With a subdued M&A market stymying sponsors’ exit opportunities, and confronted with a more challenging backdrop for fundraising, some direct lenders in Europe are eagerly exploring private credit secondaries as a new avenue that can bolster liquidity for the asset class, market sources told Debtwire.

Faced with a need to return capital to their limited partners (LPs), and in some cases maturing loan books, direct lenders are taking a steer from their equity and US-based counterparts and turning to secondaries as an elegant – albeit complicated – means to resolve this dilemma, sources said.

“Secondaries are a simple answer for the lack of exit opportunities we still have at the moment, and hence the return of cash to investors,” one Frankfurt-based private credit lawyer said. “In my mind, they are just another way of providing LPs with their necessary liquidity – some people say it’s a sign of sophistication, but another way to look at it is to say it’s just a function of an imperfectly working primary market.”

Others note that while secondaries are indeed helping lenders cope with liquidity needs and the ever-increasing duration of some investments, some general partners (GPs) also view them as a means to retain prized assets amid a competitive landscape for new deals.

“Managers… to some degree in credit have realized that if there is still upside with specific, compounding assets in their portfolio, they could sell it to another GP and let them take that upside, or they could hang onto it,” Nicole Brennig, partner at DLA Piper, said. Viewed from this vantage point, secondary continuation vehicles (CVs) enable lenders to continue realizing these assets’ upside while still bringing in new dry powder to either reinvest or return to LPs, dealmakers said.

Tens of billions in PC CVs expected

While the potential scale of the still-nascent market for private credit secondaries in Europe is subject to debate, dealmakers estimate it is already running into at least the tens of billions of euros given the size of the overall private credit space in the region.

Deals announced this year involving some of the region’s largest players suggest the appetite for secondaries in Europe is on pace to meet these assumptions.

In April, Arcmont announced the closing of a USD 2.5bn (EUR 2.88bn) credit CV, including leverage, led by Ares Credit Secondaries funds, at the time the largest European credit secondaries transaction to date. Ares Management is also reportedly exploring the sale of EUR 3bn of bundled LP interests in a European direct lending fund linked to Ares Capital Europe IV.

Other players are taking steps to enter the market via dedicated credit secondaries funds including LGT Capital Partners, while Generali Investments launched its maiden private credit secondaries fund with the help of Partners Group last year.

What’s clear however is that there has been a shift over the past year in terms of the players driving these transactions.

Secondaries in the private credit space initially emerged as an LP-led phenomenon, where investors looked to exit stakes in GPs for reasons ranging from changes in deployment strategy to accelerating liquidity events in the face of “lacklustre” levels of Distributions to Paid-In Capital (DPI) and longer investment horizons, a manager at one European-based direct lender said. These initial trades tended to price at wide, double-digit type discounts, partly given the lack of a sophisticated buyer universe for these stakes, they added.

The balance of activity has tipped, however, with GPs themselves now accounting for an increasingly large slice of secondaries activity as many fund managers reach a “critical point” in their own lifecycle, dealmakers said.

“I do think in 2026, we’ve seen a dip in that activity on the LP-led side and an increase on the GP-led front,” DLA Piper’s Brennig said. “GP-led continuation vehicle deals are sort of taking more centre stage this year.”

This is partly the result of the fact that credit funds typically have a shorter lifespan compared to private equity funds, dealmakers said. Coupled with the longer durations of PE-held assets, this mismatch in time horizons has also spurred some funds to explore secondaries options.

“You are going to see more GP-led transactions,” Jeffrey Griffiths, global head of private credit at Campbell Lutyens, said. “Most direct lending funds are sitting on 50-60 assets or more and don’t control when they are exited, so they end up with a set of assets left when the fund is outside its investment period. They could end up with a melting ice cube of a fund in years 8-9 and there could even be something left by year 12.”

At the same time, fundraising dynamics and managers’ need to begin making distributions to investors ahead of the next round of fundraising are also playing a role in the strategies’ growth.

Some managers are even tying their CVs directly to new fundraising efforts with a so-called “staple” in which GPs ask investors to pour a certain amount of capital into a new fundraising vehicle alongside the existing pool of assets going into a CV, Josh Shipley, head of private credit in Europe at PGIM said.

“It helps them to raise funds into their new vehicle and provides liquidity to old investors,” Shipley added. “It’s a way to create liquidity and also a strong fundraising mechanism when you’re in the cycle.”

The existence of an already robust market for GP-led secondaries in the private equity world in Europe and the US, meanwhile, has smoothed the path for credit funds looking to quickly adapt this strategy.

Trading closer to NAV

In contrast to the earlier, discounted LP-led stake sales, however, GP-led secondaries have so far shown a tendency to trade at or close to net asset value (NAV).

Reasons for this include robust interest from secondaries buyers keen to deploy in a portfolio of performing credits at scale as well as the emergence of dedicated secondaries investors whose vehicles were designed with lower return requirements in mind, sources said.

“For some buyers, the appeal is not hugely different to a secondary in the PE space,” Teneo’s Financial Advisory CEO Dan Butters said. “It gives you the opportunity to gain scale quickly, as opposed to having to originate in what has been a highly competitive market.”

Moreover, the breadth of detail available to secondaries buyers enables more thorough due diligence than in some primary transactions and bears some resemblance to how M&A transactions are carried out, dealmakers said.

“We even see some deals priced slightly above NAV, because you are buying a performing portfolio and a known portfolio with no blind pool risk – and that is very key,” PGIM’s Shipley said.

Still, despite the appeal of secondaries from both the buyer and seller point of view, dealmakers caution that these transactions often entail complexities around issues of valuation, or even conflicts of interest.

For an industry in which valuations were traditionally opaque and based on a mark-to-issue approach, the emergence of a secondaries market in which portfolios begin to change hands will require a shift towards a more mark-to-market approach to loans, dealmakers said.

“As a consequence, you are going to start to see a convergence of lenders coming together and that will create a much more stimulating debate around valuation,” Teneo’s Butters said. “For trades taking place where one firm is going to pick up a portfolio of loans from another, valuation will be an absolutely critical part of that, and this will be the first time that valuation is being properly tested.”

Fairness opinions and some form of external validation are also set to play a role in these deals as GPs look to assuage LP concerns in transactions where they are effectively selling to themselves, dealmakers said. Others note that it is in GP’s own interests to avoid any impressions of self-dealing and maintain good relations with LPs.

“I would be flabbergasted if a GP did not treat its existing LPs in the most transparent and fair manner possible. LPs are the GP’s business and its lifeblood,” one London-based advisor said. “There are always discussions around conflicts and the different interests of GPs and LPs. However, in every fund-finance transaction we have seen, there has been very strong discipline around ensuring that existing investors are treated fairly.”

Compared to the US, Europe’s fractured regulatory regime may also prove a hurdle to some transactions, as dealmakers will need to navigate the intricacies of various tax, legal and enforcement regimes.

Still, for many direct lenders, the overarching need to either deploy or recoup capital is set to make a secondaries strategy an enticing prospect as the industry matures, while the clubbier nature of the lending landscape suggests credit secondaries activity could be just as brisk as the PE space has seen.

“The lenders are definitely more in that spread-the-risk, collaborate, and originate-together mindset… and it seems to be happening with regularity now more and more,” DLA Piper’s Matt Schwartz said. “As soon as the returns hit and it starts looking good, people will pile into the space.”