Investment staff of the $50 billion Arizona State Retirement System (ASRS) informed trustees last month that they were working with the system’s general consultant, NEPC, on an asset allocation study of the system’s investment portfolio to determine whether and what changes to make to its structure in the current environment.
One asset class with which the system is impressed is private credit. “As a result of these opportunities, we continue to be overweight in these asset classes,” said CIO Michael Viteri, referring to private and distressed debt and other credit sub classes.
According to an investment program update presented to the board, the ASRS’ staff finds that there are compelling investment opportunities in the credit class. They point to private debt, distressed debt and other credit. As a result, ASRS has an overweight in that asset class. ASRS has approximately $11 billion invested in the credit asset class representing 22% allocation, which is slightly over its 20.0% policy target but is within the 10-30% policy range. Private debt is approximately 70-75% of the ASRS’ allocation. Its commitments to partnerships in the credit asset class, net of partnerships in liquidation (or pending liquidation), represent approximately 22.7% of the total fund, according to Viteri.
“These opportunities are almost exclusively in private rather than public markets or are in areas of the market, such as distressed debt, which typically require investments in locked-up vehicles with limited liquidity,” Viteri said,
He added, “We generally do not believe that public credit markets, such as high yield bonds, leveraged loans and asset-backed securities, offer as attractive investment opportunities in comparison to the private markets. We believe that select opportunities exist to achieve attractive returns in other credit, a sub-asset class which we characterize as credit opportunities that are not encompassed in private debt, distressed debt or high yield, and offer an expected return which will likely meet or exceed the credit asset class benchmark.”
