The $4.4 billion Ventura County (Calif.) Employees’ Retirement Association is planning to conduct a search to hire up to two US senior direct lending managers, based on recommendations made by its consultant NEPC at a board meeting yesterday (16 March). The firms would fill the pension’s new 5 percent target for allocations to private debt, which PDIpreviously reported on.
A memo from consultants Dan LeBeau and Allan Martin said the plan was to “conduct a search to hire up to two US Senior Direct Lending managers who are currently calling capital using NEPC’s Focused Placement List (FPL) to fill the targeted 5 percent allocation to private debt, with 5 percent reallocated from US fixed income”. The recommendation added that “it is possible that a third manager focusing on non-US senior direct lending could be recommended as part of the private debt allocation in the future”.
The pension also approved doing a private search through NEPC rather than a publicly advertised search which would involve the pension fund issuing a requests for proposals, and getting managers that respond to fill out lengthy questionnaires before shortlisting a number of firms to pitch. That lengthy procurement process is often bypassed in the case of alternative investment funds that have limited investment windows.
NEPC recommended using its Focused Placement List—a roster of managers it already knows in the space and has deemed appropriate for recommendations to LPs—to conduct the search for Ventura. “We have done a considerable amount of work in the senior secured direct lending space, and we do not believe that a public search will result in a materially different conclusion than using our FPL,” NEPC said in its recommendation.
The consultants expect to conduct analysis and recommend investment managers at Ventura’s May board meeting. These firms will also attend the May board meeting to make presentations to the board.
The consulting firm also shared some thinking behind its focus on senior mid-market direct lending strategies in the documents. “Senior secured floating rate debt yields remain relatively attractive (5.75% – 8.5%) compared to traditional fixed income, but credit underwriting standards are loosening as more capital is raised for lending funds,” NEPC wrote. “Borrowers are typically seasoned, healthy, growing companies that have limited access to capital, especially middle-market companies in both the US and Europe. Middle-market loans generally compare favorably to broadly syndicated loans as these loans have wider spreads, lower leverage, and tighter covenants. Loans of this size have traditionally provided protection of principal. Lower-middle market and middle market loans have historically demonstrated default rates that have been lower than their large market peers with higher recovery rates.”