A Chicago pension fund has pivoted towards private debt as it looks to reduce its exposure to private equity.
The $2.5 billion Policemen's Annuity and Benefit Fund of Chicago (PABF) recently started a search for a secondaries broker to begin drawing down the fund's $121 million private equity portfolio. A price discovery of the entire portfolio is under way.
“We have modelled what kind of IRR we can expect from this portfolio going forward and it is in low single digits, therefore there is considerable opportunity cost in holding it,” said chief investment officer Aoifinn Devitt.
She added: “We are concerned that the fees are so high for such a low expected return.”
The pension fund recently made $10 million commitments to private debt investment strategies managed by both Brookfield and Sound Mark. The firm issued a request for proposal for debt managers towards the end of last year as it looks to increase its allocation to the asset class to 8 percent.
“When we look at private credit we like investments that deliver a coupon. We much prefer those to strategies where the interest is reinvested,” she added.
With a 5 percent liability gap to bridge every year, such cash generation is key. Devitt said she is interested in strategies targeting the mid-market as yields remain attractive and immune to some of the pricing pressures seen in other parts of the market. But Devitt said that an important question for managers is how they are able to salvage value from a transaction when it does not go according to plan.