SDCERA to consider private debt

The San Diego County Employees Retirement Association may add a separate allocation to private debt within its private markets portfolio, according to a report compiled by its advisor Salient Partners.

The report recommends a 40 percent overall allocation to private markets strategies with a 10 percent allocation to private debt. Within private debt, SDCERA would focus its investments on direct lending, distressed and mezzanine strategies.

The retirement association could not be reached for comment at press time. Its board of retirement will hold meetings on April 18-19 to discuss possible new allocation mixes.

Any changes to San Diego County’s asset allocation would not be finalised until August at the earliest, according to a Salient report.

“We believe that because supply and demand for capital is dynamic, it is critical that private markets exposure be truly broad and diversified,” the report said. “This is especially true in terms of diversification across capital structures.”

Although traditional private equity strategies have higher return expectations, it may not always represent the best risk / reward opportunity for investors, Salient said in its report. As an example, Salient cited the financing gap that currently exists in Europe, where companies still have a high demand for capital despite a decline in regional and national banks’ ability to provide it.  

“As these banks’ sovereign debt holdings have also deteriorated, most banks have had to significantly tighten lending activities,” according to the report. “This capital supply/demand imbalance creates the opportunity for better risk-adjusted returns in private lending.”

Along with private debt, Salient’s recommendation also calls for a 6.67 percent allocation to energy infrastructure. The new asset mix would remove allocations to CTAs and TIPS.

SDCERA had $3.14 billion committed to private market strategies as of 31 December, according to meeting materials.