The normalization of credit markets following years of lower defaults will create greater dispersion in manager and asset performance, increasing the value of liquidity for LPs in private credit funds, according to Sycamore Tree Capital Partners.
The firm, which launched its private credit secondaries platform earlier this year, is focused on investing in opportunistic secondaries transactions and in lower middle market funds, seeking discounts of around 20-30 points below par as opposed to the near or above par pricing sometimes seen in vanilla direct lending continuation vehicles, said Trey Parker, CIO and co-founder of Sycamore Tree, in an interview with PitchBook LCD.
Parker also said he expects attractive discounts in assets originated during vintages between 2016 and 2021. He particularly highlighted the Covid era as a period that did not deliver as much distress as some investors expected, creating an opportunity to pay out investors who did not get returns they hoped for.
“Some of those investors [in Covid-era opportunistic funds] are quite frankly just ready to wash their hands of those opportunities, and that creates a real transaction motivation,” said Parker.
“If you think about the number of dislocation funds that were raised around Covid, which ended up having a somewhat V-shaped recovery, those investors were promised significant opportunities, but many of those firms put money to work at discounts that were not as deep or attractive as expected.”
Allocators will also seek to rebalance their portfolios, he said, following years of massive allocations to private credit by institutional investors. Parker said he does not expect allocators to meaningfully cut private credit allocations across the board, but that this year’s volatility is generating secondaries opportunities as some LPs seek to exit their positions in credit funds.
The firm said it expects to find discount opportunities in software assets despite much of the noise around the sector, adding that disruptions are less likely to be systemic but that some companies will be caught off guard. Parker emphasized the importance of selectivity, particularly considering the difficulty of predicting recovery rates on software loans, where IP tends to be the main source of collateral and value recovery.
Sycamore’s credit secondaries platform will favor software businesses in cybersecurity, which Parker said tends to be more defensible, as well as businesses in industries with highly sensitive customer data, including confidential medical and financial information.
Regarding the broader platform, Parker said that its secondary business will be free of conflicts of interest because Sycamore Tree is not a direct competitor in distressed or opportunistic private credit, making GPs more open to both granting information access and allowing assignment into their funds.
“Firms tend to hold access to their funds as sacrosanct — access to a fund potentially gives insights into sourcing, deal flow, and relationships — particularly in the non-sponsored world. Letting competitors inside the tent is something people will continue to be protective about,” said Parker.
Featured image by Philippe LEJEANVRE/Getty Images
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