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America’s Best Pension Plans Consider Private Credit

Some of the largest US pension funds are looking to invest money in private credit to capitalize on the market upheavals resulting from the coronavirus pandemic.

The $ 227 billion California State Teachers Retirement System (Calstrs) and the $ 215 billion New York State Common Retirement Fund have identified private lending as an opportunity for investors with enough cash to lend to struggling companies.

Meanwhile, data from trade publication FT MandateWire shows that many other public funds in the United States are also looking to make similar investments. For example, Connecticut’s $ 32 billion pension plans and trust funds approved a $ 1.5 billion allocation to private credit last month.

As U.S. equity markets rebound from their mid-March lows, the best place to invest right now is in credit, which remains oversold, said Anastasia Titarchuk, chief investment officer for the New York State Common Retirement Fund.

“Right now there are opportunities everywhere,” she added. “There are very few areas of the credit market, other than maybe the investment grade, that have really made a comeback.”

Ms. Titarchuk is particularly interested in structured products such as commercial mortgage backed securities, where regulatory uncertainty and whether or not tenants will pay rent creates a lot of market disruption. However, the New York fund plans to wait on the sidelines until it has a better idea of ​​how things will turn out, she added, noting that the fund is focusing on being a senior in the capital structure.

“We are not betting on results where we have no clarity,” Ms Titarchuk said.

After surviving the 2001 recession and the 2008-09 financial crisis, Chris Ailman, chief investment officer of Calstrs, said he used similar tactics when markets began to collapse this time around.

The first step for the fund was to build up cash. “As an investment, cash can be trash. But in a crisis, money is king, ”Mr. Ailman said.

Now that volatility is stabilizing, the fund can start to get more aggressive – and boosting Calstrs’ investments in private credit is a priority.

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“We will be looking for more opportunities in the private markets,” Mr. Ailman said. Because this crisis is a “health crisis” instead of a “financial crisis”, he does not expect to see big gains from the stock markets. “[It’s] unusual that governments have fundamentally shut down the economy, ”he said. “We are seeing more opportunities for debt, senior debt, secured debt, to help bridge the downturn in the economy.”

Assets invested in private debt – largely made up of non-bank loans to unlisted companies – reached a record $ 812 billion in 2019, driven by investors looking for higher returns. In recent years, there has been a rise in direct lending strategies, where investment funds play the role of so-called shadow banks, intervening as traditional lenders have pulled out due to rules. more stringent capital and direct loans to businesses.

But while direct lending funds make up almost half of the market, investors said that at present the most attractive investments come from different types of complex and risky investment strategies.

Distressed debt funds, specializing in buying discounted loans that need to be restructured, should be well suited to take advantage of the current environment, said David Lebovitz, global market strategist at JPMorgan Asset Management.

“We are faced with a cash flow problem. Consumers have no income and businesses have no income, ”he said. “We believe that struggling managers can come and buy things at good prices and make a good profit.”

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

The success of any private credit investment made now will depend on predicting how quickly things will get back to normal and how businesses emerge on the other side of foreclosure, he added: “In Right now, in some industries, it is very difficult to determine where this is, so there may be a large margin of error. “

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