ERS, the largest pension fund in the country, may invest in private debt to boost returns.

CalPERS returned 6.7% for the year-ended June 30, 2019, with assets at $370 billion. That fell short of the pension fund’s targeted rate of return of 7%. CalPERS’ overall funding was 70% as on that date. The fund has so far avoided investing in private debt, a rapidly growing asset class. But that may be about to change, according to Mergers & Acquisitions.

Apart from the need to boost returns, CalPERS may also change its investment policy on private debt. That could be on the initiative of Chief Investment Officer Ben Meng. Meng would certainly be aware that other funds are likely raking in returns as high as 10% on private debt.

Funds’ interest in private debt

According to Bloomberg, a massive shift is taking place with institutional funds withdrawing from hedge funds but ramping up their exposure to private debt and direct lending. Examples include Arizona’s State Retirement System, the Ohio Police & Fire Pension and the Teachers’ Retirement System of the State of Illinois.

While 186 public pensions had investments in private credit in 2015, that number jumped to 281 in 2019. Median allocation rose to 2.9% from 2.1% in that time.

Meanwhile, private credit has grown to more than $800 billion of assets under management from less than $400 billion in 2012, according to Preqin.

The Canada Pension Plan Investment Board (CPPIB) and the Ontario Teachers Pension, may deploy $1.5 billion in private credit in India – an emerging market country. The pensions are setting up credit platforms and may tie-up with local players for the purpose.

They would join private equity global funds including KKR, Apollo Global Management, Blackstone and Baring, which have specialised debt or special situation platforms.

Meng talks to CalPERS Board

Meng reportedly discussed private credit at a board meeting in Sacramento. He remarked that it was an area the fund had overlooked in the past due to post-crisis regulatory changes.

He also recommended including private debt in the fund’s portfolio.

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