Arizona lays out private, opportunistic debt returns

The Arizona State Retirement System revealed that its opportunistic debt managers made a loss in 2015, while its private debt portfolio posted a gain.  

The Arizona State Retirement System’s opportunistic debt portfolio posted 3.1 percent in losses last year, while its private debt portfolio gained 8.5 percent, the pension fund said.

Oaktree Capital Management’s Opportunities Fund VIII posted the worst annual numbers for the pension’s opportunistic debt portfolio, which houses distressed and special situations strategies, losing 13.3 percent. Avenue Capital Group’s Europe Special Situations II fund delivered the best, showing a 10.6 percent gain.

The portfolio also includes investments in funds and separate accounts with Ares Management, BlackRock and GSO Capital Partners, among others.

Since inception in 2008 until 31 December 2015, Avenue-ARS European separate account mandate posted the biggest loss (9.9 percent), while BlackRock Credit Investors II recorded the highest gain (15.7 percent).

Since 2008, the portfolio as a whole posted 9.3 percent net IRR.

ASRS’s private debt portfolio, which contains direct lending, mezzanine and real estate debt strategies, posted a healthy performance in 2015, returning 8.5 percent last year and 10.9 percent since inception in July 2012. The portfolio has a 10 percent target.

Last year, the pension fund raised its private debt target to 10 percent from 3 percent and has been investing in more funds or handing out additional commitments to existing managers.

Over the past year, ASRS invested $1 billion more into private debt and estimates it will reach the target in the first half of 2017. New commitments included:

 – A $500 million investment in AP Mezzanine Partners III, a fund-of-one partnership with HPS Investment Partners (formerly known as Highbridge Principal Strategies);

– A $100 million increase to Cerberus ASRS Credit Opportunities Fund to $1.1 billion;

– A $100 million addition in the RFM Cactus Holding Company (originally a $500 million separate account with Related Funds Management);

– A $100 million raise to the HPS Cactus Direct Lending Fund, a direct lending partnership with Highbridge that was originally a $500 million investment;

– A $100 million increase to Monroe Private Credit Fund A to $450 million;

– An additional $50 million cheque to the H/2 Core Real Estate Debt Fund (on top of $350 million);

– A White Oak Global Investors’ mandate rose from $160 million to $210 million.

The $32 billion ASRS also revealed that it recently partnered with Ares to create a new $300 million mandate, the Ares Saguaro Income Opportunity Fund, which will invest in BDCs and commercial mortgage REITs.

Describing the pension fund’s penchant for private debt strategies in the documents, ASRS said: “Private debt offers the most attractive opportunity in the fixed-income markets with double-digit yields readily available for investors willing to accept illiquidity. We believe the market opportunity has recently improved due to a number of factors, including the piecemeal sale of GE Capital, a reduced capacity to lend by business development companies, the enforcement of leveraged lending guidelines by banking regulators … and a materially less receptive new issuance market for high-yield bonds and tradable leveraged loans.”