A $41 billion pension fund is betting big on private credit

Arizona's move follows a similar one by the Teachers 79彩票注册网址 System of Illinois.

Bloomberg

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79彩票注册网址(Bloomberg) — Arizona’s $41 billion State 79彩票注册网址 System is looking to dedicate one out of every six dollars it manages to direct lending -- more than five times the industry average -- in a move some see as a harbinger of what’s to come for the booming asset class.

, the Teachers’ 79彩票注册网址 System of the State of Illinois said it “continues increasing exposures to private debt opportunities,” even as it retreats from fixed income broadly.

“We’ve been invested in private debt since early 2013,” said Al Alaimo, who oversees the Arizona fund’s credit investments and aims to boost direct lending, one of the most popular private-credit strategies, to 17% of the portfolio, from about 13.6% previously. “We were very conscious that we were an early adopter and we tried to lock up as much capacity as we could with managers we perceived as being the best.”

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79彩票注册网址 in assets, even incremental increases in exposure can mean billions of dollars in inflows for alternative credit managers.

The Arizona State 79彩票注册网址 System invests with some of the biggest players in the business, including Ares Management, HPS Investment Partners, Cerberus Capital Management, GSO Capital Partners, Oaktree Capital Management and Monroe Capital, according to .

79彩票注册网址Global pension funds are “increasingly attracted to the high current risk-adjusted returns offered through experienced private credit managers,” said Ares CEO Michael Arougheti.

79彩票注册网址With a growing scarcity of higher-paying assets to help pension managers meet their long-term obligations, the shift toward private debt appears poised to accelerate.

Yields on more than $11 trillion of debt around the world are still in negative territory. Blue-chip U.S. company bonds pay roughly 2.9%, near multi-year lows, while speculative-grade notes yield about 5.1%, the least since 2014.

Direct lending, in contrast, offers an average yield pickup of 5.14 and 5.3 percentage points versus the average rate on speculative-grade bonds and leveraged-loans, according to a 79彩票注册网址man Sachs Group Inc. analysis based on data through June 30.

79彩票注册网址That’s helped assets in private-credit strategies balloon to more than $800 billion.

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79彩票注册网址Yet all that money pouring in is making the asset class more competitive, and thus less attractive, according to Neil Sheth, director of global research for NEPC. The influx of cash may fuel weakening lending standards, and the investment consultant, which counts public pensions like the Arizona fund as clients, is urging investors to be diligent committing significant capital to such an illiquid asset class amid a maturing credit cycle.

“If you’re just learning about and thinking of putting a lot of capital in the space right now, you’re too late,” Sheth said.

79彩票注册网址The Arizona retirement system -- which oversees the benefits of nearly a quarter-million people -- is already exploring alternatives strategies such as litigation finance and securities backed by aircraft leases to help boost returns going forward.

79彩票注册网址These more opaque corners of the market are part of its push to bring its investments in illiquid credit to nearly a quarter of its portfolio over a three-year period, according to Alaimo.

79彩票注册网址“We wish there were fewer people in the marketplace,” Alaimo said. “However, the reality is if you partner with the right managers, they can be discriminating in the deals that they do.”

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