Attempts by some of private credit’s biggest names to develop a hot new corner of the US$1.6 trillion market have hit a roadblock: their peers.

Buyers including Apollo Global Management, Ares Management and Tikehau Capital have raised billions to spend on so-called “secondary” deals, when an investor in a private credit fund decides to sell their stake early. But in some cases they’re being excluded from lists of approved acquirers by the firms who run the funds, according to people with knowledge of the matter.

While secondary sales have been increasing of late, restricted-buyer lists threaten to hobble efforts to make private credit more liquid. Giant insurance and pension firms have been piling into the asset class recently, prompting worries at the Bank of England, European Union and International Monetary Fund about how easily they’d be able to sell out of their exposure in a crunch.

Private credit investors need the consent of a fund’s manager — known as the general partner (GP) — before they can sell their holding. But some GPs have been reluctant to let close rivals buy stakes because they fear it would allow them too good a view of the inner workings of their portfolios.

“Presumably this is meant to protect proprietary information,” says Craig Bergstrom of Corbin Capital Partners, which invests in secondary private credit funds. “But lists of approved buyers can be quite short.”

GPs and secondary buyers often come from the same small pool of top private credit firms, ratcheting up the competitive tension. The limits echo the “whitelists” used in the buyout industry, where GPs can stop lenders to their companies from selling out to undesirable buyers.

A few private credit GPs such as Fortress Investment Group have even asked that any sales by their investors be effectively offered to them first, according to several of the people familiar, who wanted to remain anonymous discussing commercial matters. Such limits could make it harder to get auctions going.

Despite these tactics, Cecile Mayer-Levi, Tikehau’s head of private debt, argues that the situation is starting to improve. “Blocking, once an entrenched practice, is gradually yielding to a more progressive attitude,” she says.

Ares, Apollo and Fortress declined to comment.

BUTTING HEADS

Some fund managers say this initial butting of heads is all part of the normal development of a nascent asset class, and that similar problems bedeviled the early stages of private equity’s secondaries market. Business remains brisk, they say, as demand for these second-hand stakes is still outstripping the supply from investors, known as limited partners.

“We’re definitely seeing more activity in private credit secondaries as investors look to exit due to needing more liquidity, or because they realize they were overallocated,” says Madelyn Calabrese, a partner at law firm Haynes Boone.

However, having extra hurdles on who they can sell to will be a concern for the biggest investors in private credit funds, especially insurers and pensions. Secondary stakes already sell at an average discount of about 10 per cent on the price the buyer paid, according to Corbin’s Bergstrom.

Although investors understand this asset class is by its nature illiquid — usually involving closed-end vehicles with caps on withdrawals that make private corporate loans — the promise of a robust secondary market has reassured some that their exposure can be better managed.

PRIVATE PERIL

The private credit market, which has boomed as investment banks retreated from the business of lending money to risky companies, is yet to be fully tested in a crisis. And its ability to liquidate holdings is a key danger highlighted by regulatory bodies such as the EU, whose questions are surfacing just as insurance and pension funds plan to increase holdings in the asset class.

U.S. government officials said Friday that they’re looking at placing “non-bank” financial titans under strict Federal Reserve oversight, something typically reserved for Wall Street, to root out lurking risks in the finance system.

The BoE has gone as far as to plan a permanent backstop facility for non-banks, including investment vehicles that typically encompass private credit. The central bank still bears the scars from Prime Minister Liz Truss’s disastrous mini-budget last autumn, which triggered a pensions liquidity crisis.

 “Things may get tasty,” says Matt Huggett, a partner who advises on direct lending at law firm Allen & Overy. “If the tide does go out, then this time around a number of pension and insurance companies are facing the risks rather than depositors.”

Mayer-Levi says investors’ need for liquidity is the reason firms like Tikehau are vital: “Given the projections of the private debt asset class nearly doubling in the next five years, liquidity is expected to be a top priority for LPs. Consequently, the secondary market is poised to expand significantly.”

There are certainly plenty of buyers around right now, notwithstanding restrictions on which of them might be deemed acceptable to a GP. Prominent acquirers include Pantheon Ventures and Coller Capital as well as Tikehau, Apollo and Ares. Managers of these new secondaries portfolios buy stakes from both private credit funds themselves and their investors.

Deals are being done, too. Pantheon expects to see as much as $23 billion of private debt change hands on the secondary market this year, up from about $5 billion four years ago. In September Wells Fargo & Co. sold about $1 billion of stakes in Norwest Mezzanine Partners to a group of secondary investors including Atalaya Capital Management and Pantheon in one of the largest transactions of its kind.

And yet it’s the boom in the number of vehicles set up to buy secondaries — including by some of private credit’s marquee names — that makes GPs more nervous about giving up state secrets to close rivals, says A&O’s Huggett.

Even those who manage to buy sometimes aren’t invited to investor meetings or get less access to fund data than existing backers, industry executives say. Some have to promise to buy into a GP’s next fund.

“There is much more awareness of having to contractually police how information within portfolios may be used by a buying secondary fund and its sponsor,” Huggett concludes.