Reginald D. Tucker, senior investment officer of opportunistic investments and absolute return strategies at the New York Common Retirement Fund (NYCRF) spoke with IA about the fund’s allocation to private debt, a fairly new asset class for the fund. Tucker gave details about the breakdown of the asset type in the fund’s opportunistic portfolio, the returns it looks for and the challenges it has found in benchmarking the asset class. The fund has $210 billion under management and is the third largest public pension plan in the nation.
In which investment bucket in your portfolio do you put private debt?
Private debt investments sit primarily in our opportunistic portfolio, which has $2.5 billion under management, within the alternative credit sub-strategy. Depending on the return profile, certain private debt strategies may be considered in other asset classes, like private equity, real asset and real estate. The opportunistic portfolio was created in 2009, following the GFC (global financial crisis) to take advantage of market dislocations as well as fill gaps in the markets created by increased regulation and traditional financial providers vacating those lending markets.
What kind of returns do you look for? What benchmark or index do you use to measure returns? Have you had trouble figuring out how to measure returns in the asset class?
The opportunistic portfolio has an overall target investment return of roughly 9%. This is based on a formula calculated by our plan’s actuarial required rate of return + a premium or, currently, 7% + 200bps. Our plan’s consultant uses a blended custom benchmark to model the opportunistic portfolio for asset allocation and risk purposes. This blended benchmark is currently a combination of non-core fixed income, non-core real estate (including value add and opportunistic) and PE/VC
As the portfolio is the youngest in the plan and started investing over the past few years, we hadn’t had any issues related to benchmarking. However, as these investments have matured and overall exposure to this class of investments has grown, it has recently become an important focus for us.
What percent or amount of your portfolio is invested in the asset class?
Three percent of the overall Plan ($6 billion) is allocated to the opportunistic portfolio. Of that total allocation, 20-50% of the opportunistic portfolio is targeted to be allocated to alternative credit. Depending how you define private debt, or for us alternative credit, we are either towards the high end of this range or over it. CRF’s periodic asset allocation review is coming up in 2020 and the allocation will be formally reviewed at that time. Also, since most of the opportunistic portfolio commitments are in closed-end vehicles that will drawdown capital over time, the sub-strategy allocations can shift significantly depending on what’s happening in the markets.
Do you agree that it’s difficult to benchmark for it, or has it not been a problem for you?
One of the challenges you might find in benchmarking private debt is defining how different investors define what fits into the class itself. For us, alternative credit is fairly broad and includes both public and private credit investments. There are many options for benchmarking, and I’ve discussed some of the pros and cons with other investors and consultants.
Given the disparate nature of the strategies in private debt, the idea of one benchmark for the whole portfolio versus benchmarking specific strategies and exposures seems easier, given we generally won’t be able to get total loan or investment transparency from GPs (general partners) to benchmark specific strategy exposures. We’ve done some specific work as it relates to real estate debt and work closely with one of the researchers.
Other general challenges we’ve found in private debt benchmarking include:
- Defining the ‘universe’ and strategies to include in it. Does the universe include both public and private strategies?
- Lack of an actual investable indices that actually mirrors the private debt space;
- The general lack of holdings and performance data available;
- A question of if the quarterly reporting nature of most strategies skews certain risk and correlation statistics.
How long have you been invested and do you plan on increasing the allocation?
Our first alternative credit investment was in 2013 to a middle-market direct-lending fund. We are currently more specifically assessing the sizing of these investments in the opportunistic portfolio as they have grown.
In what underlying asset classes are you invested in the sector?
- Exit or substantial weakening of capital providers after the recent credit crisis
- Limited access to capital for small/medium enterprises
- Enhanced yield over investment grade fixed income
Types of Investments:
- Non-investment grade credit exposure, including high yield, leverage loans, convertibles, mezzanine and bridge loans
- Stressed/distressed debt
- Asset-backed securities
- Middle-market lending
- Purchase of non-core portfolio assets from bank, insurers, etc.
Do you see the portfolio as fixed income or equites or alternatives?
The opportunistic portfolio is intended to be a diversifier for the broader plans, which like most plans, generates most of its risk through equities. The portfolio also focuses on finding alpha in parts of the market where other asset classes can’t or don’t invest. To the end, in alternative credit, we focus on non-core or below investment grade opportunities.
Do you plan on increasing investment?
There are no definitive formal plans right now to increase, but this could change in the 2019 asset allocation study.