Neil Sheth was featured in a recent Pensions & Investments article that focused on multistrategy private credit.
In the never-ending search for higher investment returns, institutional investors increasingly are turning to specialist fixed-income managers that combine multiple private credit strategies in a single mandate.
Asset owners including the $52.7 billion Teachers' Retirement System of the State of Illinois, Springfield, and the $31 billion Indiana Public Retirement System, Indianapolis, recently committed large allocations to separately managed accounts that give the manager flexibility to move assets between diverse strategies such as sale-and-leaseback, revolving credit facility, structured credit, European tactical credit and direct lending in response to market conditions.
Indiana PRS, for example, in September committed $400 million to Intermediate Capital Group LLC, London, to access the firm's "broad capabilities in European private credit," an investment report said.
The fund set up a separately managed account with $200 million to be invested in the firm's revolving credit facilities fund and $100 million each to be invested alongside the manager's senior debt and sale-and-leaseback funds.
Indiana Chief Investment Officer Scott B. Davis was not available for comment.
Among managers experiencing strong demand for multistrategy private credit from asset owners, including Intermediate Capital Group, are Alcentra Group Ltd., BlackRock Inc., GoldenTree Asset Management LP and Hayfin Capital Management LLP.
Performance is the primary driver of demand for multiple private credit strategies within a single vehicle for institutional investors, said Stephen L. Nesbitt, CEO of specialist alternative investment consultant Cliffwater LLC, Marina del Rey, Calif., in an interview.
"Investors are searching for what's working regarding returns. That's not hedge funds, factor-based strategies, active management or risk-parity strategies right now," Mr. Nesbitt said.
"The premise behind private credit strategies is that they will return an annualized 3 (percentage points) over publicly traded credit, such as high-yield bonds or leveraged loans. Those publicly traded credit instruments likely will return an annualized 5% over the next five years, while private credit likely will return about 8% annualized over that time period," Mr. Nesbitt said.
"Private credit investments don't have a long lockup — generally about five years — and they start paying out (income) at about three years. That's an attractive combination for investors," Mr. Nesbitt said.
Flexibility between strategies
The flexibility managers of these kinds of private credit vehicles have to efficiently move between different strategies is another major reason asset owners are increasing their investments in these vehicles, said Neil Sheth, partner and director of global research, NEPC LLC, Boston, in an email.
Giving private credit managers the ability to "invest across both corporate credit and securitized credit is an advantage, particularly for firms with local offices in multiple geographic locations, including in the U.S., Europe and Asia. Managers with staff on the ground can respond more easily to the ebb and flow of securitized market segments," Mr. Sheth said.
"At various points, it has been better to have more capital deployed in securitized private credit in Europe and the U.S., while other times there has been a more balanced mix of corporate and securitized credit opportunities," Mr. Sheth said.
He added that NEPC's investment consulting clients "continue to deploy a large amount of capital to best-of-breed multiprivate credit managers."
Mr. Sheth declined to identify the NEPC clients in these strategies.
Investors also benefit from having a single manager balancing the liquidity level of a multistrategy private credit portfolio, said Leland T. Hart, co-CIO of Alcentra, based in New York.
"Multiasset private credit strategies provide investors with more return because the manager can move between liquid and illiquid assets depending on market conditions," Mr. Hart said in an interview.
"There's a natural stabilization effect between the strategies with one manager who doesn't have to be tied to the mast of a single index. It neutralizes the investment process and lets (the manager) say no," so he or she can make the best tactical investment decisions, he said.
Alcentra managed $40 billion as of Aug. 31. Alcentra declined to provide the amount it managed in private credit.
Savings and efficiency
Sources said investing in a diversified private credit portfolio managed by a single manager also offers investment efficiency and cost savings.
"Asset owners increase returns and reduce costs by investing with a single private credit manager rather than with five or more managers," with better transparency, reporting and flexibility for the manager to invest tactically across strategies, said James E. Keenan, the New York-based CIO and co-head of the global credit team within BlackRock Inc.'s alternative investment unit, in an interview.
BlackRock is seeing high demand for multistrategy private credit from larger North American institutional investors after experiencing a surge of interest from European asset owners over the past few years.
Because the need for return also is "very important to smaller investors," BlackRock also offers multistrategy credit solutions for asset owners with smaller mandates and retail investors, Mr. Keenan said.
BlackRock managed a total of $6.96 trillion as of Sept. 30, of which $17 billion was managed in private credit strategies.
Pricing was a driver in the Illinois Teachers' Retirement System's decision to invest $500 million each in customized multistrategy private credit separately managed accounts run by Hayfin Capital Management and Intermediate Capital Group, said Scottie Bevill, senior investment officer for fixed income, during an investment committee meeting on Oct. 29. Both managers are based in London.
Hayfin will split its allocation among its European special opportunities, European tactical credit and relative value strategies.
Intermediate Capital Group will use its global syndicated loan, structured credit, dislocated markets, European direct lending and sale-and-leaseback strategies in its investment approach.
Mr. Bevill told trustees during the meeting that fees for separately managed accounts "are very good, lower than those for commingled funds," but did not provide specific figures. Mr. Bevill was traveling overseas and could not be reached for comment.
As part of the fund's 2020 fiscal-year private credit tactical plan, the pension fund will add one to three more separately managed accounts from the fund's private debt portfolio, which totaled $2.2 billion as of June 30, or 4.3% of current plan assets. The fund's target allocation to private credit is 6%.
The pension fund was fortunate to invest with Hayfin Capital: The firm has reached capacity thanks to high demand globally from large institutional investors, said Timothy B. Flynn, Hayfin's founder and CEO, in an interview.
Mr. Flynn said the firm has offered customized combinations of its middle-market lending and special situations/distressed strategies since its inception in 2009 and, more recently, included its newer tactical credit strategy, but the number of investor requests has recently risen sharply.
"Demand is high and we are turning away investors," he said.
Hayfin Capital Management managed $16.7 billion, of which $11.6 billion in managed in private credit strategies as of Sept. 30.