Pennsylvania Schools bets big on private debt

The $50.8bn retirement system committed almost $950m to private debt funds at its meeting last month, focusing its strategy on the US and European mid-markets.

The Pennsylvania Public School Employees’ Retirement System committed more than $943 million to private debt funds at its meeting late last month, according to documents. 

The retirement system divided its commitments between the US and European mid-markets, committing a total of $425 million across two American funds and €400 million across a pair of European vehicles.

“There is a significant need for debt capital providers in the middle-market space as a result of the on-going global financial crisis, which continues to cause a significant contraction in capital available to middle market companies,” portfolio manager Joseph Sheva said in a state memorandum. “This financing need creates opportunities for non-bank lenders and investors to secure attractive risk/reward opportunities.”

A PSERS spokesperson was unavailable for further comment. 

The $50.8 billion retirement system committed $225 million to Cerberus Levered Loan Opportunities Fund II; $200 million to LBC Credit Partners III; €200 million to ICG Europe Fund V and €200 million to HayFin Special Opportunities Credit Fund. 

Cerberus is targeting a $1.5 billion hard-cap for its second levered loan opportunities fund, which will focus on the origination and issuance of senior secured, floating rate debt to US mid-market companies. Cerberus’ previous fund has generated a 20.4 percent net annualised internal rate of return as of June, according to PSERS documents. 

PSERS’ other US-focused commitment went to LBC Credit Partners III, which is targeting $650 million with a $1 billion hard-cap for US mid-market companies with revenues between $50 million and $750 million. The firm’s first and second credit partners funds were generating net IRRs of 9.5 percent and 10.8 percent, respectively, according to documents.  

Haymarket Financial is targeting €500 million for its first third party vehicle. The firm, which was founded in 2009 by Towerbrook Capital Partners and chief executive officer Tim Flynn, held a first close on €204 million on 1 September. The general partner will commit at least €100 million to a vehicle that will invest alongside the fund, which will target opportunities made available by dislocations in the European credit market. 

PSERS also committed €200 million to Intermediate Capital Group’s latest European fund, which is targeting €2 billion with a €2.5 billion hard-cap for mezzanine investments in support of leveraged buyouts, refinancings and sponsorless opportunities in Europe. The firm’s previous European vehicles have generated a 12 percent net IRR since ICG’s launch in 1989.

PSERS private debt allocation includes commitments to distressed debt, mezzanine and structured products. The retirement system had a 3.5 percent allocation to private debt as of 30 June.