Orange County approves $50m direct lending commitment

  The $10.6bn retirement system opted to invest in domestic direct lending in-lieu of its sub-allocation for European credits.      

The Orange County Employees Retirement System approved a $50 million commitment to Tennenbaum Capital to fund the direct lending sub-allocation of its diversified credit portfolio, spokesperson Robert Kinsler told Private Debt Investor.

“In May 2012, the Investment Committee approved an allocation of 7 percent of the total OCERS portfolio to Diversified Credit, with a sub-allocation of 15 percent of that amount (presently $110 million) to Direct Lending managers, and an equal sub-allocation or “earmark” for European credits (the funding of Tennenbaum Capital came out of that latter “earmark”),” Kinsler said in an email.

The $10.6 billion retirement system opted to commit to Tennenbaum in-lieu of one-half of its European allocation because of the risk of Eurocurrency break-ups and the presence of attractive yield opportunities in the US, Kinsler said.

“The prudent course for now appears to be a heavier emphasis on domestic direct lending and a later entry in Europe,” he said. “However we have already short listed European direct lenders and will likely conduct due diligence in this area in coming months.

OCERS chief investment officer Girard Miller and advisor NEPC find the returns available to mid-market lenders appealing with “much greater potential for recovery in recessions than high yield bonds, if the loans are properly structured, underwritten and managed”, Kinsler said. “We also like the floating rate feature of many of these credits which gives us a strong cushion against ultimately higher interest rates.”

OCERS had allocated approximately $200 million to direct lending and European credits.

Tennenbaum typically invests up to $250 million in US-based companies across several industries, including healthcare, automotive and financial services. The firm was founded in 1999 and has more than $4.5 billion in capital under management. 

Last month, OCERS approved a plan to take a more assertive stance on management fees and alignment of interest within its alternatives portfolio. 

“What caught our trustees’ eyes was the large increase in indirect investment expenses, when they looked at the 2013 investment budget,” Miller told sister publication Private Equity International at the time. “Because those costs are indirectly charged against fund expenses, and not billed directly, they were not highly visible before.”

“The system’s indirect investment management fees jumped in the 2013 budget from $22 million to $45 million,” according to documents from OCERS. “[That] was a compelling reason to revisit our fee policy and become more proactive in this space,” Miller said.