Private credit managers price continuation vehicles below par as distributions dry up

Private credit managers closed at least five continuation vehicles in the past twelve months at prices below nominal par, a structural admission that distribution-to-paid-in capital ratios no longer move without engineering. The transactions, which ranged from $400 million to $1.8 billion in gross asset value, allowed general partners to book realized proceeds while keeping the same loans on their balance sheets under new fund structures. The pricing—between 92 cents and 98 cents on the dollar—reflects what secondaries desks already know: institutional LPs will accept a haircut to show liquidity this year.

The mechanic is clean. A manager takes a portfolio of middle-market loans originated in 2019 or 2020, when spreads were tight and covenant packages were loose, and offers existing LPs a choice: sell your stake at a modest discount to a secondaries buyer, or roll into a new vehicle with a three-to-five-year extension and no fresh capital call. Most LPs take the cash. The manager reports the transaction as a distribution, which lifts the fund's DPI from 0.6x to 1.1x or better, depending on the size of the continuation vehicle relative to the original fund. The loans never leave the manager's portfolio companies. The secondaries buyer—typically a dedicated continuation fund or a large pension with co-investment capacity—steps into the LP position at a price that implies 8% to 11% net IRRs if the loans pay out at par over the extended term.

The pattern signals two things. First, private credit distributions have stalled. Managers who marketed 2018-2021 vintage funds on projected DPIs above 1.4x by year five are now sitting on portfolios where 30% to 40% of the underlying borrowers have requested maturity extensions or covenant amendments since rates moved above 5%. Refinancing windows that were supposed to open in 2023 remain shut, and the loans that do pay off are often the highest-quality credits that LPs would prefer to keep. Second, continuation vehicles are no longer tools for managers to retain trophy assets—they have become liquidity valves for an asset class that promised faster capital return than buyout funds and is now delivering slower.

The bifurcation in secondaries pricing is sharp. Plain-vanilla LP stake sales in private credit funds trade at 82 cents to 88 cents on net asset value, a 600-to-800-basis-point discount steeper than last year. Continuation vehicles, by contrast, price closer to par because the manager curates the portfolio and the buyer receives governance rights that approximate a co-investment. That 10-to-15-point spread explains why managers prefer continuation structures even when the optics—selling assets to themselves at a discount—invite scrutiny. For the LP base, the choice is between a 15% haircut in the open secondaries market or a 5% haircut in a manager-led process with a term extension they did not originally sign up for.

Family offices and insurance allocators should watch three things over the next six to nine months. First, whether continuation vehicle pricing holds or compresses further as more managers test the market with portfolios that include borrowers trading below par on the credit-default-swap curve. Second, whether any large pension systems begin publishing DPI figures that separate manager-led secondaries from true realizations, which would force disclosure standardization across the industry. Third, whether covenant-lite loan portfolios originated in 2020 and 2021 start showing material impairments as borrowers miss EBITDA targets originally underwritten at 4x to 5x leverage but now effectively levered at 6x to 7x on a mark-to-market basis.

The managers running these processes are not improvising. They are responding to LP pressure for cash and using the secondaries market as it was designed—to provide liquidity when the underlying assets cannot. The pricing is the message. When a portfolio sells at 94 cents in a continuation vehicle, the buyer is pricing in either a default rate the manager has not disclosed or a terminal value below the stated NAV. Either way, the 1.4x DPI that appears in the next quarterly report is accounting, not economics.