[Edaily Marketin YunJi Kim Reporter] The way funds are recovered from corporate loans in the global private lending market is changing. Private lending is an investment method in which private investment institutions, such as private equity fund managers, lend money directly to companies and receive interest, rather than banks. Recently, there has been a series of transactions in which lenders transfer loan assets to other investors to recoup their investment, rather than waiting for the company to repay the debt. This effectively opens up a new avenue for recovering funds in the private lending market, where capital was often tied up for long periods once invested.

Loans Transferred to New Funds… Major Asset Managers Make Successive Transactions

According to industry sources on the 28th, major global private equity fund (PEF) managers are engaging in a series of transactions to transfer loan assets from existing funds to new ones. This is the result of aligned interests between existing investors—who seek to recover their capital without waiting for companies to fully repay their loans—and new investors—who aim to secure loan assets already generating interest income.

The most recent firm to engage in such a transaction is KKR. KKR has completed its first continuation fund (CV) transaction—a method of transferring assets from an existing fund to a new one to continue investments—by moving the loan assets from a private credit fund established in 2017 into a new fund. The new fund has raised over $460 million (approximately 611.4 billion won), with Germany’s Allianz Global Investors participating as a major buyer.

Through this transaction, existing investors now have two options: △ to sell their holdings and recover their investment, or △ to roll over their investments into the new fund. The deal is viewed as beneficial for both the fund manager and investors, as it allows KKR to return capital to existing investors without having to urgently dispose of the loan portfolio.

This does not mean, however, that the existing fund’s investment performance has been poor. According to KKR’s disclosure materials, as of the end of June, the fund’s net internal rate of return (IRR) stood at 11.0%, and its multiple on invested capital (MOIC) was 1.7x. However, it is explained that, regardless of investment performance, there is a consistent demand for redemptions from institutional investors seeking to secure new investment capital or adjust their asset allocations.

Prior to KKR, other major asset managers also completed similar transactions. Last January, Crescent Capital raised a $3.2 billion (approximately 4.2784 trillion won) CV by transferring loan assets from a fund established in 2016. At the time, it was regarded as the largest transaction in the private debt secondary market based on a single fund portfolio. In addition, Blackstone secured approximately $1 billion this month and is proceeding with a transaction to transfer loan assets from a fund established in 2022 to a new fund.

Last Year’s Transaction Volume Surpassed in Just Six Months… Changes in the Exit Strategy

As major asset managers are engaging in transactions one after another, the private debt secondary market is also growing rapidly. According to global investment bank Evercore, the volume of private debt secondary transactions last year reached approximately $20 billion (about 26.784 trillion won), an 83% increase from the previous year’s $10.9 billion (about 14.5972 trillion won). In the first half of this year alone, $20.4 billion in transactions were recorded. This means that in just half a year, the transaction volume has already surpassed last year’s total.

What is particularly noteworthy is who is driving these transactions. Transactions led by asset managers—which accounted for about 60% of the total transaction volume last year—rose to 83% in the first half of this year. In terms of value, this amounts to $17 billion (approximately 22.7494 trillion won). In essence, transactions in which asset managers directly transfer assets to new funds are driving market growth, rather than transactions in which existing investors sell their fund shares.

Industry analysts attribute this largely to the fact that the time for capital recovery is approaching for private credit funds established long ago. According to Evercore, private credit funds established between 2018 and 2021 are entering the exit phase. As situations increase where money lent to companies remains outstanding but must be returned to investors, more asset managers are turning to new funds.

Fortunately, the number of investors looking to acquire these assets is increasing. Evercore estimates that uncommitted investment commitments in the private debt secondary market totaled approximately $31 billion in the first half of this year. More than 90% of buyers surveyed said they plan to raise additional capital within the next year. This means that not only are investors looking to recoup their money, but those looking to invest it are also lining up.

The market expects this trend to continue for the foreseeable future. Global investment banks such as Lazard stated in their market outlook reports for this year, “As private credit managers increase new transactions and funds specializing in this sector flow in, the private credit secondary market is expected to grow faster than other alternative investment sectors,” adding, “Continued demand for liquidity and the solid fundamentals of loan assets will underpin private credit secondary transactions.”