investments

• Market Volatility: Economic uncertainty driving institutional investors to reassess and reshuffle portfolios

• Scale Economics: Concentration among major players as credit secondaries becomes a process-driven, scale-dependent business

Key Topics Covered:

• Market Evolution: How Coller pioneered credit secondaries during 2008 crisis before direct lending became mainstream

• Seller Motivations: Denominator effects and liquidity needs mirror private equity secondaries despite different asset class

• Risk Management: Focus on high-quality GPs with proven workout capabilities given untested downside scenarios

• Competition Dynamics: Institutional heritage and process expertise creating barriers for new market entrants

Key Insights:

• Private credit secondaries could eventually surpass private equity secondaries in size given the broader $30-40 trillion addressable private credit market compared to traditional PE.

• The shift from bank lending to private fund lending represents a fundamental structural change rather than cyclical growth, driven by funds' superior ability to provide long-term liquidity.

• Private credit funds' 8-9 year durations create identical liquidity pressures for institutional investors as private equity investments, eliminating the traditional duration advantage of credit investments.

• Coller Capital's early entry in 2008 provides a significant competitive advantage as most competitors only started focusing on credit secondaries in 2021.

• Volatility serves as a natural catalyst for secondary deal flow as institutions step back to reassess portfolios, with recent UK budget crisis and LDI pension fund issues providing examples.

• The credit secondaries market will likely consolidate around a small number of large players due to the scale economics and process requirements, similar to the primary credit market structure.

Memorable Quotes:

• "I think we sort of actually created the credit secondaries market full stop back then" - Michael Schad, reflecting on Coller's pioneering role during the 2008 financial crisis

• "In the long very long term private credit secondaries could be bigger than private equity secondaries" - Michael Schad, explaining the massive addressable market potential

• "Credit is not about upside it's about eliminating downside risk and giving a solid and predictable performance" - Michael Schad, contrasting credit investment philosophy with equity strategies

• "Can this market be at 50 billion in 3 to 5 years? Yes I think so" - Michael Schad, making his bold market size prediction

• "Credit in my view and you see that in the primary market it's a scale game" - Michael Schad, explaining why the secondaries market will consolidate among major players

The Wrap:

The credit secondaries market stands at an inflection point where institutional recognition meets massive underlying growth in private credit. Schad's prediction of a $50 billion market reflects both the maturation of private credit as an asset class and the inevitable liquidity needs that long-duration investments create. As market volatility continues and institutional processes become more sophisticated, the winners will likely be established players with deep expertise in portfolio analysis and GP evaluation. The secular shift from bank to fund lending suggests this isn't just another alternative investment fad, but a fundamental restructuring of how credit markets operate.