OCERS aims at $400m pacing plan for DL investments

The California pension fund also recently tapped Park Square for a new $50m European direct-lending mandate, while continuing negotiations with Cross Ocean and Alcentra over fees.  

The Orange County Employees Retirement System (OCERS), which has committed about $1.08 billion to direct-lending strategies in recent years, could set an annual $400 million pacing plan to these investments.

Documents from the $12 billion retirement fund say that NEPC, the pension’s consultant, has told OCERS that it would need to pace at this level to maintain its exposure to the sleeve “given that capital will be returned to OCERS from these private lending funds as loans mature”.

The pension fund has previously announced that it will be redeeming money from the PIMCO DISCO Fund II as returns have not been up to expectations. It will also downsize one or more of its multi-strategy long/short credit hedge fund mandates, as returns there have been lower than those in more illiquid credit mandates.

The PIMCO portfolio runs to about $120 million. OCERS’ diversified credit portfolio with hedge funds has about $498 million in funds managed by Brigade Capital Management, CQS, Beach Point Capital and Tricadia Capital Management. The OCERS documents did not specify which funds were underperforming and a spokesman declined to comment.

The OCERS board also recently voted to make a new $50 million commitment to a European direct-lending fund managed by Park Square Capital Management. The pension launched a search for international direct lending managers in April and selected three finalists, Park Square and Cross Ocean Partners, with which the pension has invested previously, and Alcentra, which would be a new relationship for OCERS.

At a meeting on 12 November, OCERS approved the commitment to Park Square’s Capital Partners III fund, which is raising €1 billion overall, according to PDI Research & Analytics. The pension is still considering $50 million commitments to funds managed by Cross Ocean and Alcentra. Between the PIMCO redemption, the downsizing of the hedge fund mandates and the $400 million pacing plan, the pension fund has plenty of room to accommodate all three managers in 2016, OCERS’ meeting documents said, though the pension is negotiating with the two firms over fees.

An OCERS spokesman declined to elaborate on the specifics of the fee negotiation process, though OCERS’ original request for proposal said the pension required firms to only charge fees on invested capital, that the management fee not exceed 1.5 percent and that the performance fees have a hard hurdle rate of 5 percent annualised.

OCERS has about $550 million invested in direct-lending mandates, with about $529 million more to be called. In addition to the Park Square and Cross Ocean mandates, the pension fund has direct-lending investments with NXT Capital, Monroe Capital, Crescent Capital, Tennenbaum Capital Partners, Hayfin Capital Management, Brigade Capital, BlueBay Asset Management and BlackRock. Most of the investments were made in 2013, with the first funded mandate going to NXT’s Senior Loan Fund II at $30 million.