With a 20-year strategic plan and risk-free rates not far below its discount rate, a public pension fund should not rush into private credit, said Sriram Lakshminarayanan, chief investment officer of the $41.1 billion Iowa Public Employees’ Retirement System, Des Moines.
Lakshminarayanan, who joined IPERS in 2014 as chief risk officer and ascended to the CIO role in 2022, said in a May 20 interview that his overarching philosophy is that with a 5.5% risk-free rate and a 7% discount rate, there is not much risk to take and there’s really no hurry in taking on that risk.
“I’m willing to wait for good opportunities,” said Lakshminarayanan. “And it’s always a constant communication with the board, letting the board know that I know the target (to private credit) is 8%, and I’m only at 5%, but I’m not going to rush in because there’s no hurry. This is a strategic plan for 20 years or so. I don’t need to invest all the money and then bring it up to 8% on any given day.”
Laksminarayanan said he has been a bit reticent over the past couple of years to go “all in” on private credit, given “the challenges in the market and also the demand for private credit.”
“Every manager has a line that runs around the block with people wanting to invest in it, so we’ve been a bit more cautious,” he said.
While many asset owners have raised their private credit targets, caution is the byword at the pension fund, with both investment staff and its board bracing for an eventual downturn the past couple of years. In September 2022, IPERS reduced targets to public markets asset classes by a total of 4 percentage points: domestic equities to 21% from 22%, fixed income to 19% from 20%, international equities to 16.5% to 17.5% and public credit to 3% from 4%.
While those reduced targets were funded by a hike in the private equity target to 17% from 13%, that was primarily due to outperformance leading to a significant overweight in the asset class. As of June 30, 2022, the actual allocation to private equity was 21%.
Lowering active management
The pension fund has also been lowering overall active management within public markets asset classes, said Lakshminarayanan. He did not provide specific investments that were changed.
“We believe that active management has a role to play in portfolio construction,” he said, “but we have some central themes we’re looking for in active management. Essentially the alpha that the managers generate on public money in the portfolio needs to be generated at a time when IPERS needs it the most.”
“They call it downside protection, negative skew and all that, but I need help when the beta is selling off for whatever reason. That’s when I really value the excess that’s generated by active managers.”
He said those kinds of downside protection-oriented return streams are what the pension fund has been looking for in active management for the last decade or so.
That sense of active management as something to value on the downside is also a result of a significant sense of cost consciousness by the pension fund, said Lakshminarayanan.
