Private credit AUM crossed $1.6 trillion across US and international markets by mid-2024, according to data from major alternative asset research providers. The asset class has compounded at roughly 15% annually for the better part of a decade. And yet, if you need to exit a position in a private credit instrument under $50 million face value before maturity, your realistic options are: wait, negotiate a bilateral transfer that may take four to six months, or accept a distressed-pricing discount. Secondary liquidity, for most of this market, is effectively zero. We spent a long time trying to understand why — and what it would actually take to fix it.
Why Secondary Markets Haven't Developed Naturally
Public bond markets solved liquidity through standardization and intermediation. Treasuries, investment-grade corporates, and even high-yield bonds have enough standardized documentation, transparent pricing benchmarks, and broker-dealer market-making infrastructure that a buyer and seller can transact in hours.
Private credit never developed those conditions. Each deal has bespoke documentation — term sheets, credit agreements, subordination provisions — that requires legal review on both sides of any transfer. There is no standardized pricing reference; NAV is calculated monthly or quarterly, and even that calculation involves discretionary assumptions. The investor base is small and often not in continuous contact with each other. And broker-dealer intermediation requires minimum deal sizes where the fee economics work — in practice, that floor is somewhere around $25–50 million for most brokers who will touch private credit paper.
Below that floor, liquidity is a social problem masquerading as a market problem. You either know someone who wants your position, or you don't. Legal counsel needs to review the transfer on both sides. The transfer agent needs to update the cap table. The fund admin needs to reconcile the transaction. None of these steps are automated, and none of them are fast.
The Structural Barriers Are Operational, Not Regulatory
Here is a distinction worth making carefully. The common assumption is that private credit lacks liquidity because of regulatory restrictions — that it is fundamentally locked up for compliance reasons. That is not quite right.
Reg D and Reg S instruments can transfer. The restrictions are on who can receive them — verified accredited investors, or non-US persons under Reg S — not on whether transfers can happen at all. The operational barriers are what make secondary transactions slow and expensive:
- Fragmented cap table records. Buyer and seller both need to verify current ownership and instrument terms. If the cap table lives across a transfer agent database, a fund admin spreadsheet, and the GP's own records, assembling the true current state takes time.
- Redundant compliance checks. Each secondary transaction requires re-verifying the buyer's accreditation and AML status from scratch, even if they cleared the same fund's onboarding six months ago under a different instrument.
- No discovery mechanism. Buyers and sellers cannot find each other. There is no aggregated indication-of-interest layer for private credit positions. You are relying on relationship networks and placement agent calls.
- Manual settlement. Even after buyer and seller agree on price and terms, closing a secondary transaction requires legal docs, wire confirmation, and manual cap table updates — typically two to four weeks even when both parties want to move quickly.
What Tokenization Changes at the Infrastructure Level
The on-chain approach does not change the legal structure of a private credit instrument. A tokenized term loan is still a term loan. What it changes is the operational plumbing around that instrument — and specifically the four barriers we listed above.
Cap table. On-chain, the token ledger is the cap table. There is no reconciliation problem because the ledger updates atomically with each transfer. The fund admin, the GP, and any credentialed auditor can read the same state at any moment.
Compliance checks. ERC-3643's identity registry holds investor attestations on-chain. When a buyer wants to purchase a token in a secondary window, the smart contract checks whether the buyer's address holds a current accreditation attestation and passes the issuer's eligibility rules before executing. If the attestation is current from a prior deal on the same compliance infrastructure, the check takes milliseconds. No manual re-KYC required.
Discovery. A tokenized secondary window can aggregate indications of interest from all whitelisted investors simultaneously. The issuer opens a window — typically a defined period, say 72 hours — during which holders can post bid or ask prices. Other whitelisted investors see the aggregate order book and can match. This is not public price discovery in the exchange sense; it is private price discovery within a controlled, compliant pool. But that is exactly what private credit secondary needs.
Settlement. Compliant secondary trades settle at the smart contract layer. The token moves from seller wallet to buyer wallet atomically; the cap table updates in the same transaction. Legal docs were executed at the original subscription; the secondary transfer documentation is generated programmatically. Settlement time: minutes, not weeks.
The Economics of Smaller-Size Secondary Markets
Consider a $15 million term loan originated by a specialty lender to a mid-market manufacturer. Under the current model, if an LP wants to sell their $2 million position, the economics don't support broker-dealer involvement. A 150-basis-point fee on a $2 million transaction is $30,000 — which may not even cover the legal review costs, let alone represent a viable commission for a broker. So the LP is stuck.
With a tokenized secondary window, the marginal cost of facilitating that transaction approaches zero once the compliance infrastructure is in place. The issuer incurs gas fees (trivial on most EVM chains at current rates) and whatever platform fee applies. The buyer and seller both saved weeks of back-and-forth. The $2 million position is no longer illiquid by default — it is illiquid only when there are no willing buyers in the whitelisted pool, which is a very different problem.
We've seen funds use this framework to price new primary issuances more aggressively, because they can credibly tell LPs that a liquidity window will be available at 12 or 24 months. The liquidity premium they were previously paying implicitly through higher yields or lower subscription prices converts to a direct negotiation with LPs who can now model a potential exit path.
What This Does Not Solve
Secondary liquidity for private credit is not a fully solved problem even with on-chain infrastructure. A few honest limitations:
Whitelisted investor pools are still small relative to public markets. If you have 60 whitelisted investors on a deal and none of them want to buy your position, the secondary window is academic. The liquidity improvement is proportional to the depth of the investor pool — which is a distribution problem, not a technology problem.
Pricing is still opaque. A secondary window gives you price discovery within the whitelisted pool, but it does not give you a public reference price. LPs negotiating at arm's length still need to agree on what the instrument is worth, and that conversation starts with the fund's most recent NAV statement — which may be 90 days old.
And the legal structure of the underlying instrument still matters. A tokenized instrument with complex subordination provisions, PIK interest components, or cross-default clauses is not necessarily easier to sell in a secondary window just because it is on-chain. The token simplifies the mechanics; it does not simplify the credit analysis.
What we can say with confidence is this: the operational barriers that have made small-size private credit secondary transactions economically impossible to execute are solvable through on-chain infrastructure. Not perfectly, and not instantly — but practically and measurably. That is a different claim than "tokenization solves private credit liquidity," which is too broad to be useful. The claim we stand behind is narrower and more defensible: for instruments where the buyers exist but the mechanics don't, on-chain infrastructure removes the mechanical barriers.
