San Francisco pension fund plans $800m for private credit

The allocation will have a bias toward senior and mezzanine debt strategies, which the retirement plan has labelled ‘capital preservation’ strategies.

The San Francisco Employees’ Retirement System is planning to deploy $800 million toward private debt in 2018, with subsequent increases in coming years as the pension fund looks to hit its 10 percent portfolio allocation target for the asset class.

The northern California-based retirement plan anticipates committing dramatically more to the asset class than in 2018, when it allocated $225 million, according to pension fund documents. The presentation was set to be made at Wednesday’s investment committee meeting, which was cancelled.

SFERS expects to set aside $950 million by 2025 for the strategy, in which the pension fund began investing in 2008 out of its fixed-income allocation. In November 2017, the plan created a 10 percent bucket for private credit, in which about 2 percent of SFERS’s assets currently sit.

“We are always evaluating strategies, in private credit and other asset classes.  We review strategies on the Cambridge and NEPC platforms. From there we decide which strategies we want to learn more about,” an SFERS representative said in an email.

The allocation will be divided approximately 35-65 percent to capital preservation investments, including senior debt and mezzanine debt; 15-45 percent to opportunistic strategies, encompassing credit opportunities, specialty finance and real estate debt; and 0-30 percent to return maximisation, consisting of special situations, distressed debt and capital appreciation such a preferred equity financing.

The private credit return target is an 8-12 percent net internal rate of return. Capital preservation investments will target a 7-10 percent net IRR, opportunistic strategies an 8-12 percent net IRR and return maximisation a 12-15 percent net IRR.

The portfolio will be constructed of between 15 and 25 credit managers, including separate accounts with three to five of those general partners.

Commitments in 2018 included up to $60 million to AnaCap Credit’s AnaCap Credit Opportunities IV, $75 million to MGG Investment Group’s MCC SF Evergreen Unlevered Fund and $60 million in Pemberton Capital Advisors’ European Strategic Credit Opportunities Fund.

Editor’s note: The article has been updated with a comment from the pension fund.