US pension plans pour billions into private credit

investmentnews.com:

US state and local retirement funds are pumping billions into private credit, joining the stampede into a booming sector of finance in the pursuit of higher returns. 

These systems are collectively allocating at least $100 billion of their roughly $5 trillion in assets into private debt, according to Equable, a bipartisan pension researcher founded by public finance leaders. While that’s only a sliver of their holdings at present, funds’ private credit positions have been steadily growing and are poised to take off as pension plans including the California Public Employees’ Retirement System — the largest among its peers and a bellwether — show a keen interest in committing more to the space.

“Everybody is looking at private credit,” said Rosemary Guillette, a vice president for Segal Marco Advisors who has advised public pensions for more than two decades. “You are going to see a steady increase.”

For almost two decades, public pension funds have increasingly looked beyond traditional investments such as stocks and bonds and tapped alternatives to help boost returns and fill funding shortfalls. They’ve ramped up their exposure to private credit in recent years as the asset class has ballooned to $1.6 trillion globally. Private debt allocations at state pension funds, for example, may reach 6% over the next two years, up from 3.6% last year and 2.1% in 2017, according to Cliffwater LLC,  an investment adviser that specializes in alternative assets.

So-called direct lenders have filled a void left by banks that have retreated from extending credit to some riskier corporate borrowers amid a spike in interest rates and tightening regulations. Other aspects of private credit include asset-based finance as well as debt for