The Arizona State Retirement System in Phoenix is expanding its credit asset class with a focus on niche private debt strategies that have the potential to outperform much of the system’s portfolio in the years to come.
At trustees’ December meeting, the implementation plan was presented for the $42 billion pension system to place $2.6 billion in additional commitments with the fresh capital slated to go to existing managers with expected returns ranging from 10% to 15%.
Back in September, a senior portfolio manager on the pension fund’s fixed income team told trustees that, “ASRS views core bond markets of U.S. Treasury obligations and investment grade corporate obligations as unattractive, with the likelihood of persistent low rates in light of foreign central bank policies.
In 2019, there were five new strategies added totaling $1.4 billion in commitments. According to a board meeting presentation a total of $1.6 billion of investment commitments are in the process of liquidation or pending liquidation in underperforming strategies.
Funds under liquidation are: H/2 Core Real Estate Debt Fund; Blackstone/GSO Capital Solutions Fund; AP Mezzanine Partners II, LP; GSO Cactus Credit Opportunities Fund; Avenue Europe Capital Partners II and III; Oaktree Opportunities Fund VIII and VIIIb; Fortress MSR Opportunities Fund II and TCW Capital Trust.
The pension system didn’t specify which debt funds were underperforming.
Officials said they were focused on investing in attractive private market opportunities and have actively withdrawn capital from lower return, more volatile public market investments such as high yield bonds. In addition, officials have selectively withdrawn capital from lower returning private market strategies.
Aksia is the investment consultant overseeing Arizona’s credit portfolio.
The new allocations have been in what the system dubs “other credit.” These include niche market opportunities such as aircraft leasing, equipment leasing, life settlements, infrastructure loans, litigation finance, and risk sharing transactions.
The most recent commitments were in August and September with Melodeon Capital Partners and Chorus Capital receiving $240 million and $250 million respectively.
The Melodeon Arizona LBS Feeder specializes in litigation finance and has the highest expected return aims of the newer manager grouping at 15%. New York-based Melodeon Capital was founded in November 2012 by Omar Jaffrey and Andres Scaminaci, formerly co-heads of the UBS Special Situations Group of the Americas.
London-based private debt firm Chorus Capital’s fund Chorus Capital Rhondo was tapped in September and specializes in ‘risk-sharing’ transactions, according to Arizona State Retirement System reports.