This infatuation is not a one-day romance. North American pension funds plan to invest another 5.9% of their assets in the public market on average.
They thus have room to increase their presence on this market made up of remunerative investments, although illiquid and unrated, which represents only 3.8% of their portfolio, according to the analysis company Preqin.
Several large US pension funds are increasing their investments in private loans. They represent 5% of the portfolio of the California Public Employees’ Retirement System, which manages US$450 billion in assets, and 4% of the investments of the New York State Common Retirement Fund (US$230 billion). The pension fund for public employees in Ohio (US$120 billion) has just added a 1% allocation to private credit.
After the heavy losses suffered in 2022 due to stock market volatility, pension funds see the private market as an exit door to obtain returns of 6% or more.
Private market debt has indeed benefited from the rise in interest rates, which slowed the granting of bank loans last year. In this context, the regular income distributed by private loans has attracted pension funds.
However, they should invest in this sector with caution, as the private debt default rate was up in the third quarter of 2022, reaching 1.56%.
In order to limit the risk, they must make sure to diversify their investments and be careful in the use of leverage.
