Maine PERS backs AG’s third direct lending fund, as pensions pile into private credit

Maine Public Employees Retirement System has significantly increased its asset allocation to alternative credit after approving a commitment of $100 million to Angelo, Gordon & Co’s AG Direct Lending Fund III LP.

Having set an asset allocation target of 5 percent for private credit in November 2016, Maine PERS is now within touching distance of that figure, at 4.78 percent, after the AG commitment.

The New England pension fund joins four other investors, including Texas Municipal Retirement System and North Dakota Board of University and School Lands, in shoring up capital toward the new AG fund, which has already raised $573 million in the past month.

This development follows a trend of institutional investors, and particularly of pension funds, pushing into the “alternative credit,” or private credit, sector. Private credit funds are funds that invest in debt instruments issued by non-investment grade and unrated entities.

There were 153 new private credit funds in market seeking to raise an aggregate $65 billion as of November 2017, according to Prequin. The United States, having the largest and most developed private debt market, takes the lion’s share of this new business at 63 percent.

After the 2008 financial crisis, banks, which had traditionally been lenders to small and middle-market companies, began to scale back their operations in response to the regulatory oversight introduced by Dodd-Frank. That created an opportunity for unregulated private equity firms to step in.

With the economic cycle in its late stages, investors began looking into private credit as a stable alternative to public credit, as well as a means of diversification. Private credit also carries the added benefit of three-to-five year loan terms, which allow investors to make quicker returns than they otherwise would on private equity investments.

AG’s direct lending fund is targeting an internal rate of return of 6 to 8 percent. Its base management fees are between 65 and 70 basis points, with incentive fees of 15 percent, subject to delivering on a 7 percent preferred return.

Maine PERS’s investment comes only months after it backed three other senior debt and direct lending funds. Within the space of six months late last year, the pension fund made commitments of $100 million each to Owl Rock Capital Corp, Audax Group’s Audax Senior Debt MP LLC, and Tennenbaum Capital Partners’ TCP Direct Lending Fund VIII.

The Tennenbaum fund has proven to be a particularly popular private credit fund among Maine’s peers, with a targeted unlevered annual yield of 9 to 12 percent. Both Ohio Police and Fire Pension Fund and San Mateo County Employees’ Retirement Association have committed $50 million and $35 million, respectively, to the fund.

Meanwhile, Sacramento County Employees’ Retirement System opened a $100 million separate account with Tennenbaum Capital Partners Direct Lending Fund VIII-S. The evergreen will allow Sacramento to reinvest its capital on a long-term basis.

In its 2018 annual investment plan, Sacramento County introduced an asset allocation target of 4 percent for private credit, having not previously had one. Since then, it has shifted four existing credit funds from its private equity portfolio to the new asset class.

By 2020, Sacramento County aims to commit $220 million across four direct lending and opportunistic credit funds, with the United States, Europe, and Asia being the key areas of focus.