Church of England favors private credit over stocks

A pension scheme for retired clergy of a 500-year old Christian institution in England is seeking to boost returns by shifting money into firms that extend private loans to small and medium-sized companies.

The Church of England Pension Board plans to increase its allocations to private credit to 8% over the next 10 years, from 3% at the end of 2017, according to its chief investment officer Pierre Jameson. The pension fund manages £2.6 billion ($3.3 billion) of assets.

It is part of a broader change of tack by the 38,000-member fund toward private investments and away from equity, Mr. Jameson said in an interview.

The strategy is another example of how pension funds are being drawn to private assets as they seek to lift returns and meet payout commitments amid ultra-low interest rates. The asset class is also less sensitive to market volatility, according to Jameson.

"Escaping from price swings is key for U.K. pension schemes given we're required to mark to market," he said. "Private assets' values are based on realistic expectations and cash flows for the underlying businesses so we feel our actuarial assumptions are solid and not vulnerable to market sentiment."

The church's pension scheme aims to slash its public equity allocation to 35% from 66% currently within its "return-seeking assets," which account for 85% of the fund. It will reallocate the proceeds into infrastructure, private debt and private equity. The scheme expects returns of 6% to 8% on its private credit investments, Mr. Jameson said.

The number of Europe-based public pension funds investing in private debt has jumped to 136 last year from 60 in 2015, with the median allocation to the strategy increasing to 2% from 1.28% in the period, according to Preqin, a London-based research firm.

"The return profile from private credit looks interesting given how low yields are in the public fixed-income market. Many are also moving away from equity due to high valuations," said Samuel Gervaise-Jones, a senior director at bfinance, a consultancy that advises pension funds and other end-investors.

"There remains room for growth as there are plenty of pension funds with no exposure to the asset class," Mr. Gervaise-Jones said.

Investors' appetite for higher-yielding assets, together with banks pulling back from riskier lending, is helping drive a boom in private debt fundraising. Preqin noted that assets under management had soared to $770 billion in June 2018 from $275 billion in 2009.

But as capital floods into private credit and competition intensifies, more leverage has crept into deals and underwriting standards have loosened. That has prompted regulators to look at the sector more closely.

End-investors "acknowledge that the market has changed and are putting much more focus on managers' origination and underwriting processes," Mr. Gervaise-Jones said.