The $8.2 billion San Bernardino County (Calif.) Employees Retirement Association (SBCERA) recently voted to invest in Alcentra’s second European Direct Lending Fund and the Alcentra Strategic Credit Fund. The investment committee of the California pension also voted to expand its existing mandate with Partners Group to include investments in private debt and infrastructure. The firm was originally hired last year to make private equity and real estate investments.
At a retirement board meeting earlier this month, the board approved a $25 million commitment to the Alcentra European Direct Lending Fund II and a €25 million investment in Alcentra Strategic Credit Fund.
Alcentra’s second European lending fund aims to capitalize on the market dislocation created by regulatory requirements on banks, said SBCERA meeting documents.
The European Direct Lending Fund II is targeting €1 billion to €2 billion in capital commitments, split between levered and unlevered sleeves. The unlevered sleeve charges a 1.25 percent management fee on called capital, while the levered version charges 1.5 percent. Both offer 25 basis point discounts for investments exceeding €75 million as well as investors that commit ahead of the first close. The unlevered fund will charge a performance fee of 10 percent over a 5 percent hurdle rate. The levered version charges 15 percent over a 7.5 percent hurdle. The fund is aiming for a first close this quarter and expects to be in marketing for a total of 12 months, according to documents posted on SBCERA’s website.
The Alcentra Strategic Credit Fund is targeting another opportunity thrown up by European bank market dislocation – discounted senior loan portfolios put up for sale by bank lenders seeking to improve their capital position by selling assets. The vehicle will buy mainly senior secured loans “at a discount to their intrinsic value with strong cash flow characteristics from banks that are looking to improve their capital adequacy test scores,” the SBCERA documents outlined. The fund is targeting €500 million. It will charge a 1.5 percent management fee on drawn capital and a 20 percent performance fee on an 8 percent preferred return.
SBCERA invested with three prior Alcentra funds and earned between 13 and 16 percent net IRRs on these investments. The direct lending fund is targeting a net IRR of 12 to14 percent and a net cash multiple of 1.5x to 1.6x on a levered basis. The strategic credit fund is targeting a mid-to high-teens return with a ‘best ideas’ approach to investing in bank loans, high-yield and structured credit.
At an investment committee meeting on 25 August, SBCERA’s staff and consultants also recommended expanding Partners Group’s master custody account (MCA) with the pension fund to include investments in private debt and infrastructure. The previous mandate allowed for private equity and real estate. It was set up last year at $195 million. The investment size will remain the same.
A memo to the SBCERA board from the pension’s investment consultants at NEPC said that Partners Group’s tenure, investment size and track record in the two areas warrant the expansion. Partners Group has approximately $5 billion invested in global infrastructure and more than $1.8 billion in private debt assets across multiple funds. The two teams have track records reaching back more than 10 years. Returns across the two strategies are in line with market expectations. Since 2001, infrastructure delivered an 18.9 percent IRR. The private debt group manages several funds that invest in both senior and mezzanine debt across multiple geographies. “Since inception net IRRs for the more mature funds are in the mid-to-upper single digits, with multiples on invested capital reaching from 1.21x to 1.37x,” the NEPC document said.