Not all pension funds are completely sold on private credit

Multiple pension funds have decreased their focus on private credit in recent months, bucking the trend of limited partners’ broadly embracing the asset class.

Last week, the Los Angeles County Employees’ Retirement System (LACERS) addressed implementation plans for its private credit programme. Plans approved in August would have seen up to $670 million, or 3.75 percent of the pension fund’s assets, devoted to the asset class, and added an additional credit manager to its portfolio, as previously reported by Private Debt Investor.

The pension fund felt it may not be able “fully fund” the original mandate at this stage of the credit cycle and wants to implement it over a longer period of time to help reduce the additional risk, according to 28 May meeting documents. Consultant NEPC proposed committing to $200 million during 2019 to two evergreen credit funds and operate a pacing plan to commit at least $80 million to funds spanning each vintage year from now on.

Although private credit is usually seen as a less risky alternative to equity, LACERS is not the only pension fund that is turning away from the asset class to mitigate risk.

In April, the Denver Employees Retirement Plan also decided to decrease in its allocation to private debt from 9 percent to 8.5 percent after it updated its strategic plan to stablise portfolio risk, and the Orange County Employees Retirement System cut its private credit allocation by 2 percent last December in similar vain.

While these changes may seem like a potential warning signal to general partners, the majority of information and data suggests the opposite to be true.

Bucking the trend

Tim Atkinson, a principal at Meketa Investment Consulting, told Private Debt Investor that he hasn’t noticed a pullback from private credit from the investors he works with. Instead, Atkinson has noticed a steady increase of investors looking to dive into the strategy for the first time or increase their exposure over the past couple of years.

PEI Perspectives 2019, an annual LP survey performed by sister publication Private Equity International, found that many LPs were keen on their current allocation to the asset class.

Some 88 percent were either happy with their exposure or wanted to take on more: 59 percent of respondents wanted to maintain their allocation, while 29 percent of respondents wanted to increase it. Only 12 percent said they wanted to decrease their exposure.

That 88 percent figure is relatively unchanged from the previous year’s survey. In 2018, 87 percent of LPs interviewed wanted to either maintain or increase their investments into private credit. In 2017, the survey, which asked slightly different questions, found that more than 55 percent of LPs wanted to increase or maintain their private credit allocations.

In addition, the 2019 survey also found that 43 percent of LPs were looking to increase the amount of credit managers they work with.

“I think investors that have gotten comfortable with an initial investment in private debt a few years ago are starting to build out and expand on allocations,” Atkinson said. “There are clearly a lot of investor concerns, specifically with regard to credit quality, documentation or structuring, and valuations, but I do not see that impacting actual allocations yet.”

Over the last few years, there have also been a number of LPs that have increased their allocation to the strategy too. In April, the Texas County and District Retirement System increased its allocation to strategic credit by 4 percent. The State of Wisconsin Investment Board voted on 12 March to increase its private debt/equity allocation by 1 percent.

While some limited partners are turning away from private credit, the general trend still points toward the asset class as an area of growing investor appetite.