The Sacramento County Employees’ Retirement System has finalised its private credit investment policy as it prepares to commit $200 million across four funds: three direct lending and one opportunistic.
The northern California pension fund – which adopted a 4 percent portfolio allocation goal for private debt in January – will target a mix of 70 percent direct lending and 30 percent opportunistic vehicles, according to the investment policy statement adopted at the 21 June meeting.
By geography, 85 percent of investments will be within the US and 15 percent will be international. It reasoned that adding the asset class to its slew of investments would produce “attractive risk-adjusted returns” and “generate current cash flow”.
SCERS adopted a performance benchmark of the Credit Suisse Leveraged Loan Index plus 2 percent and estimated that the program could take four years to fully invest the category. Its investment performance expectations are 7-10 percent for directing lending with a 7-9 percent cash yield and 10-15 percent for opportunistic investments with a 9-11 percent cash yield.
Commitments to private credit investments are expected to be $200 million for both this year and next year, followed by allocations of $220 million for 2019 and 2020. SCERS would then put $250 million into the asset class from 2021-2025.
The pension fund made a recent $25 million commitment to Athyrium Capital’s Athyrium Opportunities Fund III, which will count toward the private credit bucket.
That vehicle, which is sub-advised by Neuberger Berman, invests in healthcare companies, had raised $473.5 million as of November 2016, according to three regulatory filings with the US Securities and Exchange Commission. It predecessor, which closed in July 2015, raised more than $1.2 billion, according to a statement at the time.
Other provisions of the investment policy include a requirement that SCERS never make up more than one-fifth of a commingled fund. It may also make secondaries investments or direct co-investment, though the retirement plan anticipates doing so sparingly.
SCERS adoption of a dedicated private credit investment category is just the latest of a trend of limited partners upping its exposure to the asset class. California pension funds have been a large investor in the asset class, while the Chicago Policemen’s Annuity and Benefit Fund has also run full speed toward private credit as it began to reduce its private equity portfolio this month.