Kern County’s private debt allocation underweight

The Bakersfield, California-based pension voted to increase its exposure last July.

The Kern County Employees Retirement Association's private credit allocation is trailing its target allocation for the asset class, documents from last week's board meeting showed.

Private credit currently accounts for 1 percent, or roughly $38 million, of its $3.8 billion portfolio. This is well below its target allocation of 5 percent, or $190 million, for the asset class, based on the latest available data.

The to-date book value was not available at the time of publishing, and the firm was not immediately available to provide an updated number or comment.

The pension board added a private credit allocation goal of 5 percent last July, as Private Debt Investor previously reported. Fixed-income securities continue to make up the largest portion, or 29 percent, of KCERA's investments, with private equity set for 5 percent and hedge funds targeting 10 percent.

Verus, the consulting firm and author of the presentation, predicts a 6.5 percent 10-year return on KCERA's private credit allocation.

That firm also predicted strong returns of 6.5 percent for not only KCERS, but all investors in private credit over the next ten years, projecting potential high yield returns on top of a two percent illiquidity premium.

Verus cited the fluctuations of the US dollar and rising interest rates for the boosting its return predictions in the overall credit market in the next decade.

“Given the relatively higher yields in the US, the dollar is expected to depreciate against most currencies over the next 10 years,” the presentation read. “This positive currency effect added 0.6 percent to our global credit return forecast and 2.2% to our international equity forecasts.”

Prior to the KCERA presentation, The Seattle-based investment consultant Verus has been recommending new private credit allocations, or raising existing targets, to several clients to boost returns recently.

Last June, the consulting firm assisted Fresno County Employees' Retirement Association start a search for a separate account manager to boost the $ billion California pension's underweight private equity and credit allocations, from roughly 4 percent to its target 14 percent. And last March, the trustees of the $1.2 billion Tulare County Employees' Retirement Association approved a 5 percent target following a recommendation from Verus, translating to about $60 million of the total pension fund.