Early innings

With private debt still an emerging asset class among US public pension funds, managers would be helping themselves if they were better at educating investors.

This week, PDI took to the Windy City to meet the plethora of debt managers based there and to catch up with investors at The Pension Bridge’s Private Equity Exclusive conference. The event was private equity focused, but included several credit discussions, demonstrating growing awareness of the strategy.

On the sidelines, though, public pension fund representatives revealed that many are still unfamiliar with the differences in various private credit instruments and strategies, even while they explore investing in the sector. 

On the way to the networking event (a White Sox game) one pension fund trustee confided that immediately following a panel dedicated to mezzanine, the instrument was still a mystery. That particular discussion quickly veered off course into unitranche and other topics, which explains some of the confusion. 

Tangents notwithstanding, it’s clear that some investors don’t know much about the market. And managers are proving less than effective at helping them get to grips with it. Among private debt experts, it’s still an insider’s game with people in the know failing to explain the nitty gritty to less familiar investors.

Some large debt managers tend to boast about having “more sophisticated” investors, such as sovereign wealth funds, insurers and foundations. Good for them.

In the US, however, to legitimise a strategy as a distinct and investible asset class, managers need a large book of business from more transparent large public pension funds. Not least because the whole industry notices when a pension fund publishes investment information which includes a large cheque for a debt fund or formalises a private credit allocation.

Some, like the New Jersey State Investment Council, the Pennsylvania Public School Employees Retirement System and the Arizona State Retirement System, have been building sizeable allocations in the space. 

There are 3,998 US public pension funds with a combined $3.3 trillion cash and investments at the end of 2013, according to the US Census Bureau. Of those, 176 invest in private debt, according to PDI Research & Analytics. 

In terms of the totals, private debt investors are a tiny proportion, but the curiosity is there. And if the asset class is to grow, these pensions’ representatives need better education.

Several debt managers that PDI met in Chicago agreed that education on private debt is rarely well presented in one place, but added that they have invited investors in for education sessions and are trying to improve understanding.

The Pension Bridge event had around 300 attendees with around half of that number making it to the White Sox game. Similar gatherings, where at least half are public pensions interested in private debt – such as the PDI Forum in New York in the autumn – present such opportunities. While PDI’s event is not exclusively public pension fund focused, the conference will be well attended by different investors, as it was last year. 

The heavy hitters among the managers going should take this opportunity to educate investors, rather than view it as an insiders’ retreat.