One of the latest fund managers to utilize the strategy, which is becoming more popular and often including larger portfolios these days, according to 9fin sources, is Napier Park.

The firm is in the market with a continuation fund worth around $1bn, as 9fin reported earlier this week. The fund in question houses infrastructure credit assets, and FIRSTavenue Partners has been hired to advise the transaction. We should expect to see more continuation vehicles around the $1bn range in the near term and in general, according to secondaries market sources.

It comes at a time when the private credit secondaries market continues to balloon in size, driven by liquidity needs as well as the growing tally of buyers dedicated to the niche asset class, which is in turn encouraging supply and increasing expectations for transaction volumes this year.

Deal volume is expected to increase by 50%-100% this year, with $10bn-$15bn of closed transactions expected in 2024, according to Ely Place Partners, a specialist adviser in alternative assets.

The private debt secondaries survey Ely Place released this week also shows that respondents are seeing an increase of both LP- and GP-led deals, but that LPs continue the drive the majority of flow, with pension funds being the largest sellers.

Credit puddle

A 2% increase in the credit allocation of a $77bn fund is a headline in itself, but there is something more notable to the move by Los Angeles County Employees Retirement Association than merely big dollars re-arranged.

For LACERA is not just making more investments in credit, it is redefining it, by combining its private and public buckets into one. The illiquid and liquid blended: frozen water or watery ice, depending on how you see it. However LACERA builds the portfolio, credit will now make up 13%, up from 11% previously.

The pension fund said that “enhanced flexibility for sub-asset class implementation,” is the key reason for the shift. In other words, the portfolio can be tailored to market cycles more effectively. LACERA can more easily seesaw between public and private credit, as market conditions change.

But a big benefit to doing this is that it mitigates volatility. Nelson Pereira, alternatives investment director at Mercer, told 9fin that a combined allocation removes the low ceiling on expected public returns, rolling them in with the higher ceiling illiquid bucket. In LACERA’s case, the option it was recommended to take increased the likelihood of the plan achieving its 7.5% return target and as a result, the Sharpe ratio —a measure of investment returns relative to risk — fell from 12.4% to 12.2% (a lower number means lower volatility).

“You'd see less volatility just across the board, because you'd have more downside protection,” Pereira said of combined allocations generally. “That downside protection is given to you by the liquid aspect of the allocation. So you're probably going to see less volatility by combining both.”

Do or default

Proskauer’s latest private credit default index came out this week, showing that the default rate for Q1 climbed to 1.84%. That’s higher than the previous two quarters (at 1.6% and 1.41%, respectively), but still lower than it was a year ago, at 2.15% in Q1 of 2023.

The report breaks down which market segments are seeing the most defaults. Below $25m and the quarterly percentage is up, but both between $25m-$50m and above $50m they’re down. Quite what to make of it is unclear.

Nevertheless, defaults are lower than they were a year ago, but it doesn’t necessarily mean that borrowers are financially healthier than they were — tactics like PIK options, covenant relief, and creative applications of DDTLs, are covering a multitude of sins.

We can see an alternative indication of rising distress in the anecdotal uptick in private credit restructurings this year, as sources say that workouts are becoming more common, and often in ways that won’t show up in a default index — one of the perks of private credit.

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