Golub Capital is boosting its trading of private credit deals, according to people familiar with the matter, the latest evidence of growing interest among some industry players in developing a secondary market for direct loans.

The firm traded about US$1 billion of private debt through the first half of the year, the people said, asking not to be named because they’re not authorized to speak publicly. Industry insiders broadly say Golub is among the most active participants in the space, which includes the likes of JPMorgan Chase & Co and others.

The buying and selling of loans remains relatively rare in the US$1.7 trillion private credit market, where most lenders typically hold debt until maturity. Still, there are signs that transactions are picking up as investors seek the ability to swiftly enter and exit positions, be it due to liquidity constraints or a desire to free up capital for new investments. In some cases, it can offer opportunities to offload more stressed credits. JPMorgan recently sought to broker trades in the debt of Pluralsight Inc, a struggling workforce development company, Bloomberg reported.

“Private credit has proliferated, it’s become so big that it’s rivaling the broadly syndicated market - you’re going to see some trading, people looking for liquidity and to de-risk,” said Chris Santana, a co-founder of Monarch Alternative Capital, a credit investment firm that focuses on purchasing debt on a secondary basis.

In an emailed response to questions, a representative for Golub said that the firm offers private equity sponsors numerous financing capabilities “including providing liquidity, primarily through new issue trading activity, to those who find this differentiated offering valuable”.

While many view secondary trading as a natural evolution of private credit, similar to the growth of the leveraged loan market over the past few decades, not everyone is convinced.

Some say it undermines the value proposition of direct lending, including the convenience of dealing with just a handful of lenders, the ability to keep details of loans private, and the price stability a lack of trading affords.

“Borrowers don’t want it because the expectation from most private credit borrowers is that they know and have a say in who holds the loan,” said Joseph Weissglass, a managing director at Configure Partners, which helps corporate borrowers obtain financing, “Lenders that plan to sell down a portion of the position generally don’t like the idea of losing control of the sell down effort because they want to know who will be in the loan with them.”

A spokesperson for Blue Owl Capital Inc, one of the biggest lenders in the business with more than US$192 billion in assets under management, told Bloomberg that the firm has no intention of creating a trading desk for private credit.

In addition to trading, Golub is also syndicating out some of the loans it originates, allowing the firm to lower its exposure to specific credits.

Golub led a roughly US$1 billion private debt facility last month backing TA Associates acquisition of Momentive Software that it then sold to other investors.

Other firms, including Antares Capital, are trading private loans on an ad hoc basis, the people familiar with the matter said.

A spokesperson for Antares said the firm has traded direct loans it’s the agent on for more than two decades.

Being able to trade in and out of direct loans is particularly appealing to investors dealing with distressed borrowers, according to Andrew Milgram, the chief investment officer of Marblegate Asset Management.

Non accruals, or loans on which lenders are at risk of losing money, have remained elevated as companies grapple with higher interest rates.

“I’ve gotten a number of calls from private credit guys who are looking to dispose of deeply troubled loans, looking for us to take their position,” Milgram said.

What’s more, the emergence of the sort of controversial financings that have proliferated in the leveraged loan market in recent years could spur investor exits, according to Monarch’s Santana. Earlier this year, Pluralsight’s private equity owners shifted assets away from its direct lenders as part of a move to raise fresh funds.

“Between all the cash flow going to pay interest, the risk of liability management transactions, and weaker operating performance, it’s a cocktail that makes you want to sell,” Santana said, speaking about private credit generally.

  - Bloomberg