Employees Retirement System of Texas solidifies opportunistic credit strategy

The Employees Retirement System of Texas (ERS) has voted to enact a new opportunistic credit strategy.

The Austin-based pension fund approved a motion at its 6 March meeting to update its tactical allocation plan for the strategy, effective immediately, according to public meeting documents. This new plan will allocate up to 3 percent of the fund’s portfolio to opportunistic credit across its external credit, real estate and hedge fund strategies.

“The strategy is completing our ability to invest in different private credit investments,” said Sharmila Kassam, ERS’s deputy chief investment officer. “We do have private credit in other portfolios, but this allocation will include credit strategies that don’t fit nicely [in other portfolios].”

The motion passed through the pension’s investment committee and pension board unanimously.

The strategy will focus on short-term debt solutions with a hold period of five years at most, which may change in the future though. ERS is looking to target a weighted return of at least 6.5 percent for the strategy.

The pension fund does not intend to invest more than 1 percent, or $270 million, toward the strategy during 2019. The documents stress that hitting the 3 percent allocation isn’t the goal and that the objective instead is to focus on meaningful investments within that target.

“The teams are not required to make any allocations to the strategy and should recommend an investment only when they have strong conviction about a strategy,” the report said.

This update is meant to solidify the pension fund’s opportunistic credit strategy from 2017, which allocated 2 percent of the portfolio to opportunistic credit across private credit and real estate strategies. The plan was drawn up that year with the potential to raise the allocation to 3 percent in 2019 or 2020.

This new strategy will encourage collaboration across the different asset class teams and help create a bucket for all its private credit investments, Kassam said.

ERS has already made multiple commitments to opportunistic funds, including a commitment of $50 million to the Torchlight Debt Opportunity Fund VI and $30 million to KSL Capital Partners Credit Opportunities Fund II.

“We feel that there are a lot of opportunities in the credit space that will provide income and can be done in a risk-adjusted manner with very attractive returns, and predictable outcomes,” Kassam said.

ERS was founded in 1947 and manages a pension fund with more than $30 billion of assets under management.