PGIM and LGT Capital Partners co-led a $680 million vehicle for direct lender Tree Line Capital Partners, a day after KKR's first credit continuation fund was reported. KKR's older lending fund returned an 11% net IRR.
A liquidity tool that used to be rare in private credit is becoming routine, and a handful of large institutions have led the deals made public so far.
PGIM and LGT Capital Partners co-led a $680 million continuation vehicle for Tree Line Capital Partners, a U.S. direct lender to lower-middle-market companies, PGIM said on Wednesday. The vehicle offers a liquidity option to investors across several Tree Line funds. It holds a seasoned portfolio, primarily senior secured first-lien loans to more than 60 private-equity-backed companies.
The second in two days
On Tuesday PitchBook reported KKR's first private credit continuation vehicle, which drew more than $460 million of commitments led by Allianz Global Investors. PitchBook also reported that the fund it recapitalizes, KKR Lending Partners III, had produced an 11.0% net internal rate of return and 1.7 times invested capital as of June 30, citing KKR's quarterly filing. KKR has not announced the deal.
A few names recur. Allianz Global Investors also led Blackstone's $1 billion credit continuation vehicle and co-led a $3.2 billion one for Crescent. Now PGIM and LGT have taken the lead on Tree Line's.
Why lenders need exits
Direct lending funds are built to hold loans to maturity, but loans are often refinanced or extended, and investors want their money back on schedule. Continuation vehicles let a manager move a seasoned portfolio into a new fund. Investors who want liquidity sell; those who want to stay roll over.
The pressure for liquidity is visible elsewhere. Investors in non-traded business development companies asked to redeem $13.8 billion in the third quarter, and about $8.2 billion of those requests went unmet, according to Stanger data. Credit quality, meanwhile, is not deteriorating on one widely watched measure: Proskauer's private credit default index fell to 2.41% in the third quarter from 2.51%.
Market-building or a warning sign?
The constructive reading is that these deals show a functioning secondary market for private loans, with large institutional buyers willing to price seasoned portfolios and give investors a choice.
The cautious reading is that neither deal disclosed its price relative to the loans' stated value, the buyer base is narrow, and a rising number of continuation deals alongside unmet redemption requests suggests investors want liquidity faster than portfolios can provide it.
What to watch
Pricing disclosures on credit continuation deals, whether new buyers join the small group leading them, fourth-quarter redemption requests at non-traded BDCs, and KKR's third-quarter results on Nov. 9.