The $34 billion Arizona State Retirement System (ASRS), which voted to increase its private debt allocation to 10 percent from 3 percent in February, has now shared more information about its approach to private debt investments, the managers it employs and how it plans to continue funding the allocation. In its 22 June investment committee meeting materials, the pension plan said that its Investment Management Division (IMD)’s house view is that “private debt offers the most attractive opportunity in the fixed-income markets with double-digit yield readily available for investors willing to accept illiquidity. The market opportunity is principally driven by regulatory constraints that make it unattractive for banks to hold illiquid loans or other debt of below investment grade quality.”
The ASRS private debt portfolio is currently 4.5 percent invested towards its 10 percent target, which can have an 8-12 percent range. The brief is spread across 10 lending strategies, with five managers handling US corporate loans and targeting unique areas of the middle market. One US corporate manager is focusing on larger companies, while one firm oversees European middle-market lending. Two managers are handling real estate finance and one is following an asset-backed strategy. ASRS aims to invest in “fund-of-one” partnerships with managers so it can tailor the terms to its liking. The customized aspects could include scalability, termination rights, superior fees, investment restrictions and leverage constraints, the committed documents said.
So far this year, Arizona has increased its Cerberus ASRS Credit Opportunities fund to $1 billion from $600 million. It also committed an additional $200 million in the RFM Cactus Holding Company account, a separate account with Related Fund Management that was initially funded at $300 million. The retirement fund also made new investments of $500 million in the Highbridge Principal Strategies-Cactus Direct Lending Fund, $350 million in the Ares Cactus Private Asset Backed Fund and $350 million in the Monroe Private Credit Fund A. ASRS has $401 million soon going to a European private lending partnership scheduled to close in June, which it couldn’t yet name as contracts are pending.
When all these investments are finalized and the capital is put to work, the pension fund will have 11 percent invested in private debt, achieving its target for the asset class. Its other private debt relationships include a $350 million account with H/2 Core Real Estate Debt Fund, $221 million with the Highbridge Principal Strategies – AP Mezzanine Partners II fund, $160 million in a separate account with White Oak Global Advisors and $114 million in a Blackstone GSO Capital Solutions fund.
The pension also has a separate opportunistic debt allocation, where it currently has 2.9 percent invested, although there is no specific target for the portfolio (it has a range of 0 to 10 percent). The IMD house view is that “opportunities exist in select fixed-income markets (primarily distressed debt) to achieve outsized returns or generate expected returns that exceed other fixed-income asset classes in the SAAP (Strategic Asset Allocation Policy).” ASRS has $1.2 billion of commitments (representing about 3.4 percent of the total fund) in ongoing opportunistic debt partnerships and $400 million in partnerships that are in liquidation.
The opportunistic debt managers making new investments include the GSO Cactus Credit Opportunities Fund, which is running a $350 million mandate; the Avenue ASRS Europe Opportunities Fund & Avenue Europe Capital Partners III, which handles a $350 million portfolio; the OZ (Och-Ziff) Credit Opportunities Fund that runs $300 million; and the Fortress MSR Opportunities Fund II, which ASRS invests $200 million in. The funds in liquidation include the Avenue Europe Capital Partners II fund, which has a $186 million account; the Oaktree Opportunities Fund VIIIb, which handles $149 million; The Oaktree Opportunities Fund VIII that runs $29 million, and the TCW Capital Trust, which manages $25 million.
The opportunistic debt portfolio has returned 11.46 percent net IRR since inception, while the private debt one delivered 13.1 percent net IRR since inception. The pension fund has also outlined individual manager performance in its 22 June meeting documents.