The Indiana Public Retirement System plans to invest five percent in private credit strategies, as part of its fixed income ex-inflation linked portfolio, which currently makes up 24 percent. The board of the $30 billion system approved the change at a meeting last Friday (26 June), amid other tweaks to its asset allocation policy. The changes, which were recommended by the pension’s investment consultant, Verus, were made to improve risk-adjusted returns.
The retirement system is increasing its non-inflation-linked fixed income portfolio to 24 percent from 22 percent, while dropping its inflation-linked fixed income portfolio from 10 to seven percent. The ex-inflation linked portion, which includes private credit strategies, is only going up by two percent, the pension will allocate five percent overall to private credit strategies, while cutting TIPS (Treasury-Inflation Protected Securities) and other non-inflation linked bond investments, according to Indiana’s board meeting materials.
“Private credit has attractive risk / return characteristics but is illiquid and would take time to build out,” said the pension’s meeting documents. “Private credit allocation could function as a ‘release valve’ for current overweight to private equity, requiring less aggressive funding to reach target weight,” added a presentation from Verus to the board.
Indiana already invests with some private credit managers and funds, although it hasn’t previously stated a target for the asset class. Earlier this year, the pension invested $250 million in a separate account with Oak Hill Advisors and another $100 million in a broad credit mandate with Oaktree Capital Management.
Other changes to the new asset allocation policy include raising the risk parity allocation to 12 percent from 10 percent, as well as slightly dropping real estate but half a percent to 7 percent. The new asset mix should help the pension achieve 6.44 percent 10-year returns, up from a current projected yield of 6.25 percent over ten years.