California rapidly builds out private debt aims

California Public Employees’ Retirement System trustees approved the creation of a 5% allocation to opportunistic strategies in June, and by the end of the month had already put $1 billion to work in the space. The heady pacing was questioned by trustees earlier this month during an investment committee meeting, where staffers outlined the exposures the portfolio would likely take on in the months to come as officials build up a private debt portfolio that is a cornerstone of the system’s so-called 7% solution -- or a way forward to hitting its assumed annualized rate of return on a consistent basis. “Our major initiative for next year is we want to continue deploy money to the private debt to ensure a robust and well-diversified portfolio,” Jean Hsu, interim managing investment director told trustees on September 15. In June, trustees for the nation’s largest pension fund approved a boost from 3% of assets to 5% of assets, which represents the $385 billion pension’s opportunistic portfolio growing from more than $8 billion to $19 billion in assets. “This revision is in recognition of the increased market opportunity set, as the COVID-19 pandemic has impacted the global economy to an unprecedented degree,” wrote consulting firm Wilshire in its memo supporting the changes to the fund investment policy. As of the end of June, two investments sat in the opportunistic portfolio – Oaktree Strategic Lending and PIMCO DISCO III splitting the $1 billion allocation evenly. Hsu dubbed the $500 million allocation to DISCO III as a dislocation play rather than distressed debt during the trustee meeting. Oaktree’s fund is a private debt offering, however. Private debt is in focus for the remainder of the fiscal year, according to Hsu’s presentation. The retirement system had been supportive of a bill that emerged earlier this year to establish set parameters and limit what is publicly released related to private debt investments by public pensions in the state. Last month, the bill was withdrawn by its author and was widely criticized. Still the publicity surrounding the proposed bill did attract enough attention to potential managers, and while the private debt process can be lengthy it seems that staff at CalPERS are ready to press on quickly.

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