Lack of valuations pose risk in secondaries market
A lack of independent valuations has been highlighted as a risk in the lower mid-market for secondary buyers.
The private credit secondaries market has been growing, as investors increasingly seek early liquidity in a traditionally illiquid asset class.
Ryan McGovern, managing director and investment committee member at specialist lower mid-market investor Star Mountain, told Alternative Credit Investor that he sees strong opportunities for further growth, but warned that portfolio deterioration is a risk for secondary buyers.
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“You buy [the portfolio] at a certain price based on the valuation of the fund and its underlying assets at a certain reference date and if the valuation deteriorates after that, the discount you may have bought it at may not be sufficient to cover the deterioration in value,” he said. “That’s why it’s very important to understand the underlying portfolio assets that you’re buying into.
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“That’s part of the challenge within the lower middle-market, particularly as there is typically no third-party independent quarterly portfolio valuations done. So, understanding those underlying portfolio investments by doing as much due diligence on the portfolio before buying the LP stake is crucial and our synergistic direct private credit investing business allows us to do so.”
Private markets valuations have been under scrutiny, with regulators and central banks questioning their opacity. Earlier this year, the UK’s Financial Conduct Authority confirmed that it plans to undertake a review of private market valuations. This followed the introduction of new rules by the US Securities and Exchange Commission last year to improve the transparency of private market funds.
