Alternative credit allocations shot up to a record 9.9% in 2020

A Gapstow report cites opportunistic allocations after the ‘dramatic’ sell-off in March 2020 and predicts interest to continue.

Demand for alternative credit from US pensions is booming and will continue its ascent, says investment adviser Gapstow Capital Partners.

Allocations into alternative credit surged to a record 9.9 percent in 2020, far outpacing the previous year, according to Gapstow’s annual Alternative Credit Allocations by US Public Pension Plans report.

Gapstow attributes the growth to “opportunistic allocations made after the dramatic market sell-off in March 2020”. The 9.9 percent net flows for alternative credit allocations in 2020 vastly outperformed 2019’s 3.5 percent and 2018’s 2.6 percent. The tally included both new investment and accelerated fulfillment of previous fund commitments.

Gapstow surveyed 40 US public pension plans with $5 billion to $80 billion current assets, which represents a large cross-section of providers of capital to alternative credit. Its findings are based on an analysis of the investment holdings and asset allocation policies of the plans.

The report also found that pension plans have 7.9 percent of their total assets invested in alternative credit. The allocations to alternative credit also increased in 2020 to 8.3 percent, a rise from 8 percent in 2019.

The volume of comprehensive plans, which Gapstow defines as holding a long-only alternative credit strategy as well as two or more additional strategies, has grown to 17 in 2020, up from 12 in 2019 and 11 in 2018, reflecting the wider adoption of credit as an asset. Those plans had an average of 14.2 percent of their total assets in alternative credit. While more plans are allocating to alternative credit, the number of plans without allocations to the asset class decreased to four in 2020, a steady decline from the five in 2019 and six in 2018.

“Public pensions’ overall demand for alternative credit will continue to grow in the United States over the next several years, regardless of market cycles,” the report said, “because alternative credit is increasingly a strategic part of their asset allocation policies, not a tactical or opportunistic one.”

Gapstow also noted that greater demand for alternative credit will increase managers’ responsibility to investors. “The adoption of a more comprehensive, sophisticated approach to alternative credit investing will require alternative credit managers to enhance their business models to address clients’ needs more fully,” it said.

“Alternative credit solutions will become more important than simply alternative credit products,” Gapstow added.

The New York City-based Gapstow is a registered investment adviser and research outfit focusing on alternative credit.