Top US pension plans eye private credit

Some of America’s largest pension funds are looking to pour money into private credit to capitalise on dislocations across the market stemming from the coronavirus pandemic.

Both the $227bn California State Teachers Retirement System (Calstrs) and the $215bn New York State Common Retirement Fund have identified private credit as an opportunity for investors that have enough liquidity to lend to struggling companies.

Meanwhile, data from FT Specialist publication MandateWire shows that numerous other public funds in the US are also looking to make similar investments. For example, the $32bn Connecticut Retirement Plans and Trust Funds approved a $1.5bn allocation to private credit last month.

With US equity markets bouncing back from their mid-March lows, the best place to invest right now is in credit, which remains oversold, Anastasia Titarchuk, chief investment officer of the New York State Common Retirement Fund, said.

“Right now there are opportunities everywhere,” she added. “There are very few sectors of the credit market, aside from maybe investment grade, that have truly come back.”

Ms Titarchuk is especially interested in structured products like commercial mortgage-backed securities, where the uncertainty around regulations and whether or not tenants will be paying rent is creating a lot of dislocation in the market. However, the New York fund is planning on waiting on the sidelines until it has a better idea of how things will shake out, she added, noting that the fund puts a premium on being senior in the capital structure.

“We don’t gamble on outcomes where we don’t have any clarity,” Ms Titarchuk said.

After surviving the 2001 recession and the 2008-09 financial crisis, Chris Ailman, chief investment officer of Calstrs, said it had employed similar tactics when markets started tanking this time.

The first step for the fund was to hoard liquidity. “As an investment, cash might be trash. But in a crisis, cash is king,” Mr Ailman said.

Now that volatility is levelling off, the fund can start getting more aggressive — and boosting Calstrs investments in private credit is high on the agenda.

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“We are going to look more into private markets for opportunities,” Mr Ailman said. Because this crisis is a “health crisis” instead of a “financial crisis”, he does not expect to see big gains coming from equity markets. “[It’s] unusual that the governments have basically stopped the economy,” he said. “We’re seeing more debt opportunities, senior debt, secured debt, to help bridge the time period the economy is shut down.”

Assets invested in private debt — largely made up of non-bank loans to unlisted companies — reached a record $812bn in 2019, boosted by investors hunting for higher yield. In recent years there has been a surge in direct-lending strategies, where investment funds take on the role of so-called shadow banks, stepping in as traditional lenders have retreated because of tighter capital rules and making loans directly to companies.

But while direct-lending funds make up nearly half of the market, investors said that right now the most attractive investments are coming from different types of complex, risky investment strategies.

Distressed debt funds, which specialise in buying up discounted loans that need to be restructured, should be well suited to capitalise on the current environment, said David Lebovitz, global market strategist at JPMorgan Asset Management.

“We are dealing with a cash flow problem. Consumers have no income and businesses have no revenue,” he said. “We think distressed managers can come in and buy things at good prices and turn a nice profit.”

However, investors should not be in any hurry to “back up the truck”, said Tim Atkinson, a research consultant at Meketa Investment Group, which advises pension funds on asset allocation.

The success of any private credit investments made now will be dependent on predicting how quickly things get back to normal and how companies will come out on the other side of the lockdown, he added: “Right now, in certain industries, it’s very difficult to pinpoint where that is, so there may be a big margin for error.”