Updated with correction
Large institutional investors' movement into strategic accounts has reached credit strategies.
Investors now are shopping for managers for such accounts in search of lower fees, flexibility to make tactical investments and more say on investment strategies.
The accounts — called strategic accounts by some and separately managed accounts by others —in essence are single relationships in which investors commit large amounts of capital — typically between $100 million and $1 billion — to a single manager, giving that manager discretion among various investment strategies. Investors like the accounts because they provide lower fees, more control and greater transparency. It also allows the managers to move quickly in and out of opportunistic investments.
Credit and debt strategies are a growing portion of institutional investors' alternative investment portfolios. Some 42% of private equity investors have exposure to private debt strategies, and another 18% of private equity investors without exposure to private debt are considering adding private debt in the near future, according to a recent survey by London-based research firm Preqin.
In May, the Oregon Investment Council, Tigard, which runs the $63 billion Oregon Public Employees Retirement Fund, Salem, committed $250 million to New York-based alternative investment manager The Blackstone Group LP for its first strategic account. Blackstone's mandate includes opportunistic investments and investments with high current cash yield, which can include non-performing debt.
The council expects its strategic account with Blackstone will give it “greater and timelier access to attractive, opportunistic investments that OPERF might otherwise miss,” according to materials for the May 1 meeting. The agenda materials also noted the council will be paying lower-than-typical management fees on committed and invested capital and lower-than-market incentive fees from Blackstone.
Blackstone has about $3.5 billion in separately managed accounts in what it calls its tactical opportunities business that includes credit strategies. In the quarter ended June 30, Blackstone raised $805.1 million, mostly in managed accounts, according Peter Rose, Blackstone spokesman in an e-mailed response to questions. The managed accounts of Blackstone's credit subsidiary, GSO, are separate from those in tactical opportunities. Blackstone does not break out how much GSO manages in separate accounts.
“In the last 12 to 24 months, we've seen a dramatic increase in demand for strategic portfolios or separate accounts. This trend is being driven by the largest investors in the world, primarily public pension plans and sovereign wealth funds, which have large amounts of capital to allocate. Smaller institutions, like endowments and foundations, normally don't have the scale to create such accounts,” said Beth Chartoff, senior managing director for New York-based GSO Capital Partners LP, Blackstone Group's credit arm, in an interview.
“In particular, we have found institutions are trying to be more nimble, flexible and opportunistic with their capital, particularly in these volatile, rapidly changing markets,” Ms. Chartoff said. “Public pension funds often have long board approval processes and stringent asset allocation models that don't afford the ability to invest quickly in unique and non-traditional asset classes.”