Direct lending, in contrast, offers an average yield pickup of 5.14 and 5.3 percentage points versus the average rate on speculative-grade bonds and leveraged-loans, according to a Goldman Sachs Group Inc. analysis based on data through June 30. That’s helped assets in private-credit strategies balloon to more than $800 billion.
Yet all that money pouring in is making the asset class more competitive, and thus less attractive, according to Neil Sheth, director of global research for NEPC. The influx of cash may fuel weakening lending standards, and the investment consultant, which counts public pensions like the Arizona fund as clients, is urging investors to be diligent committing significant capital to such an illiquid asset class amid a maturing credit cycle.
“If you’re just learning about and thinking of putting a lot of capital in the space right now, you’re too late,” Sheth said.
The Arizona retirement system -- which oversees the benefits of nearly a quarter-million people -- is already exploring alternatives strategies such as litigation finance and securities backed by aircraft leases to help boost returns going forward.
These more opaque corners of the market are part of its push to bring its investments in illiquid credit to nearly a quarter of its portfolio over a three-year period, according to Alaimo.
“We wish there were fewer people in the marketplace,” Alaimo said. “However, the reality is if you partner with the right managers, they can be discriminating in the deals that they do.”
--With assistance from Claire Boston.
This article was provided by Bloomberg News.