Arizona considers private debt allocation

As more private equity firms enter the private debt market, the Arizona State Retirement System may add the asset class to its investment strategy in an effort to diversify its fixed income portfolio.

The Arizona State Retirement System's board of trustees will consider adding an allocation to private debt at its meeting on Friday, according to its agenda.

If the $28.3 billion retirement system approves the new asset mix, Arizona will target a 3 percent allocation to private debt over the course of the next several quarters, spokeswoman Tamera Wilson said. Arizona does not have a private debt portfolio at this time and its investment staff have yet to consider or select any managers. 

To accommodate the proposed increase, Arizona would reduce its allocation to US public equities and core fixed income, according to state documents. 

“ASRS investment staff and their consultants believe that private debt offers favorable risk adjusted returns that are expected to enhance the return characteristics of the fixed income portfolio compared to core fixed income investments,” Wilson told Private Equity International. 

As the availability of private debt financing has declined, particularly in Europe, several private equity firms have become active in the space. A recent report from Partners Report indicated that a period of “binge” lending has turned into a debt “hangover”, creating an opportunity for non-traditional lenders. 

Earlier this year, 3i’s debt arm purchased seven collateralised loan obligation contracts worth €2 billion — primarily invested in sub-investment grade debt issued by companies in Europe — from Invesco. The Carlyle Group also bolstered its debt portfolio this year, acquiring four management contracts for €2.1 billion-worth of European CLOs. The transaction – Carlyle’s first in the European CLO market – brought the firm’s CLO assets under management to $16 billion.

“Basically, European CLOs are dying out and no new ones are being raised,” Juri Jenkner, co-head of private debt at Partners Group, told Private Equity International in a previous interview. The supply of CLOs in Europe will fall by roughly 80 percent, according to the report.