Arizona set to OK upping of private debt allocation

The Arizona State Retirement System is poised to formally sign off on upping its private debt allocation target from 10 percent to 12 percent, a change offset by trimming its exposure to the US high yield market.

The Phoenix-based pension fund’s board backed the changes in February though the board lacked a quorum to formally sign off on the issue, according to materials for Friday’s meeting. Though ASRS made the change effective in April, the board is being asked to demonstrate approval from the requisite number of its members.

The portfolio change put the private credit investment goal even further ahead of the retirement plan’s allocation to private equity, which currently stands at 8 percent and would not change under the proposed alterations.

The updated portfolio configuration also expands the private credit target range from 8-12 percent to 8-16 percent. Currently, ASRS aims to have private equity make up 6-10 percent of its investment mix, which also would not change under the new portfolio numbers.

The fund has made large allocations to the asset class, including six separate accounts larger than many credit funds. Those include the $1.1 billion to the Sonoran Private Credit Opportunities Fund with Cerberus Capital Management and the $750 million Cactus Direct Lending Fund with HPS Investments, which target deals with and without private equity sponsors, respectively.

Since its creation in July 2012, the pension fund’s asset class allocation has returned 11.5 percent, which exceeded the category’s benchmark – the Standard & Poor’s/Loan Syndication and Trade Association’s leveraged loan index plus 2.5 percent – by 4.3 percent. ASRS’s private credit investments have also outperformed the total pension fund by 1.9 percent.