Key Takeaways
- • Private credit lacks a functioning secondary market, creating potential liquidity bottlenecks for investors if credit conditions deteriorate, since funds cannot easily exit positions unlike public credit managers.
- • Private credit borrowers are typically small-to-mid-sized companies with average EBITDAs of $30–40 million and debt-to-EBITDA ratios of 5–7x (comparable to single-B through CCC public borrowers), yielding over 150 basis points above single-B loans with lower volatility.
- • Private credit assets lack public ratings and rely on quarterly valuations with 2–3 month data lags, structural constraints that prevent timely pricing consistent with active secondary market trading.
- • Securitization frameworks—including CLOs and ETFs—have successfully bridged illiquidity gaps in syndicated loan markets and could serve as a model for improving private credit liquidity without creating systemic risk.
- • The illiquid nature of private credit does not pose major risks to the broader financial system or investors themselves, despite the absence of an active secondary market.
Summary
The private credit market faces a structural liquidity challenge: secondary trading activity remains extremely limited, creating a potential constraint for investors who need to exit positions during market stress. Unlike public fixed-income managers operating under credit quality mandates, private credit funds cannot easily trade out of holdings to maintain their stated credit profiles if conditions deteriorate. However, this lack of a secondary market does not appear to present material systemic risk.
The typical private credit borrower profile reflects a distinct middle-market segment. According to Morgan Stanley Research, these companies have average EBITDAs between $30 million and $40 million with debt-to-EBITDA ratios of 5–7x, positioning them comparably to single-B through CCC borrowers in public markets. Private credit yields typically exceed single-B loan returns by over 150 basis points, delivering higher annualized returns alongside lower volatility—an attribute that has made the asset class increasingly attractive to institutional investors seeking to match longer-term liability durations against more conservative public fixed-income alternatives.
The operational mechanics of private credit valuation create inherent obstacles to secondary market development. Assets lack public credit ratings; instead, credit funds assign internal "shadow ratings" to underlying loans. Valuations occur quarterly with embedded data lags of two to three months due to the complexity of gathering information on distributed, bespoke lending relationships. This timing mismatch prevents assets from being priced with the frequency and precision required for active secondary trading, unlike public markets where real-time price discovery occurs continuously.
Securitization has emerged as a proven mechanism for addressing illiquidity in comparable asset classes. The syndicated loan market demonstrates this model through CLOs and ETFs, which package less liquid loans into tradeable securities and enable secondary market participation. Similar securitization frameworks could theoretically bridge private credit's liquidity gap, allowing institutional investors greater flexibility while maintaining the operational and informational structure that currently defines the asset class.
The typical private credit borrower profile reflects a distinct middle-market segment. According to Morgan Stanley Research, these companies have average EBITDAs between $30 million and $40 million with debt-to-EBITDA ratios of 5–7x, positioning them comparably to single-B through CCC borrowers in public markets. Private credit yields typically exceed single-B loan returns by over 150 basis points, delivering higher annualized returns alongside lower volatility—an attribute that has made the asset class increasingly attractive to institutional investors seeking to match longer-term liability durations against more conservative public fixed-income alternatives.
The operational mechanics of private credit valuation create inherent obstacles to secondary market development. Assets lack public credit ratings; instead, credit funds assign internal "shadow ratings" to underlying loans. Valuations occur quarterly with embedded data lags of two to three months due to the complexity of gathering information on distributed, bespoke lending relationships. This timing mismatch prevents assets from being priced with the frequency and precision required for active secondary trading, unlike public markets where real-time price discovery occurs continuously.
Securitization has emerged as a proven mechanism for addressing illiquidity in comparable asset classes. The syndicated loan market demonstrates this model through CLOs and ETFs, which package less liquid loans into tradeable securities and enable secondary market participation. Similar securitization frameworks could theoretically bridge private credit's liquidity gap, allowing institutional investors greater flexibility while maintaining the operational and informational structure that currently defines the asset class.
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