PSERS plows $650m into three credit relationships

The $52 billion Pennsylvania pension plan is making new commitments to the Avenue Special Situations fund and the OWS Credit Opportunity fund, while also drafting a high-yield separate account with TPG.  

The Pennsylvania Public School Employees Retirement System (PSERS) has made $200 million investments in both the Avenue Europe Special Situations Fund III and the OWS Credit Opportunity Offshore Fund III at a board meeting this week (6 October). Trustees of the $51.8 billion pension also voted to invest $250 million into the PSERS TAO Partners Parallel Fund, a separate account with TPG Special Situations Partners (TSSP) that will spread capital across various funds and strategies within TPG’s credit business.

The recommendation on Avenue’s European special situations investment came from James Del Gaudio, senior investment professional at PSERS, and the pension’s private equity consultant Portfolio Advisors. Avenue set up the fund earlier this year primarily to invest in the debt of Western European financially distressed companies. The vehicle is raising $2 billion overall, as PDI previously reported.

The PSERS pension has invested with many other prior Avenue vehicles and cites the firm’s experienced senior management team, including Marc Lasry, Sonia Gardner, Richard Furst and Jon Ford; strong track record in the European and US special situations strategies and low historical loss rate, as reasons to invest in the fund. Avenue’s Europe Special Situations I and II funds posted 15.9 percent net IRR and 9.6 net IRR, respectively. The first fund had a realized loss rate at 4.3 percent and the second at 5.5 percent.

The OWS Credit Opportunity Offshore Fund III pursues a structured credit strategy and falls into PSERS’ absolute return portfolio. The fund will invest in residential mortgage backed securities (RMBS), performing and non-performing mortgage and consumer loans, commercial mortgage backed securities (CMBS), commercial real estate loans, collateralized loan obligations (CDOs) and whole loans in the US and Europe. The investment was recommended by PSERS portfolio manager Robert Little and consultants at Aksia. The fund is managed by One William Street Capital Management, which was founded by David Sherr and a group of investment professionals from Lehman Brothers.

The separate account with TPG was set up through TSSP Adjacent Opportunities Partners (TAO), which consists of a series of parallel funds that invest in adjacent and co-investment opportunities generated by the TSSP platform, TPG’s $12 billion credit business. PSERS is the sole limited partner in the account and will invest alongside the TAO vehicles on a pro-rata basis, said PSERS’ documents. The account will target three main areas: defensive yield, stressed opportunities and distressed non-control investments.

TSSP will also invest in crossover investments which could include large, non-performing loan portfolios, global rescue financings and large-cap distressed-for-control investments. Crossover opportunities with the firm’s business development companies TPG Specialty Lending (TSLX) and TPG Specialty Lending Europe (TSLE) may include North American and European direct lending investments, respectively. TSLX lends to US-domiciled mid-market businesses and TSLE was set up earlier this year to do European direct lending. It’s structured as a private equity closed-end fund that has so far raised about half of its €800 million target.

PSERS has made other sizeable commitments to private debt funds throughout the year, including investments with funds managed by ICG, Sankaty Advisors, Cerberus Capital Management and Venor Capital Management, among others. The pension fund’s private debt commitments stood at about $1 billion as of 30 June, according to PSERS’ website.