ASRS bets on private debt over US high yield

The retirement plan’s private debt allocation is larger than its private equity bucket. 

The Arizona State Retirement System upped its private debt exposure by 2 percent at its February meeting, according to a draft of meeting minutes released with materials for April’s meeting.

The $34.6 billion pension fund boosted its private debt portfolio allocation to 12 percent from 10 percent, a target it in February 2015 when more than tripled its target, which at the time was 3 percent. The committee also voted to expand the acceptable range for private credit from 8 percent to 16 percent from 8 percent to 12 percent.

Currently, the asset class makes up 9.35 percent of its portfolio, as of 11 April, which is larger than the Phoenix, Arizona-based retirement plan’s 8 percent allocation to private equity. ASRS also holds 3.77 percent of its investments in opportunistic debt.

Alongside upping the ante on private debt, the fund reduced its US high yield target to 2-4 percent and set a target range for that strategy at 0-6 percent. Some 3.1 percent of ASRS’ assets are dedicated to high yield as of 11 April.

Meeting materials from February showed that Karl Polen, the pension plan’s chief investment officer, recommended the shift because increasing its commitment to private debt at the expense of US high yield would boost returns and reduce volatility.

A presentation to ASRS read: “We believe private debt offers the most attractive opportunity in the fixed income markets with high expected net returns available for investors willing to accept illiquidity and a delayed deployment of capital.”

During the February meeting, ASRS also approved a $25 million commitment to an unspecified manager.

Private debt investments have consistently outperformed the benchmark ASRS set for category, which is the Standard & Poor’s/Loan Syndications & Trading Association’s leveraged loan index plus 2.5 percent.

Private credit’s one- and three-year internal rates of return were 10.8 percent and 10.5 percent, respectively, as of 30 September. The one-year IRR exceeded the benchmark by 2 percent, while the three-year IRR surpassed it by 4 percent.

The IRR since inception, or July 2012 when ASRS created its private debt bucket, was 11.1 percent, clearing the S&P/LTSA index-based metric by 4.5 percent.

The February presentation outlined ASRS’s private debt commitments, which included $4.97 billion divvied among 11 managers. The largest commitment is a $1.1 billion mandate to Cerberus for a separate account that targets secured loans to companies backed by private equity firms.

The second and third largest were $600 million allocated to Related Companies and HPS Investments. The Related commitment targets certain tranches of Freddie Mac-sponsored securitisations and mezzanine debt real estate financing. The HPS fund-of-one invests in secured loans to companies without a private equity sponsors.