SBCERA outlines Ares returns

The California pension fund, which has invested with Ares Management in a variety of strategies over the years, sees improving opportunities arising from the locked-up structure and widening spreads over the next credit cycle.  

San Bernardino County (Calif.) Employees Retirement Association (SBCERA) is sticking with its multi-strategy investment programme with Ares.

The pension has invested with Ares Management since 2008 and sees further opportunity in the relationship over the coming credit cycle, according to a presentation to the pension’s investment committee earlier this month.

The $8 billion SBCERA has a master custodial agreement (MCA) with Ares, which acts as a separate account and funnels capital into a variety of Ares’ credit strategies and funds.

SBCERA’s original $215 million Enhanced Credit Opportunities (ECO) investment was funded between 2008 and 2010 generated an annualised return of 11.4 percent since inception through to 31 January.

The MCA was formally set up in December 2013 to wrap all the Ares commitments into a single pot.  Since then the pension has put $250 million into Ares Strategic Investment Partners I, $60 million into ECO II, $50 million each into Special Situations Fund (SSF) IV and Illiquid Credit Opportunity Fund (ICOF) III and $16.5 million in a partnership to finance risk retention requirements for European CLOs.

Taken together, the strategies are producing a current yield of 7.2 percent. The SBCERA documents said that 30 percent of the investments in the MCA are in locked-up capital vehicles. “The combination of higher return profiles associated with locked-up capital vehicles, along with recent spread widening we believe positions the MCA to target returns of 10-12 percent per annum over the coming cycle,” the presentation said.

In an analysis of the market Ares said: “2015 was a highly volatile year for financial markets as elevated concerns related to slowing global growth and continued instability in the commodity sector drove a widespread aversion to risk assets.”

Some of this negative sentiment and volatility has continued into 2016 so far, the presentation continued. “We believe uncertainty centered around the health of the global economy and rising default rates will amplify market volatility in 2016. Market participants will focus on assessing credit and liquidity risk as this market matures.”

At the end of January, the capital was 44.3 percent invested in senior secured loans, 25.9 percent in high-yield bonds, 14 percent in hedged strategies, 7.2 percent in special situations, 5.3 percent in structured products and 3.3 percent in cash. The portfolio included 204 deals with an average life of 2.8 years. Most of the brief, 70.5 percent, is invested in the US. The five largest exposures in the portfolio are Rite Aid Corp, Avago Technologies, Sirius Satellite, Tegna and Formula One.

SSF IV Fund held its final close on $1.5 billion in April 2015. The fund has called about $525 million of that capital so far and its investments have been concentrated on distressed corporate debt investments, with energy and commodity related sectors making up 64 percent. “We remain optimistic on the outlook for distressed investing over the next several years as we believe default rates are poised to rise over the near term,” Ares said. The manager added that future deployment in this vehicle should diversify beyond commodity-related sectors.

ICOF III fund is currently seeking $500 million. It’s targeting risk-adjusted net returns of 10-12 percent and a 1.5x net multiple on invested capital over a four- to six-year horizon. The fund will invest primarily in secured, asset-backed investments across private asset-backed securities, as well as US and European CLOs.

The European risk retention vehicle, meanwhile, is seeking LP commitments to invest in its European CLO platform to help the firm comply with risk retention rules. The firm is targeting initial equity capital of €280 million, which is expected to make investments in eight to 10 CLOs managed by Ares. Ares plans to invest €30 million in the vehicle.

No management fees will be charged at the partnership level. “The partnership anticipates to benefit from CLO management fee rebates in CLOs initiated with initial capital,” the document said. Ares also plans to evaluate listing possibilities in three- to five-years from initial deployment.