Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. ALTERNATIVES
February 19, 2018 12:00 AM

Private credit strategies in stratosphere

Investments in asset class jump 57%; new hires up $10 billion

Christine Williamson
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Jack Yang said investors enjoy the high uncorrelated returns.

    Institutional investors splurged on private credit in 2017 to an unprecedented degree.

    New commitments to private debt strategies topped $10 billion to reach a peak of $28.7 billion in the year ended Dec. 31, a 57% increase from the prior year.

    Analysis of Pensions & Investments' reported hiring activity by asset owners showed astronomical growth in new commitments to strategies investing in non-public securities that include direct lending, distressed/special situations, structured products, mezzanine debt, specialty leasing and financing, and multicredit strategies.

    In 2017, reported commitments to private debt by pension funds, endowments, foundations and insurance companies were:



    • direct lending, $11.3 billion, up 211% from 2016;

    • distressed debt/special situations, $10.4 billion, a 44% increase;

    • general and multiasset credit, $3.1 billion, a rise of 42%;

    • structured credit, $2.9 billion, 25% higher; and

    • mezzanine, $983 million, down 66% compared to 2016.

    Longer term, asset owners committed a total of more than $100 billion to private debt in the eight years ended Dec. 31, P&I data showed. Total commitments in 2017 were 617% higher than the $4 billion tracked by P&I in 2010.

    Actual commitment levels likely are higher because some institutions don't make their investment activity public. U.S. public pension funds accounted for most of the 271 private credit moves reported by P&I last year.

    Industrywide, assets managed globally in private debt strategies (excluding unfunded commitments) totaled $638 billion as of June 30, an increase of 211% in the 9.5 years since year-end 2007, according to data from Preqin Ltd.

    The massive growth in private credit investments to date is only the beginning, sources said. "We're seeing the tsunami now and it's primarily driven by worries about a low-return environment," said Tod J. Trabocco, managing director-private credit, at investment consultant Cambridge Associates LLC, Boston.

    "Private credit is only starting to really take off, and institutional investors are at the forefront of investing in this area," Mr. Trabocco said.

    Simple math

    Predictions for major growth in private credit strategies are based on simple math, sources said. Many pension funds, especially public funds, still have substantial money to invest to reach target allocations.

    "Many public pension funds have a 5% allocation to private credit but most have reached about 2% of the target investment," said Jack Yang, head of Americas and global head of business development for specialist credit manager Alcentra Ltd. Mr. Yang is based in the firm's New York office.

    "Investors are making a tactical move out of liquid, core fixed income into private credit to take advantage of attractive uncorrelated returns," Mr. Yang said, noting return expectations for less liquid or illiquid private credit are in the high single to low double digits, about 200 to 300 basis points higher than expected returns of publicly traded fixed income.

    Alcentra managed $35.7 billion as of Dec. 31, predominantly in private credit strategies.

    To speed up the process of reaching the private credit target allocation, many asset owners have set ambitious tactical investment plans for private debt in the next few years, observers said.

    The $49.9 billion Teachers' Retirement System of the State of Illinois, Springfield, for example, approved an investment pacing plan in December that earmarks annual private debt commitments of $350 million in the three fiscal years through June 30, 2020, with a total investment of $750 million to $950 million.

    The subasset-class breakdown aims for a total of about $350 million in direct lending and up to $150 million each in real estate debt, credit events, specialty financing and customized strategies.

    Among the most active private credit portfolio builders during 2017 were:



    • Florida State Board of Administration, Tallahassee, which committed about $2 billion total to 18 varied credit deals for the $167 billion Florida Retirement System;

    • the $28 billion Texas County & District Retirement System, Austin, which allocated $1.9 billion to 12 different funds; and

    • Iowa Public Employees' Retirement System, Des Moines, which split $1.5 billion between two structured products funds.

    Institutional investors are becoming more comfortable with the varied private credit strategies.

    Direct lending, for example, because it offers yield, low correlation, low volatility, low losses and downside protection, said Cambridge Associates' Mr. Trabocco. "It has fairly broad appeal for both corporate and public pension fund portfolios," he added.

    Institutional investors obviously agree: P&I analysis showed that assets committed to direct lending rose 28,245% during the eight years ended Dec. 31.

    The largest investors in direct lending strategies in 2017 were:



    • the $28 billion Texas County & District Retirement System, Austin, which earmarked a total of $1.3 billion to six funds;

    • Virginia Retirement System, Richmond, which committed a total of $1.3 billion to two funds from the $78.3 billion fund; and

    • the $98 billion North Carolina Retirement Systems, Raleigh, which allocated $1.2 billion to two funds.

    Picked up portfolio

    The £60 billion ($84.7 billion) Universities Superannuation Scheme, Liverpool, took a different tack to increase its direct-lending investments. Rather than build a direct lending portfolio fund by fund, USS acquired a $3.1 billion middle-market direct lending portfolio from investment bank Credit Suisse AG.

    "This transaction gives USS exposure to top-tier private credit managers through a high-quality portfolio of loans delivering attractive risk-adjusted cash flow ... USS' private credit strategy continues to look for innovative solutions to access return premia above those available in public markets," said Ben Levenstein, the scheme's head of private credit and special situations, in a news release.

    Distressed debt/special situations strategies also were very popular with institutional investors in 2017, attracting commitments totaling $10.4 billion, a 44% increase from 2016, P&I's analysis showed. Over the eight-year period ended Dec. 31, assets committed to the distressed debt/special situations category increased 247%.

    The Florida State Board of Administration committed the most to distressed debt in 2017, with $1.3 billion to 11 funds. Following were the $203.1 billion New York State Common Retirement Fund, Albany, which earmarked $1.1 billion to four funds, and the $28.7 billion Pennsylvania State Employees' Retirement System, Harrisburg, which committed an aggregate $750 million to six strategies.

    Sources said institutions are positioning their portfolios to take advantage of distressed investment opportunities likely to arise when the fixed-income cycle comes to an end.

    "In 12 to 24 months, the cycle will end and institutional investors want to be invested in complex private credit instruments like (collateralized loan obligations) and bank loans," said Trey Parker, partner, co-chief investment officer and portfolio at credit manager Highland Capital Management, Dallas.

    "The next recession will be more of a true shakeout and the market will be back to fundamentals. The debt market is huge and the opportunity set in distressed debt will be enormous," Mr. Parker said.

    Highland Capital managed $14 billion as of Dec. 31, $10 billion of which is managed in fixed income, including private credit.

    Paulina Pielichata contributed to this story.

    Related Articles
    USS union, employer negotiating committee agree to freeze pension plan
    Institutional investors flock to private credit
    More seek multiasset credit strategies to diversify return stream
    More seek multiasset credit strategies to diversify return stream
    Texas appeals court affirms Highland Capital victory in Credit Suisse fraud case
    Commentary: Baring their teeth – FAANGs take a bite out of the equity market
    Competition heating up in direct lending market
    Recommended for You
    Pile_Of_Dollars_i.jpg
    New Enterprise Associates closes 2 venture capital funds at $6.2 billion
    Blackstone sign, New York headquarters
    Blackstone reports record assets of $975 billion for 2022, just shy of $1 trillion goal
    Partners Group hires Tokyo head from Apollo
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing