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Public Pension Funds in Private Debt: Current Activity and Future Plans – May 2015

by Fiona Isaac

  • 11 May 2015
  • PD

Preqin’s Private Debt Online service maintains detailed profiles of 263 public pension funds active within the private debt fund universe. The chart below shows that public pension funds constitute a significant proportion of investors active in the asset class at 17%. With access to large pools of capital, these investors are a target for private debt managers seeking to raise funds. On average, pension fund managers allocate around 3% of their total assets under management (AUM) to private debt. These investors also have an aggregate target allocation to the asset class of approximately 6%, which could serve as an indicator of increasing appetite for private debt in the future. This investor group have traditionally sought stable, inflation-linked cash flow investments in the form of traditional assets such as fixed income holdings.

In terms of strategy preferences, Preqin data shows that public pension funds are most active in the mezzanine space, with 69% reporting an allocation to this strategy. Distressed debt and direct lending funds are also seeing significant interest with 67% and 61% of public pension fund investors respectively.

Geographically, North America is the most prominent location for private debt activity, with 85% of all public pension funds active within the asset class showing a preference for or a previous investment in this region. Preqin data also shows that 95% of North America-based investors invest in North America, as opposed to 68% registering a preference for or previous investment in Europe and 44% in Asia. In 2015, Preqin’s Private Debt Online serviceidentified that of the top 20 investors by assets within private debt, North America-based pension funds collectively account for 32% of capital allocated to private debt. Traditionally, North America-based pension funds hold more capital, are more mature in terms of investment activity and may hold a domestic bias when considering investments. Comparatively smaller growth opportunities in the European and Asian markets could provide an explanation for the relative dominance of North America in this area.

Nonetheless, 71% of all public pension fund investors in private debt have an interest in Europe. Activity within this region represents one of the more interesting developments within the asset class. Regulatory restrictions placed on European banks as a result of Basel III have led to a number of opportunities in the European market for fund managers and investors. A void in capital for middle-market companies and the need for banks and investment banks to sell their existing assets to other investors in order to meet capital expectations are driving these opportunities. The gap is being filled by investors who seek direct deals, direct lending funds and bank recapitalization within the thriving European market in order to generate stable returns that are being boosted by favourable interest rates. Preqin’s Private Debt Online service highlights institutional investors’ future plans for the next 12 months; 64% of public pensions funds globally have reported an intent to make further investments in Europe within the next 12 months. Currently, 41% of these investors are interested in Asia; countries outside North America, Europe and Asia are targeted by only 8%.

 

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