New Jersey revamps rules to boost its credit bucket

The public pension’s global credit allocation cap moved up from 7% to 10%.

New Jersey Division of Investment has adapted its portfolio regulations to expand the pension plan’s reach into global credit, which will include increased allocations to alternative lenders.

The Trenton, New Jersey-based retirement fund will now be allowed to invest in new types of private credit and set aside more for the asset class, a spokesman told Private Debt Investor. The pension plan declined to comment further on the decision.

The State Investment Council, which oversees the pension plan, changed the definition of “global diversified credit” on its books in order to expand the plan’s investment strategy to be “more inclusive of the opportunity set in the credit markets”, according to agenda materials for its July meeting.

The previous definition limited the pension’s investments to bank loans, mezzanine debt, structured credit, and commercial mortgage backed securities, the documents showed.

However, after the meeting last week, that definition expanded to include bridge financing, debtor-in-possession financings in bankruptcy cases, opportunistic credit and senior loans. The pension plan will also now be able to allocate capital to equity stakes in publicly traded firms that invest in credit, including business development companies.

The Division of Investment will simultaneously increase its credit allocation limit, from 7 percent to 10 percent of its portfolio. Though the global diversified credit allocation target of 5 percent will remain unchanged, “these amendments would simply give the Division and the Council added flexibility going forward”, the agenda materials read.

The global diversified credit allocation comprised 4.7 percent, or roughly $3.52 billion, of the total pension fund as of 31 May, according to its latest investment report. The plan’s total fund was valued at $75.02 billion as of that date.

The GDC portfolio at the pension plan has showed strong results over the last seven years, the documents also showed. In the year ending 30 April, the Division of Investment showed an 18.5 percent return; a 9 percent return over the three years ending that date; a 12.3 percent return over five years; and a 11.1 percent return over seven years.

The Garden State investment council also highlighted the credit portfolio’s attractive terms as well. “The Division has frequently been able to negotiate below market terms on [global diversified credit] investments,” the agenda read. Several such investments have management fees paid on invested capital, versus committed capital, and have a rate of 1 percent or lower, along with a carried interest rate below 20 percent, which remains the norm in the private equity world.

During the same meeting, the investment council approved a commitment up to $100 million to Glendon Opportunities Fund II, which focuses on distressed debt financings in North America and Europe.

Launched in May, the Glendon Opportunities Fund II has already garnered commitments from several pension funds, including the Pennsylvania State Employees' Retirement System ($150 million), Los Angeles County Employees' Retirement Association ($100 million), and Los Angeles City Employees Retirement System ($40 million), PDI data showed.

A Glendon spokesman declined to comment.