Two pension funds will consider voting on whether to add a separate private debt allocation to their portfolios, according to meeting documents for both retirement plans.
The Nebraska Investment Council may add a 5 percent allocation to the asset class, while the Ventura County Employees’ Retirement Association looked at setting aside 3 percent of its book to private credit. NIC and VCERA’s consultants are Aon Hewitt and NEPC, respectively.
As part of its allocation strategy, the NIC would devote three-quarters of the new bucket, or 3.75 percent of overall allocations, to direct lending, and one-quarter to opportunistic strategies. It would not include real estate debt.
Aon Hewitt suggested that preference for direct lending investments go to corporate debt and asset-based lending focused on senior secured debt. The Chicago-based firm characterised direct lending as floating-rate loans typically $20 million-$200 million in size to companies that generally have less than $50 million of EBITDA.
The Chicago-based firm put returns for the strategy from high single-digit to low double-digit returns, and it recommended a tolerance for leverage, noting it would suggest levered senior debt rather than unlevered junior debt.
The opportunistic sub-category of the private debt allotment focuses on higher returns, possibly focused on “transient opportunities”, according to the documents. Currently, NIC has existing commitments with PIMCO’s PIMCO Bravo Fund II and Oaktree Capital Management, both of which fall within the opportunistic portion.
Outlining the pros and cons, Aon Hewitt noted “current market dynamics are favourable” for private credit, also calling it a “quality substitute for fixed income”. In the cons category, the consultant noted picking the right credit manager is “critical to success” and that investors must be OK with the funds’ illiquid nature.
For VCERA’s part, the fund is poised to adopt a reformed asset allocation that includes 3 percent to private debt. NEPC put the five-to-seven-year return assumptions for the strategy at 6.5 percent, while the firm also noted credit spreads continue to compress and are below long-term averages. With a buoyant economic backdrop, spreads could “grind lower”.
Many of the consultant’s clients have embraced private credit, notably the Arizona State Retirement System, which has a 12 percent private debt allocation target. Only three years ago, the pension fund had 3 percent of its portfolio dedicated to the asset class. Some of ASRS’s commitments include a $1.1 billion separately managed account with Cerberus Capital Management and a $750 million SMA with HPS Investment Partners.
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