In the never-ending search for higher investment returns, institutional investors increasingly are turning to specialist fixed-income managers that combine multiple private credit strategies in a single mandate.
Asset owners including the $52.7 billion Teachers' Retirement System of the State of Illinois, Springfield, and the $31 billion Indiana Public Retirement System, Indianapolis, recently committed large allocations to separately managed accounts that give the manager flexibility to move assets between diverse strategies such as sale-and-leaseback, revolving credit facility, structured credit, European tactical credit and direct lending in response to market conditions.
Indiana PRS, for example, in September committed $400 million to Intermediate Capital Group LLC, London, to access the firm's "broad capabilities in European private credit," an investment report said.
The fund set up a separately managed account with $200 million to be invested in the firm's revolving credit facilities fund and $100 million each to be invested alongside the manager's senior debt and sale-and-leaseback funds.
Indiana Chief Investment Officer Scott B. Davis was not available for comment.
Among managers experiencing strong demand for multistrategy private credit from asset owners, including Intermediate Capital Group, are Alcentra Group Ltd., BlackRock Inc., GoldenTree Asset Management LP and Hayfin Capital Management LLP.
Performance is the primary driver of demand for multiple private credit strategies within a single vehicle for institutional investors, said Stephen L. Nesbitt, CEO of specialist alternative investment consultant Cliffwater LLC, Marina del Rey, Calif., in an interview.
"Investors are searching for what's working regarding returns. That's not hedge funds, factor-based strategies, active management or risk-parity strategies right now," Mr. Nesbitt said.
"The premise behind private credit strategies is that they will return an annualized 3 (percentage points) over publicly traded credit, such as high-yield bonds or leveraged loans. Those publicly traded credit instruments likely will return an annualized 5% over the next five years, while private credit likely will return about 8% annualized over that time period," Mr. Nesbitt said.
"Private credit investments don't have a long lockup — generally about five years — and they start paying out (income) at about three years. That's an attractive combination for investors," Mr. Nesbitt said.