Investors in this year's survey said they are continuing to shift assets to private credit for its current income, diversification from equity risk and higher expected returns.
Arizona State Retirement System, Phoenix, again tops the list of retirement plans with the most assets in private credit, with $12.1 billion, up 5.3% from the prior year. ASRS was an early adopter of private credit. Its board has been steadily increasing its target allocation, which is now 23% from 3% in 2012, said Paul Matson, executive director of the $50.7 billion pension fund. Currently, the pension fund is tactically overweight to its strategic allocation, he said. Private credit accounted for 23.9% of ASRS assets at the end of the third quarter.
"Our initial foray into this asset class was expected to be temporary, lasting only while the capital markets were in post-2008 turmoil," Matson said.
When the market turmoil subsided and new banking regulations that required banks to shore up their balance sheets took hold, pension fund executives decided to not only to keep its private credit allocation but to increase it due to the high rates of expected return, the limited interest-rate duration because of the loans' floating rates and the modest term of the underlying loans, among other reasons, he said. ASRS officials also invested in a "series of separate account structures that embed a significantly higher degree of liquidity, alignment of interest, with often evergreen structures," Matson said.
ASRS' expected return for the asset class is 9% to 10% over multiyear periods with modest volatility, he added.
Ranked second on P&I's list of private credit investors, CalPERS' private credit portfolio increased 41% in the 12-month period ending Sept. 30 to $10.8 billion. Officials at the $450.3 billion California Public Employees' Retirement System, Sacramento, attribute the increase in what it calls private debt to its 5% target allocation that it adopted on Nov. 15, 2021.
"Although early in its development, the private debt asset class is performing as expected in the current market environment," said James Scullary, CalPERS spokesman. "The focus for the portfolio is to continue to look for deployment opportunities with high-quality managers and issuers to benefit from the rate increase while avoiding default and/or losses."
For CalPERS, the role of its private debt asset class, like its other private market asset classes, is to boost its entire portfolio's risk-adjusted returns, Scullary said.
"Our general view is that private assets, as a whole, offer a greater return opportunity per unit of risk relative to the public markets, lower realized volatility and diversification that is critical to our portfolio."