Schwartz’s previous role at Ares was co-head of direct lending, and he voluntarily took the step to leave the IC in order to reassure GPs, which were previously his direct competitors, that he would be siloed from the firm’s direct lending business. Ares declined to comment for the story.

Such decisive actions are key to what is a relationship-driven business. These relationships between GPs and buyers of fund stakes are put to the test in the secondaries market, where GPs are asked to divulge information on their funds and portfolios to prospective buyers as institutional investors look to sell their stakes. Buyers need to show they are walled off from competitor operations.

LP-led deals make up the majority of private credit secondaries transactions, often putting lenders in the back seat while LPs and brokers move in and out of their fund — and get to look under the hood in the process, particularly the track record, the current pool of investments, and broader fund documentation.

But the sort of financial intimacy needed for sharing fund metrics, particularly with firms that have competing businesses in the primary private credit market, takes some time and trust to build.

Many of these platforms are aware of the the sort of reaction that they receive from some GPs, so they’ve gone to great lengths to put together presentations and memos about how they are truly separated from the rest of the organization, particularly the direct lending team.

There are often legal and compliance professionals overseeing these sales and the involvement of any primary market personnel, ensuring that the underlying lender is kept abreast of who’s seeing what in their portfolio.

Jumping through hoops

There remains, however, some lingering skepticism among GPs, sources said.

A number of operators in the market focus solely on secondaries investing in private equity and private credit funds. Coller Capital, Lexington Partners, and Banner Ridge are big buyers of LP stakes and don’t manage a separate direct lending platform.

But other big players in the secondaries market, such as Blackstone, JP Morgan, and Goldman Sachs, have quite sizeable direct lending operations.

“Of course there’s the question of — does the GP believe it or not?” said a private credit secondaries broker, referring to concerns around secondaries investors sharing information with potential primary counterparts.

“It’s certainly a risk, but I think it’s more of a perception than reality. But, maybe perception is reality, so in these early days I think it will be a consideration but hopefully something that we can all overcome,” the broker said.

The sources said that such conflicts will be less of a concern as the market for private credit secondaries matures and adds that issues have not arisen on this front from their experience. Nevertheless, some GPs continue to restrict access to managers that come from houses that hold competing products.

Brokers speaking to 9fin noted that the returns for any lenders engaging in any such information-sharing would be extremely short-lived, as their whole secondaries business would spoil their reputation.

“Those folks would be very quickly out of business if they were feeding their teams on the direct side and a GP got wind of it,” said the first broker.

A second broker at a different firm shared the sentiment.

“It would be a death sentence to them if it got out that information was shared internally, so I think they take an abundance of cautions to make sure that doesn’t happen. Because they’d be out of business if that got out, that’d be the end of that platform,” said the second broker.

White lists

As it stands, the private credit secondaries market is a much smaller market than its PE counterpart. And it is a strategy that has higher hurdles to scale due to certain elements of the nature of credit investing that differentiate it from PE investing.

“Because you can pitch a recapitalization at any point, the competitive issue is more apparent in debt than in equity. If you’re a PE firm and you don’t want to sell your portco but you’re giving information to a competitor, it’s not like they can act on it because you’re in control,” said one secondaries investor from a shop without a competing primary business.

“When you’re just a lender involved in an LBO, you can get refinanced at any point in time. So there’s less of an ability to control outcomes for PC lenders than there is on the PE side of the market, so it does tend to be much more restrictive.”

It was a bumpy ride for the PE secondaries market to grow, with PE managers expressing similar concerns that today’s direct lenders express. But this has largely dissipated, sources say, and they anticipate the private credit secondaries market will gain the same level of acceptance in the future.

Indeed, for private credit secondaries buyers the priority is to make it onto “white lists” that GPs supply to brokers. “Secondaries investors are very focused on getting on those lists so that they can be included in more processes, and alleviate this perception issue,” said the first broker source.

Many GPs have not seen many private credit secondary transactions, but as they grow the market will likely help normalize that information sharing and assuage fears.

“With volume picking up, [private credit managers] will have to face the reality that this will be a thing and that you have to help your LPs in transacting and that starts with not limiting their pool of buyers,” a private credit secondaries head said.

Our customers receive this news ahead of the crowd. To learn more about news on the 9fin platform, request a free trial below.