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Top 50 Public Pension Funds Investing in Private Debt – December 2014

by Brian Lee

  • 19 Dec 2014
  • PD

Preqin’s Private Debt Online service currently tracks 230 public sector pension funds investing in the private debt asset class. Recent data in the Preqin Special Report: Private Debt shows that public sector pension funds constitute the largest proportion of institutional investors in private debt, followed by their private sector counterparts and foundations. It can therefore be inferred that the top 50 public sector pension funds, by allocation to private debt, form a vital source of capital for private debt fund managers on the road.

These 50 public sector pension funds have aggregate assets under management of more than $1.8tn. With an average allocation of 3.7% to private debt, they are below their aggregate target allocation to private debt of 6.1%. This indicates that they will likely be looking to make further capital commitments to private debt funds over the coming years as they look to increase their allocations to the asset class.

Of these top 50 public sector pension funds, 80% are based in North America, which is perhaps unsurprising considering the relative maturity of the asset class in the region. The remaining 20% are based in Europe. It is also interesting to note that North America-based pension funds in the top 50, on average, allocate larger proportions of their total asset to private debt than their Europe-based counterparts. North America-based pension funds have an average allocation to the asset class of 4%, while Europe-based pension funds maintain an average allocation of 2.5%.

In regards to the general fund type preferences of the top 50 public sector pension funds with an allocation to private debt, 41 are considering investing in mezzanine and the same number in distressed debt funds, while 40 are considering allocating capital to direct lending funds. However, when looking at the fund types that these pension funds will be allocating to over the next 12 months, a slightly different story appears. Of those that expressed a preference, 86% will be allocating to direct lending funds, compared to 75% and 68% respectively for distressed debt and mezzanine funds. This seems to demonstrate how direct lending has grown significantly as a fund strategy among some of the most significant investors in private debt.

As private debt continues to assert itself as a separate asset class in the minds and investment policies of institutional investors, it is clear that some of the most significant global investors are still under-allocated to the asset class, and are looking to put further capital to work across a variety of strategies in the coming year. 

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