The board of the $52 billion Pennsylvania Public School Employees Retirement System (PSERS) voted to approve three new debt fund commitments at a meeting on 11 June. The pension plan is investing $200 million in the Cerberus Institutional Partners VI fund, $300 million in the Cerberus PSERS Levered Loan Opportunities Fund and $250 million in the Sankaty Credit Opportunities VI fund.
The Cerberus Institutional Partners vehicle invests in the private equity of operationally challenged companies, non-core/non-performing divisions of subsidiaries and business in liquidation. It also invests in distressed securities and assets including non-performing loans, residential and commercial mortgage securities and assets, corporate debt and structured loans, according to the pension plan’s meeting documents. The fund is being raised with a hard cap of $4 billion and will build a portfolio of 100 to 200 investments. “Cerberus anticipates compelling investment opportunities during the fund’s investment period (four years) in areas where Cerberus has considerable expertise, particularly in European NPLs, private equity and mortgage related investments. Furthermore, other investments and strategies may become attractive in the short term or in the longer term on an opportunistic basis, such as corporate distressed debt. As such, the fund’s multi-strategy approach should provide Cerberus with flexibility to pursue these additional investments that may become attractive during the fund’s investment period,” said a presentation to the board from Charles Spiller, PSERS’ managing director of private markets and real estate.
PSERS’ other Cerberus investment was also recommended to the board by Spiller and the pension’s private markets consultant Portfolio Advisors. The levered loan opportunity fund comes from the Cerberus Business Finance (CBF) platform that was established in 1995 to lend to US mid-market companies. The Pennsylvania Schools investment is a separate account where PSERS will invest pro-rata alongside CBF’s active loan vehicles through a separate “fund-of-one” account, the documents said. “The focus will be on direct lending, through controlling origination and issuance of senior secured loans to established US mid-market companies,” the documents said. The presentation described the market opportunity as demand being high for mid-market debt solutions, while supply from traditional lenders, such as banks, having diminished since the financial crisis due to regulatory pressures. The account will target 11-13 percent net return through leading origination, management and servicing for senior secured floating rate loans to North American mid-market companies.
The Sankaty Credit Opportunities VI fund is Sankaty’s latest distressed vehicle, targeting $3 billion. The fund employs an opportunistic credit strategy focused on global distressed securities and special situations. It aims to invest 50-60 percent in the US, 40-50 percent in Europe and less than 10 percent in the Asia-Pacific region. It expects to have 30-50 positions with an 18-month weighted average life. The target is $25 to $100 million invested capital per deal. It will aim for 13-17 percent net IRR. The market opportunity for this investment was described as “the default cycle picking up as a result of record setting credit issuance, new regulations forcing asset sales and curtailing new lending, several large industries facing secular challenges, including energy, retail, metals/mining, media and shipping. And the global economy being in flux driven by growth concerns in Europe and the emerging markets.” The recommendation was made to the board by James Del Gaudio, senior investment professional at PSERS, and Portfolio Advisors.